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.

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