RICHARD JANDA, PHILIP DUGUAY, AND RICHARD LEHUN
1. INTRODUCTION
If there is to be an ecological economy functioning sustainably in the Anthropocene and contained within planetary boundaries, it will require ecological macroeconomics and microeconomics. The contours of its macroeconomics have been traced in chapter 8. The size of the economy and its environmental footprint will have to be monitored according to a dashboard of indicators, keeping it within a safe operating space for the planet. At the same time, however, an ecological microeconomics will have to arise, ensuring that individual economic actors are no longer simply responding to the narrow profit incentives that in aggregate orient the economy as a whole toward unbridled growth. This chapter introduces the implications of ecological economics in the case of the corporation. The fiduciary principle applied to the economy as a whole—managing it within planetary boundaries in trust for future generations—must also guide economic actors and individual transactions. Corporate social responsibility standards have begun—all too modestly—to expand corporate fiduciary responsibilities. Various signals about “fair trade” and ecologically sound transactions have begun—again, all too modestly—to shift expectations about what must be accounted for in transactions. This chapter attempts to identify what it would mean to generalize and systematize these heretofore modest developments.
Ultimately, the social license to operate as an economic actor must carry with it a globally applicable test for the withdrawal of the license where externalities that transgress planetary boundaries are being generated. An account of what sorts of economic actors an ecological economy will require must begin with an account of what kinds of economic actors we now have. As will become clear, those actors—corporations—are the perfect reflection of market economy as we have constructed it.
As the chartered company evolved into the modern corporation, it shed itself of any imposed requirement to provide a public benefit. What had been a license to operate with delegated authority for purposes designated by the state became an open invitation to pursue private advantage. The hollowing out of public purpose was arguably completed with the abandonment of the ultra vires doctrine at the end of the nineteenth century; according to this legal doctrine, corporations could only act within the set of powers allocated to them by their articles of incorporation (Horwitz 1985). As courts accepted that there were no limits on the objects of the corporation that could be enforced in contracts with third parties, corporate law no longer sought to maintain any control—as against the world—over the purposes being pursued by the corporation. Only the shareholders in the corporation had recourse against their entity for failure by its directors and officers to pursue the purposes that had been set out by it. What the law determined to be of significance to third parties was the ability to rely on the corporation to act as a person in contractual relations without questioning whether the contract was properly motivated by the corporation’s “internal” purposes. In other words, although a physical person’s purposes and state of mind could be relevant in a contract to establish a “meeting of the minds,” a corporation’s purposes were to remain private and thus assumed to be obvious: to make a profit however it best determined for itself. Thus, the corporation pursued internally established purposes so as to produce external effects in the world. Purpose came to be policed by the shareholders and the market for shares. In this sense, the corporation became shareholder-centric and externality generating.
The corporation is now the principal actor in the economy. It is not internally constrained to produce or avoid damaging public goods, and consequently neither is the economy. Its shareholder-centric orientation has been challenged by efforts to produce corporate social responsibility (CSR)—accountability for the social and environmental impacts of corporate activity. However, CSR has largely been about reducing harm rather than about producing benefit. Essentially, CSR is about making corporations more responsive to external pressures from stakeholder groups bearing the costs of the externalities generated by corporate activity. It has been less about orienting corporations themselves, according to their own governance structures, toward producing a public benefit. Furthermore, U.S. corporations that would seek to pursue a public purpose at the same time as making a profit can find themselves facing liability under Delaware law for failure to pursue the maximization of shareholder value. To quote from the Delaware Chancery’s recent eBay decision: “Delaware courts have guarded against overt risk of entrenchment and the less visible, yet more pernicious risk that [directors] acting in subjective good faith might nevertheless deprive stockholders of value-maximizing opportunities.”1
That is, the court took the view that corporate goals other than wealth maximization (in the eBay case, community access to postings) could not be invoked to place a limit on wealth maximization. The alternative of establishing a not-for-profit corporation—or more recently, a community interest company2 or a low-profit limited liability company3—that seeks to control and limit its profits presents its own difficulties and places limits on the ability to attract capital (see Tozzi 2010). Social entrepreneurs seeking to use businesses to create public benefits are thus left without a corporate form fit to a related purpose.
