A corporation is an organization created by law and treated as a legal entity, literally a legal
Question:
A corporation is an organization created by law and treated as a legal entity, literally a legal “person,” that is separate from and independent of the individuals who are involved in it. As a legal person, a corporation has legal rights and duties that are primarily determined by the laws of the state in which the organization is incorporated. Forming a corporation has several benefits, including limiting legal liability, protecting personal assets, providing tax advantages, and ensuring organizational continuation beyond the life or involvement of individuals.
Traditionally, the state of Delaware has incorporation laws that provide very generous terms for shareholders. Over 50 percent of U.S. corporations and over 60 percent of the Fortune 500 corporations are incorporated in Delaware. Among the benefits provided by Delaware law are strong legal protections for the interests of corporate stockholders. In the words of the chief justice of the Delaware Supreme Court, “American corporate law makes corporate managers accountable to only one constituency—the stockholders.”3
This framework underlies what R. Edward Freeman has called the “dominant model” of managerial capitalism. Under that model, business managers act as agents of corporate stockholders and, thus, their primary responsibility is to serve stockholders by maximizing profits. This view was famously summarized in the title of a 1970 New York Times article by economist Milton Friedman: “The Social Responsibility of Business Is to Increase Its Profits.”
Framed in this way, there is an inherent tension between the legal responsibility of business managers and the call for greater corporate social responsibility. Pursuing general goals of social responsibility would violate the primary legal responsibility of business managers to pursue profits. But what if the stockholders themselves choose socially responsible goals in addition to, and perhaps even superior to, profit maximization? Benefit corporations, a new legal model created by more than 20 states (including Delaware), aim to do just this.
Like any corporation, a benefit corporation is a legal entity with legal rights and duties created to achieve the general benefits of any corporation: limiting liability, protecting owner assets, achieving tax advantages, and so on. Importantly, benefit corporations are not nonprofits; they are for-profit businesses that create value for their stockholders as a by-product of creating values for a wide range of other stakeholders. Benefit corporations differ from traditional corporations in that their boards and managers are given the legal authority to pursue social and environmental goals in addition to the financial goals that corporations generally pursue. This means that benefit corporations are free to make social and environmental goals part of the very mission and identity of the corporation and therefore make the boards and managers accountable to wider social goals. The profit sought by stockholders thus becomes one among other equally legitimate goals sought by a range of corporate stakeholders. The tension that is thought to exist between social ends and profit disappears in the benefit corporation model.
One estimate is that there were over 2,000 active benefit corporations in the United States in 2015.4 Some of the best-known companies include King Arthur Flour, Patagonia, Kickstarter, Seventh Generation, and Plum Organics. These for-profit businesses recognize that without profitability they will neither remain in business nor attract the investment needed to grow. But profit is recognized as a means, not an end in itself. Profits serve socially responsible ends by making the business financially sustainable so that it can pursue social ends.
A number of advantages are claimed for benefit corporations besides the normal financial benefits of any incorporation. Perhaps the most important is that the benefit corporation model allows corporations with socially responsible missions to protect that mission by giving both managers and boards the legal ability to prioritize mission over profits. Especially at a time when corporations and their managers are judged by short-term, quarterly earnings reports, normal corporate charters can create pressures on managers to back away from social missions in order to increase short-term profit. Recognizing that there can be different paths to profitability, benefit corporations hold management accountable for finding a path that also achieves socially responsible mission goals.
Advocates also claim that benefit corporations have the advantage of attracting employees, especially among a younger generation that is concerned as much with workplace quality as with such traditional benefits as salary and status. One study reported that businesses with a clear social mission and a reputation for creating social benefits were more successful in attracting and retaining millennial employees.5
Benefit corporations are also better positioned to attract socially motivated customers and investors. There is a growing market among socially conscious consumers for businesses that serve the common good. There is also a growing capital market among institutional and individual investors seeking socially responsible investments. Pursuit of socially responsible ends is part of the legal charter of benefits corporations and not something done simply as a public relations ploy.
As in any good business practice, benefit corporations have stimulated a movement to measure, assess, and certify businesses engaged as benefit corporations. Some choose to take an additional step and become certified as “B-Corps” by working with an independent nonprofit group, B-Labs, to assess the effectiveness of their strategy in serving socially responsible goals. Becoming a certified B-Corp provides a means for assuring consumers, investors, employees, and the general public that the company is successful in its mission. It is also possible for traditional corporations to meet the criteria established by B-Labs and become certified as a B-Corps without having the underlying legal structure of the benefit corporation.
Ben and Jerry’s was among the first and best-known corporations that adopted a strong socially responsible mission. From its earliest years in the 1980s, Ben and Jerry’s made its social responsibility goals part of its corporate mission. Although legally not a benefit corporation (the legal designation did not exist when the company was incorporated in 1984), its founding owners Ben Cohen and Jerry Greenfield committed the company to a range of social and environmental causes.
Ben and Jerry’s famously identified three fundamental goals as its corporate mission: to make the world’s best ice cream, to run a financially successful company, and to “make the world a better place.” It also started a foundation that was funded from 7.5 percent of the pretax earnings of the company. However, as a publicly traded corporation the fiduciary responsibility of Ben and Jerry’s management and board remained primarily a financial duty.
These issues came to a head in 2000 when Unilever, the multinational food and consumer product corporation, offered to buy Ben and Jerry’s for $43 per share, more than double its recent trading value of $17. Corporate buyouts by outside groups typically happen when the outsiders judge that the company is worth more than what is reflected by its share price. In this sense, the outside groups believe that the company is underperforming and worth more than how it is presently valued by the market. Both Ben Cohen and Jerry Greenfield opposed selling the company to Unilever. They feared that a corporate takeover would jeopardize the social mission of Ben and Jerry’s. But the corporate board had an independent duty to the stockholders.
Q 1: Does the Ben and Jerry’s board of directors have an ethical duty to sell the company to the highest bidder, even if this risks a change in the corporate mission?
Q 2: Should the fact that Unilever has a reputation as a socially progressive and responsible business influence that decision? Would the decision be different if Unilever planned to change the nature of Ben and Jerry’s mission?
Q 3: If things had been different and Ben and Jerry’s had been incorporated as a benefit corporation, would an offer at more than twice the present value be enough to change the company mission?
Q 4: How do benefit corporations fit into the model of private property, free-market capitalism?
Q 5: Suppose shareholders objected not to the mission to “make the world a better place,” but to the mission to “make the world’s best ice cream” and claimed that Ben and Jerry’s could maximize profits by making mediocre ice cream. Should shareholder desire override that aspect of the corporate mission?
Business Ethics Case Studies And Selected Readings
ISBN: 9780357453865
9th Edition
Authors: Marianne M. Jennings