Benefit Corporations vs. “Regular” Corporations: A Harmful Dichotomy

The following post comes to us from Mark A. Underberg, retired partner at Paul, Weiss, Rifkind, Wharton & Garrison LLP.

In less than two years, seven states, including New York, New Jersey and California, have enacted laws creating a new hybrid type of corporation designed for businesses that want to simultaneously pursue profit and benefit society. Advocates for this new type of entity—typically called a benefit corporation, or B Corp– say that it fills a gap between traditional corporations and non-profits by giving social entrepreneurs flexibility to achieve the dual objectives of doing well and doing good. [1]

At first glance, the B Corp seems a welcome addition to the corporate governance landscape, that promises to advance the cause of socially responsible business. Indeed, B Corp proponents have been remarkably successful in making their case to lawmakers; the statutes were passed without a single dissenting vote in both houses of the New York and New Jersey legislatures last year, and similar proposals are pending in four additional states. Meanwhile, hundreds of businesses, most notably the outdoor clothing company Patagonia, have chosen to organize under the B Corp banner.

But viewed from a broader corporate governance perspective, the B Corp initiative—however well-intentioned–has troubling implications. The problem is that its primary rationale rests on the mistaken, though widely-held, premise that existing law prevents boards of directors from considering the impact of corporate decisions on other stakeholders, the environment or society at large. This crabbed view of directorial fiduciary duties perpetuates the unfortunate misconception that existing law compels companies to single-mindedly maximize profits and share price, and in so doing undermines the very values that corporate governance advocates should seek to promote: responsible, sustainable corporate decision-making by companies of any stripe.

“[A]t the heart of what it means to be a benefit corporation”, according to a widely distributed white paper describing the legal details of model B Corp legislation [2], is the requirement that boards of directors consider the impact of their decisions on specific corporate constituencies, including shareholders, employees, suppliers, the community, as well as on the local and global environment. [3] Although shareholders are typically listed first, it is up to the board to decide what weight should be given to the interests of each affected group.

The principal B Corp advocacy group, a California not-for-profit called B Lab, says that this provision is an essential distinguishing feature of the new entity because it protects B Corp directors from liability when they consider the interests of non-shareholders, even if those decisions do not necessarily maximize shareholder value: “Current corporate law makes it difficult for businesses to take employee, community and environmental interests into consideration when making decisions.” [4] The New York State Senate memorandum introducing the B Corp legislation goes further, suggesting that current law restricts even those corporate social responsibility measures the have potential financial benefit: “[the bill] removes legal impediments preventing businesses and investors from making their own decisions to use sustainability and social innovation as a competitive advantage”. [5]

In fact, for the vast majority of corporate decisions, there is no legal restriction on directors’ ability to consider the interests of other stakeholders, including the groups listed in the B Corp statutes. Many states have adopted so-called “constituency statutes” that expressly permit them to do so. [6] And in other states, including Delaware, courts generally require only that a business decision bear some rational relationship to a long-term corporate and shareholder interest before applying the business judgment rule to shield the decision from shareholder challenge [7]. Given the ever-increasing link between corporate conduct and the creation (or destruction) of shareholder value, consideration of the effect of corporate actions on various constituencies is not only permitted by law but in some cases could be a prerequisite to enable directors to discharge their duty of care obligations to make fully-informed decisions. [8]

To be sure, there are limited exceptions to this judicial deference, most notably in the takeover context or if a corporate action cannot be said to benefit the shareholders in any rationale way whatsoever. [9] As a practical matter, however, directors have close to a free hand when considering matters that are most likely to have broader social or environmental implications– how products are manufactured, marketed and sold, corporate investments, fair trade, employment and supplier issues.

I am not aware of a single case holding directors liable for a routine business decision because they considered non-shareholder interests or that impose a general duty to maximize profits and short-term shareholder value. As Professor Lynn Stout of Cornell Law School concludes an analysis of legal precedent in her excellent forthcoming book, “[m]aximizing shareholder value is not a managerial obligation, it is a managerial choice.” [10]

The broader interests of responsible corporate governance are ill-served by creating a false dichotomy between “good” and “bad” companies based on the law that governs their conduct rather than on the choices made by those who run them. There’s no legal reason that all companies can’t consider a wide range of interests in order to make responsible corporate decisions. Nor is there reason B Corp advocates should provide them with excuses not to do so by overstating the limitations placed on directorial discretion by existing law. It is also unfortunate that this rationale is now enshrined in the legislative histories of the B Corp laws, which could have unintended consequences in future court rulings further defining the scope of directors’ fiduciary obligations.