The “benefit corporation” is a recent legal innovation pioneered by twenty-seven jurisdictions in the United States, including Delaware, which is the main state of incorporation.4 This example is worth exploring because it provides some insight as to how the corporate form itself might be reconfigured within an ecological economy. Benefit corporation legislation creates a special regime that works together with regular business corporations statutes. Just as nonprofits and limited liability corporations are enabled under separate legislation in most jurisdictions, benefit corporations now find themselves under a separate tier of business associations law (Honeyman 2014). The city of Philadelphia was the first municipality to offer tax incentives to benefit corporations that wish to settle within the jurisdiction, which is an indication that there could be fiscal advantages associated with this new business form (Honeyman 2014).
In its conception, the benefit corporation is designed to pursue a public benefit and to be held accountable for producing it. A benefit corporation is a business corporation that has elected to operate for “general public benefit,” and it may elect to also operate in pursuit of a one or more “specific public benefits.” In the model clause that has been adopted in the twenty-seven jurisdictions with benefit corporation legislation, the specific benefits include the following:5
1. Providing low-income or underserved individuals or communities with beneficial products or services
2. Promoting economic opportunity for individuals or communities beyond the creation of jobs in the normal course of business
3. Preserving the environment
4. Improving human health
5. Promoting the arts, sciences, or advancement of knowledge
6. Increasing the flow of capital to entities with a public benefit purpose
7. Accomplishing any other particular benefit for society or the environment
The general public benefit achieved by the benefit corporation is to have a “material positive impact on society and the environment by the operations of a benefit corporation taken as a whole, as measured by a third-party standard, through activities that promote some combination of specific public benefits.”
This pursuit of public benefit is enshrined in the corporation’s certificate of incorporation, in which the firm is to declare itself a benefit corporation. Perhaps surprisingly, although social and environmental performance are to be assessed by a third-party standards organization, such an assessment is not part of the certification process. The absence of state oversight of social and environmental performance helped to garner bipartisan political consensus in favor of benefit corporation legislation. The governance of the corporation toward general or specific benefit is to be assured instead by a range of internal governance requirements, notably the right of stakeholders to seek legal redress if the corporation fails to pursue the claimed public benefit.
What are we to make of the effort to bring public purposes back into the realm of the corporation? Does this not produce a fundamental contradiction between a profit-oriented entity and a publicly oriented entity? The challenges faced by creating hybrid organizations are explored in Jane Jacobs’s remarkable book in dialogue form, Systems of Survival (1992).
2. A MONSTROUS HYBRID?
Jane Jacobs (1992) has her characters explore the claim that there are two patterns of moral behavior—they call them “syndromes”—that are applicable to all human institutions: the commercial syndrome and the guardian syndrome. The commercial syndrome, characterized by fifteen precepts (including “shun force,” “compete,” “be efficient,” “respect contracts,” “invest for productive purposes,” and “be honest”), applies to businesspeople and traders—but also to scientists. The guardian syndrome, characterized by fifteen different moral precepts (including “shun trading,” “be obedient and disciplined,” “respect hierarchy,” “be loyal,” “dispense largesse,” and “treasure honor”), applies to warriors, governments, religions, and charities. Jacobs has her interlocutors conclude that the two syndromes cannot be mixed and matched because, when they are combined, they produce “monstrous hybrids.” The key example given is the Mafia, which mixes a guardian role with commercial dealing. However, the broader claim is made that whenever hybrids of charity and commerce arise, the result is monstrous: state-run enterprise, commercialized universities, or for-profit religion. The sets of moral precepts that provide integrity if they work separately are undermined and produce moral failure if they are intermixed.
Jacobs’ interlocutors acknowledge that human behavior does not fall neatly into two entirely separate categories. Two ways have been found to keep moral zones separate—caste systems, which assigns different social roles to each, or “knowledgeable flexibility,” which compartmentalizes each actor internally so as to allow different behaviors in appropriate settings (e.g., acting as a guardian to friends and family but acting commercially with strangers). According to the interlocutors, neither strategy is able to work without producing some injustice or ambivalence—there are points of friction at the boundaries.
One might observe that, even without mixing benefit and profit, the corporation already displays what Jacobs would identify as a hybrid form. It operates in a commercial setting; however, as Coase (1937) famously explained, the frontiers of the firm management are hierarchical, and the firm becomes an internal mechanism for superseding the price mechanism of the market. That is, within the firm, market exchange does not operate and management substitutes for it. Furthermore, the governance structure of the firm underpinning management depends on loyalty—fiduciary duties exercised by directors and officers—so that internally it relies upon a guardian ethic. Indeed, what the benefit corporation idea seeks to exploit is the notion that the guardian or stewardship role of the directors and officers of the corporation could be turned toward a wider set of beneficiaries. Guarding the firm for wider social purposes, as opposed to guarding it for shareholders alone, would remain consistent with the guardian syndrome, which can be directed toward protection of society as a whole.
