If you own a business, you get to do what you want with it. If you don’t own it, you don’t — unless the business is organized in Maryland.
A new law in that state allows corporate decision-makers to commit their companies to various social and environmental goals, even when those commitments interfere with earning profits for shareholders. By becoming certified “benefit corporations,” companies in Maryland can exempt themselves from legal obligations that require them to serve shareholders’ interests.
A traditional corporation can choose to pursue social goals, even if that means foregoing profits in the short-term, but it must have reason to believe that its actions will benefit shareholders down the road. Starbucks, for example, has been hawking fair-trade coffee since 2000. That decision to pay above-market prices for the firm’s core product may or may not provide a better standard of living for small-scale coffee farmers, which is its stated purpose, but it has definitely earned Starbucks a lot of media attention and may have helped to bring socially concerned coffee drinkers into the chain’s stores. So this debatable business strategy falls squarely into the traditional “business judgment” rule that provides leeway for corporate managers.
But, in cases where pro-social actions cannot be expected to pay off, corporations must refrain. If executives want to make philanthropic contributions with their own money, they can, but they cannot use shareholder money to advance their own personal ideas of what constitutes a social good. If they do, they risk being sued for failing to fulfill their fiduciary duties.
Ben Cohen and Jerry Greenfield, founders of Ben & Jerry's Homemade Inc., have expressed their support for a bill now under consideration in the Vermont Legislature, which is similar to Maryland’s recently passed law. In 2000, the British-Dutch conglomerate Unilever paid $43.60 per share to acquire a majority interest in the quirky ice cream company. The offer was nearly 25 percent above Ben & Jerry's closing stock price the previous day, making it a good deal for shareholders, but the conglomerate could not be counted on to hold to the values Cohen and Greenfield had had in mind when they started the company.
Had they refused the offer at the time, Cohen and Greenfield would most likely have faced a lawsuit. But, with the pending legislation, companies like Ben & Jerry’s could refuse even highly profitable takeovers. Sen. Hinda Miller, a principal sponsor of the Vermont bill, said that benefit corporations could “say, ‘Thanks for the great price, but we're not going to sell because we have obligations beyond the price of the stock.’” Cohen told The Associated Press, “The more defenses that you have and the more legal roadblocks to having the company taken over by an entity that doesn't share that social mission, the better it is for keeping the interests of the community at heart.”
Cohen and other advocates of the legislation seem to have forgotten that there already is a way for entrepreneurs to ensure that their companies will stick to their values: Don’t take your company public. A small-business owner who actually owns his or her own company can work towards any goal, whether that is to maximize profit, to provide good benefits and wages to workers, or to follow environmentally sustainable practices. Small-business owners are free to forego as much money as they want in pursuit of their dreams, and many take full advantage of that. But, when you start playing with other people’s money, rather than your own, you must work to benefit those people. Laws like Maryland’s confuse the interests of people who put their money on the line in an enterprise with those of people who do not.
The idea of what is socially responsible is too subjective and too constantly shifting to serve as a reliable guide for corporate behavior. Even if all shareholders in a company agree that they wish to benefit the world, they may not all be pleased when the CEO decides to give away the business's assets in order to help save the whales.
In the end, the only people I can see deriving any good from this legislation are the lawyers. They will be guaranteed lifetime employment as they litigate who is holier than thou.
Posted by Larry M. Elkin, CPA, CFP®
If you own a business, you get to do what you want with it. If you don’t own it, you don’t — unless the business is organized in Maryland.
A new law in that state allows corporate decision-makers to commit their companies to various social and environmental goals, even when those commitments interfere with earning profits for shareholders. By becoming certified “benefit corporations,” companies in Maryland can exempt themselves from legal obligations that require them to serve shareholders’ interests.
A traditional corporation can choose to pursue social goals, even if that means foregoing profits in the short-term, but it must have reason to believe that its actions will benefit shareholders down the road. Starbucks, for example, has been hawking fair-trade coffee since 2000. That decision to pay above-market prices for the firm’s core product may or may not provide a better standard of living for small-scale coffee farmers, which is its stated purpose, but it has definitely earned Starbucks a lot of media attention and may have helped to bring socially concerned coffee drinkers into the chain’s stores. So this debatable business strategy falls squarely into the traditional “business judgment” rule that provides leeway for corporate managers.
But, in cases where pro-social actions cannot be expected to pay off, corporations must refrain. If executives want to make philanthropic contributions with their own money, they can, but they cannot use shareholder money to advance their own personal ideas of what constitutes a social good. If they do, they risk being sued for failing to fulfill their fiduciary duties.
Ben Cohen and Jerry Greenfield, founders of Ben & Jerry's Homemade Inc., have expressed their support for a bill now under consideration in the Vermont Legislature, which is similar to Maryland’s recently passed law. In 2000, the British-Dutch conglomerate Unilever paid $43.60 per share to acquire a majority interest in the quirky ice cream company. The offer was nearly 25 percent above Ben & Jerry's closing stock price the previous day, making it a good deal for shareholders, but the conglomerate could not be counted on to hold to the values Cohen and Greenfield had had in mind when they started the company.
Had they refused the offer at the time, Cohen and Greenfield would most likely have faced a lawsuit. But, with the pending legislation, companies like Ben & Jerry’s could refuse even highly profitable takeovers. Sen. Hinda Miller, a principal sponsor of the Vermont bill, said that benefit corporations could “say, ‘Thanks for the great price, but we're not going to sell because we have obligations beyond the price of the stock.’” Cohen told The Associated Press, “The more defenses that you have and the more legal roadblocks to having the company taken over by an entity that doesn't share that social mission, the better it is for keeping the interests of the community at heart.”
Cohen and other advocates of the legislation seem to have forgotten that there already is a way for entrepreneurs to ensure that their companies will stick to their values: Don’t take your company public. A small-business owner who actually owns his or her own company can work towards any goal, whether that is to maximize profit, to provide good benefits and wages to workers, or to follow environmentally sustainable practices. Small-business owners are free to forego as much money as they want in pursuit of their dreams, and many take full advantage of that. But, when you start playing with other people’s money, rather than your own, you must work to benefit those people. Laws like Maryland’s confuse the interests of people who put their money on the line in an enterprise with those of people who do not.
The idea of what is socially responsible is too subjective and too constantly shifting to serve as a reliable guide for corporate behavior. Even if all shareholders in a company agree that they wish to benefit the world, they may not all be pleased when the CEO decides to give away the business's assets in order to help save the whales.
In the end, the only people I can see deriving any good from this legislation are the lawyers. They will be guaranteed lifetime employment as they litigate who is holier than thou.
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