The reality that corporate decision-making is largely a function of corporate choice rather than corporate law is no less true for the new benefit corporation. The B Corp legal regime no more guarantees that those companies will make “socially responsible” decisions than existing law prevents directors from doing so.

That’s not to say that providing the option for companies to organize as B Corps is a bad idea. [11] It seems likely that the laws’ mandatory mission statements and accountability provisions will help attract patient capital and thus provide a B Corp with a shareholder base less likely to apply pressure for short-term results. It’s also possible that companies will derive marketing or other commercial advantages from the B Corp designation. And in some states, the laws should provide directors with greater discretion to reject takeover bids for reasons other than price.

The B Corp case can and should be made to legislators, businesses and investors on the basis of these potential benefits. The B Corp initiative would not be diminished if its advocates urged all companies to consider the interests of its stakeholders and society as a whole rather than providing them reasons not do so.


[1] In recent years, other new corporate forms have been introduced to address this gap, though with less fanfare. Most notable among them is the low-profit limited liability company, or “L3C”, was designed primarily for companies seeking program-related investments from foundations.
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[2], page 13.
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[3] The relevant portion of this provision in the model B Corp legislation is set forth below.

§ 301. Standard of conduct for directors.
(a) Consideration of interests. – In discharging the duties of their respective position and in considering the best interests of the benefit corporation, the board of directors, committees of the board and individual directors of a benefit corporation:
(1) shall consider the effects of any action or inaction upon:
(i) the shareholders of the benefit corporation;
(ii) the employees and work force of the benefit corporation, its subsidiaries and its suppliers;
(iii) the interests of customers as beneficiaries of the general public benefit or specific public benefit purposes of the benefit corporation;
(iv) community and societal factors, including those of each community in which offices or facilities of the benefit corporation, its subsidiaries or its suppliers are located;
(v) the local and global environment;
(vi) the short-term and long-term interests of the benefit corporation, including benefits that may accrue to the benefit corporation from its long-term plans and the possibility that these interests may be best served by the continued independence of the benefit corporation; and
(vii) the ability of the benefit corporation to accomplish its general public benefit purpose and any specific public benefit purpose;

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[6] 31 states have adopted constituency statutes, about one-third of which apply only to change-of-control decisions.
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[7] See See Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173, 182–83 (Del, 1986) (“[a] board may have regard for various constituencies in discharging its responsibilities, provided there are rationally related benefits accruing to the stockholders.”)); TW Services, Inc. v. Crown, 1989 WL 20290, at *7 (“[D]irectors, in managing the business and affairs of the corporation, may find it prudent (and are authorized) to make decisions that are expected to promote corporate (and shareholder) long run interests, even if short run share value can be expected to be negatively affected”)
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[8] See, for example,
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[9] Both of these exceptions were implicated in eBay Domestic Holdings, Inc. v. Newmark,, C.A. No. 3705-CC (Del. Ch. 2010), a 2010 ruling by the Delaware Chancery Court. In that case, Ebay, a minority shareholder of Craigslist, challenged a number of defensive measures adopted by the Craiglist board, which was controlled by the majority shareholders, including a shareholders rights plan, or poison pill. Applying an enhanced standard of review applicable to defensive measures, the court found that the board made “no serious attempt” to provide evidence that the stated purpose of the poison pill—to preserve Craiglist’s “unique corporate culture”—would “lead at some point to value for stockholders.” The court found that the rights plan was instead a matter of the controlling shareholders’ “personal preference” and invalid.
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[10] The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations and the Public by Lynn Stout (Berrett-Koehler Publishers, Inc. (2012).
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[11] The structure contemplated by B Corp legislation is not without critics on the merits. For example, Professor Elson has raised accountability concerns. See (“’For an investor this is a terrible idea’, says Charles Elson, who teaches corporate governance at the University of Delaware. ‘The structure creates a lack of accountability….”)’.
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  1. Heather Van Dusen
    Posted Monday, May 14, 2012 at 12:38 pm | Permalink

    While Mr. Underberg is absolutely correct that the business judgment rule enables board members to take into consideration stakeholder interests during the vast majority of decisions, there are two points that have consistently come up within the community of mission-driven entrepreneurs that he mentions:

    “The problem is that its primary rationale rests on the mistaken, though widely-held, premise that existing law prevents boards of directors from considering the impact of corporate decisions on other stakeholders, the environment or society at large.”