Nevertheless, Jacobs (1992) or her imagined interlocutors might be brought to argue that the corporation itself is already a monstrous hybrid and that any further admixture of purposes will simply produce a greater monstrosity. Can there be a virtuous rather than a monstrous hybrid lurking in the corporation? Stripped to its simplest elements, the hybrid that is being sought in the benefit corporation is one that arises between gift and exchange. The guardian or fiduciary makes a gift of care to some other. In the benefit corporation, the public benefit is a form of gift. On the other hand, the entrepreneurs who display Jacobs’s “commercial syndrome” seek to profit from exchange in the market. The transformation of a gift into an exchange (or an exchange into a gift) can, in Jacobs’ terms, produce a monstrous hybrid. Thus, when a gift is a form of payment in exchange for benefit, it becomes a bribe. Indeed, corporations are subject to rules against such corrupt practices. When an exchange is treated as the receipt of a gift, it becomes exploitation. Thus, for example, corporations are subject to minimum wage legislation. Bribe and exploitation are obverse ways of profiting from a gift relationship. Yet, one can pay to make the conditions of a gift possible (e.g., tuition) and give to make the conditions of exchange possible (e.g., family bequests). Can the separate but intersecting and mutually enabling circuits of gift and exchange be maintained distinct but together within the corporation?
This is where governance, accountability, and certification take on added and critical significance. They are not just about producing the positive reputation effect of a brand so as to signal to a subset of interested consumers that they should purchase and to a subset of interested investors that they should invest. They are also about maintaining integrity within the benefit corporation. What the benefit corporation gains as a return on investment is subject to its own governance, accountability, and certification standards. What the benefit corporation “gives back” to its stakeholders is subject to its own form of oversight. Separate sets of considerations apply and separate codes of conduct are elaborated. This is a version of “knowledgeable flexibility” operating within the corporation—which is a person—and premised upon the elaboration of a differentiated and accountable set of performance ethics.
In practice, must there not be trade-offs between the circuits of gift and exchange within a benefit corporation? Can we, as economic actors, become sufficiently sophisticated to differentiate between and among performance ethics? There is a certain alluring simplicity to waking up in the morning as the servant of a for-profit corporation doing what is needed to maximize profit, and then returning home in the evening to family and friends where the market is suspended. If one has to wake up in the morning as the servant of many masters (for-profit and not-for-profit) and return in the evening to a bundle of private and public obligations, there will be times when one master is sacrificed to another and the performance obligations become overburdening. This may illustrate the psychological grounding of Milton Friedman’s (1970) admonition against mixing corporate profit and corporate social responsibility.
To face such overburdening, however, the benefit corporation can seek to rely upon a shared intermediation of social roles. If the entire burden of gift and exchange were to fall upon a single corporate entity, Friedman’s critique would have great force and resonate with Jacobs’ stern warning against monstrous hybrids. But if—as one entity that certifies benefit corporations, B Lab (2014), put it—in a “declaration of interdependence,” the goal is to harness “the power of private enterprise to create public good” by acknowledging that “we are each dependent upon [one] another and thus responsible for each other and future generations” each actor is understood to bear only part of the collective burden undertaken by all hybrid benefit corporations.
Thus, B Lab interacts and intersects with a host of certification standards providers. It helps to establish the conditions for the emergence of benefit corporations and, through the parallel initiative called the Global Impact Investing Ratings System, conditions for the emergence of an investor community focused on benefit corporations. Financing through social impact investors, or using social impact or pay-for-performance bonds, can provide impetus for the capitalization of benefit corporations (Social Finance 2014). Stakeholders such as environmental nongovernmental organizations in turn scrutinize and provide impetus for higher levels of accountability and performance. This helps to mobilize consumers to shift their own demand toward sources of products and services that participate in the gift circuit. If the signaling among all the actors in the ecosystem is transparent, coordinated, and socially networked, the burden of producing public benefit can be shared. Although the invisible hand seeks to align the supply and demand of private goods through exchange, visible joined hands can seek to give public goods.
A hybrid is a monster if it cannot reproduce and if it disrupts and cannot function within an existing ecosystem. A hybrid is a new species when it can indeed find its niche within an ecosystem so as to function and flourish. We can no longer treat the social and environmental externalities generated by corporations as absorbed by and treated within the purview of governmental guardians alone. They have lost their capacity to generate adequate resources to produce countervailing public goods and are outstripped by the scale of the externalities. An economic ecosystem full of social impact investors, a supply chain of benefit corporations, publicly monitored standard setting and accountability mechanisms, as well as socially responsive consumers might help produce some of the environmental and social goods we need.
If the benefit corporation can become a new species of hybrid corporation, could it respond to the diagnosis of the business corporation posed by Joel Bakan (2003), namely that the corporation is a psychopath—certainly one kind of monster? On Bakan’s analysis, the corporation is a person displaying callous disregard for the feelings of other people, the incapacity to maintain human relationships, reckless disregard for the safety of others, deceitfulness (continual lying to deceive for profit), the incapacity to experience guilt, and the failure to conform to social norms and respect for the law—hence a psychopath (Bakan 2003). Bakan has criticized corporate social responsibility as being the equivalent of seeking to get a psychopath to agree to behave well: “The fundamental difficulty with social responsibility remains the fact that we haven’t changed the nature of the corporation. It is, and continues to be pathologically constituted, in the sense that it still must put its own interests above all others” (Bakan 2008). Bakan believes that the only solution to the pathology of the corporation is to control and punish it through government regulation. Would the benefit corporation provide a different diagnosis? Could it be a corporation with a conscience, despite being an artificial person seeking to make a return on investment “with no soul to be damned, and no body to be kicked”? (Edward, First Baron Thurlow, quoted in King 1977:1)
To have a conscience is to have knowledge with oneself or with another. It is the ability to look into oneself as if one were another and to judge one’s own actions. Does the benefit corporation have the ability to look into itself as if it were another and judge its own actions? In principle, any corporation—which is constituted as a body politic—is a person governed for the sake of others (the shareholders). The fiduciary principle that underlies its governance is inherently judged by the standard of “the punctilio of an honor the most sensitive.”6 Therefore, the absence of conscience in the business corporation, rather than its presence, proves to be mysterious. How does an entity governed for the sake of producing benefit for others become one that Bakan (2003) characterized as having callous disregard for the feelings of others? This can arise only if the benefit it seeks to generate for some disregards the costs generated for others. Yet, that is precisely the result produced by a fiduciary duty which, within the business corporation, compels directors and officers to pursue only the interests of shareholders and defines those interests narrowly to maximize returns. The pathology arises therefore not from the inability to produce other-regarding behavior by the corporation, but rather from the fact that its fiduciary regard is so narrowly blinkered.7
3. CONCLUSION
The benefit corporation seeks to become a corporation with the blinkers taken off the fiduciary duties owed in its name. In principle, it will not sacrifice its obligation to operate as a going concern for shareholders. However, it will monitor itself and be held accountable for its impacts on others, seeking in the process to demonstrate that its existence is of net social benefit, even and especially with respect to the public goods partially consumed through its activities.8 This is how it is meant to become a virtuous rather than monstrous hybrid.
Although the specific features of benefit corporation certification and oversight may not yet provide full and adequate accountability for operation within an ecological economy, this new form points in the direction of the kind of shift that will be required. Transforming existing corporations into benefit corporations is a significant challenge, especially when such a fundamental change requires the agreement of existing shareholders. Nevertheless, if the expectations and requirements of those who enter into transactions with corporations were such that strong incentives would exist to be able to signal the production of public benefit accompanying each exchange, the benefit corporation or its equivalents could gain more than a toehold in the economy.
NOTES
1. eBay Domestic Holdings v. Newmark C.A. No. 3705-CC (Del. Ch. Sept. 9, 2010)
2. The community interest company (CIC) was created in the United Kingdom under Part 2 of the Companies (Audit, Investigations and Community Enterprise) Act 2004, c. 27; available at http://origin-www.legislation.gov.uk/ukpga/2004/27. CICs are subject to an “asset lock”—they are not to distribute assets to their members except in accordance with regulatory authorization; any remaining assets on dissolution are protected for the community. A CIC must satisfy a general test, showing that the activities it conducts are for public benefit, as determined by the Regulator of Community Interest Companies. As of March 2014, there were 9177 CICs in the United Kingdom (UK Office of the Regulator of Community Interest Companies 2014). The United Kingdom has also created cooperative and community benefit societies, which act either for the benefit of a group of members (cooperative society) or for the benefit of people who are not members (community benefit society). These must demonstrate their social objectives to the Financial Conduct Authority and Prudential Regulation Authority of the Bank of England to be registered. See http://www.fca.org.uk/firms/being-regulated/meeting-your-obligations/firm-guides/cooperative-and-community-benefit-societies.