    While this may be a mistaken view, to his point it remains a widely-held one, which means that there are few to no attorneys who would be willing to advise a mission-driven entrepreneur that he/she is protected in doing so. This is why, for example, Ben & Jerry felt pressured to sell to Unilever (instead of a slightly lower competing offer from Vermonters), even though VT has a constituency statute. The Delaware court has even more recently affirmed the idea of shareholder primacy in eBay vs Craigslist. Whether by law or by custom, shareholder primacy has taken hold in the minds of the courts and, as importantly, the minds of the attorneys who are advising companies on what their options are.

    Which leads us to:

    “To be sure, there are limited exceptions to this judicial deference, most notably in the takeover context or if a corporate action cannot be said to benefit the shareholders in any rationale way whatsoever.”

    It is specifically at this moment of sale, when the company is in play and therefore is not protected by the business judgment rule, that is the key moment for many entrepreneurs. They want the ability to, for example, sell to the most community minded bidder instead of the highest bidder (which in turn can help them create not just price competition among bidders, but mission competition). The benefit corp structure is designed to help mission – driven entrepreneurs maintain that mission over time, even and especially through change of control scenarios.

    For a more thorough analysis of this background, please see the white paper by Bill Clark of Drinker Biddle and Larry Vranka of Canonchet Group at

  2. Mark Underberg
    Posted Tuesday, May 15, 2012 at 3:27 pm | Permalink

    I certainly agree with Ms. Van Dusen that corporate law limits a board’s decisionmaking discretion in the takeover context. As I mentioned in the piece, one benefit that the B Corp structure can legitimately claim is that it should restore much of that discretion, particularly in connection with a potential Revlon-type change of control transaction. (However, I’m not sure how much comfort accepting a lower offer ultimately provides a social entrepreneur who wants to insure that the misson continues since, as I understand the statute, an acquiror is free to eliminate the BCorp designation anytime.)

    I also agree that the mistaken notion of a general legal duty to maximize profits and shareholder value is all too common in public discourse. But it’s hard to understand why such a mischaracterization of the law–however widespread–should justify perpetuating it. Moreover, in nearly 30 years of representing boards, I have seen no evidence that directors are typically advised that the law does not permit consideration of the interests of non-shareholder stakeholders when making business decisions. It’s not that such advice would be “conservative”; it’s that it is is wrong, and directly contrary to express judicial precedent to the contrary. In fact, the decisions that many companies routinely make suggest that boards understand that their legal obligations permit them to do so. For a variety of reasons, it is commonplace for companies to make decisions that sacrifice profitability and current share price in order to achieve other objectives. What’s more, they are only too willing to trumpet their community-mindedness, whether pledging to comply with international fair labor, human rights and fair trade standards, engaging in carbon footprint reduction efforts, making charitable contributions, supporting “hire America” policies or directly funding outreach programs in their communities. Of course, many corporations do not exercise their decisionmaking discretion in this way, but there’s no reason to provide them with an excuse—one that, at best, is factually dubious– that their lawyers have told them that the law doesn’t permit them to do otherwise. (It’s a rich topic for another day, but there are plenty of practical reasons, some of which are grounded in other provisions of corporate law, that strongly encourage shareholder-centric board actions.)

    It’s easy to overlook an important point about the Ebay Domestic Holdings v. Newmark case, which invalidated an anti-takeover measure that the court found to be based on the personal preference of the controlling shareholder rather than on any articulated shareholder interest. (I’m not sure why a court would view the personal preference of the controlling shareholder of a B Corp any differently, by the way.) But the more relevant point is what was not at issue in the Ebay case. The court invalidated an attempt to preserve Craigslist’s corporate culture for posterity because the anti-takeover provision triggered enhanced judicial review under Unocal. But Craigslist’s basic business model, which “openly eschewed profits”, went unchallenged, presumably because Ebay recognized that it would be futile to do so given the strong protection afforded by the business judgment rule. Consequently, Craigslist’s board continues to pursue a business strategy in which shareholder value enhancement takes a backseat to the interests of other stakeholders. It’s hard to imagine that this would be the case if the boards of either Craigslist or Ebay believed the law required directors to maximize shareholder value.

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