3. The low-profit limited liability company (called L3C) is a business form that has been adopted in Illinois, Louisiana, Maine, Michigan, North Carolina, Utah, Vermont, and Wyoming as an amendment to limited liability corporation (LLC) status; see, for example, Vermont 11 V.S.A. § 3001(23), available at http://www.leg.state.vt.us/docs/legdoc.cfm?URL=/docs/2008/acts/ACT106.HTM. Like charities, L3Cs must serve a charitable purpose of benefit to their community; in particular, under the Vermont legislation, “no significant purpose of the company is the production of income or the appreciation of property; provided, however, that the fact that a person produces significant income or capital appreciation shall not, in the absence of other factors, be conclusive evidence of a significant purpose involving the production of income or the appreciation of property.” Unlike a nonprofit, the L3C can issue equity and seek for-profit investors (see Rosenthal 2011).
4. At the time of this writing 26 states and Washington D.C. had adopted benefit corporation legislation and 7 states had legislation pending.
6. Meinhard v. Salmon 164 N.E. 545 (N.Y. 1928) per Cardozo J. Although this characterization of the trust relationship is not, strictly speaking, currently applicable to corporate fiduciary duties, it still provides a benchmark for the fiduciary role.
7. It might be objected that, as a general matter, legally imposed fiduciary duties are blinkered in the sense that they do not involve an obligation to display other-regarding behavior in general but only with respect to the specific beneficiaries of the fiduciary duty. When that fiduciary duty flows from a relationship of dependency, such as parent–child, doctor–patient, or attorney–client, fiduciary attention and resources are indeed devoted to the vulnerable other. It is far from obvious that shareholders are in analogous situation of dependency given their comparative ease of exit from the relationship with the corporation. Also, their vulnerability and dependency are not clearly greater than that of employees, creditors, suppliers, customers, and third parties bearing externalities. Furthermore, even if the situation of shareholders were analogous, the attention of the fiduciary devoted to the vulnerable dependent beneficiary need not be exclusive—and indeed will fail if it is. Thus, a parent will be mindful of a child’s general social integration, the doctor will be mindful of impacts of treatment on public health, and the lawyer will be mindful of his or her role as an officer of the court. Parental and professional responsibilities can only be fulfilled if the dependent beneficiary is enabled to take up social relationships with integrity. Thus, even a fiduciary duty undertaken toward shareholders should enable them and the entity constituted through them to take up their social relationships with integrity.
8. Note that once Berle and Means (1967:312–313) acknowledged that the modern business corporation owed fiduciary duties to stakeholders and not simply to shareholders, they came to believe that “the ‘control’ of the great corporations should develop into a purely neutral technocracy, balancing a variety of claims by various groups in the community and assigning to each a portion of the income stream on the basis of public policy rather than private cupidity.” Perhaps their formulation anticipated the benefit corporation, although neutrality is not the key characteristic of the fiduciary’s role. Rather, it is fidelity to the purposes of the corporation and capacity to make effective use of corporate resources to meet a polycentric set of claims upon it.
REFERENCES
Bakan, Joel. 2003. The Corporation: The Pathological Pursuit of Profit and Power. Toronto: Penguin.
Berle, Adolf Augustus, Jr., and Gardiner C. Means. 1967. The Modern Corporation and Private Property. Rev. ed. New York: Harcourt, Brace and World. First published 1932 by Macmillan, New York.
Coase, R. H. 1937. “The Nature of the Firm.” Economica 4 (16): 386–405. doi: 10.1111/j.1468–0335.1937.tb00002.x.
Friedman, Milton. 1970. “The Corporate Social Responsibility of Business Is to Increase Its Profits.” The New York Times Magazine, September 13.
Honeyman, Ryan. 2014. The B Corp Handbook: How to Use Business as a Force for Good. San Francisco: Berrett-Koehler Publishers.
Horwitz, Morton J. 1985. “Santa Clara Revisited: The Development of Corporate Theory.” West Virginia Law Review 88: 173–224.
Jacobs, Jane. 1992. Systems of Survival: A Dialogue on the Moral Foundations of Commerce and Politics. New York: Random House.
King, Mervyn A. 1977. Public Policy and the Corporation. New York: Wiley.