Andrew Farrington
Since 1978, the Business Roundtable, an association of chief executive officers of America’s leading companies, has been issuing annual statements regarding the purpose of a corporation. Each statement, from 1978 to 2018, has claimed that “corporations exist principally to serve shareholders.” Business Roundtable Redefines the Purpose of a Corporation to Promote ‘An Economy That Serves All Americans’, Business Roundtable (Aug. 19, 2019). However, on August 19, 2019, the Business Roundtable, led by Jamie Dimon, Chairman and CEO of JPMorgan Chase & Co., redefined the purpose of a corporation to include all stakeholders, namely a corporation’s customers, employees, suppliers, communities, and shareholders. Id. With this new definition, the Business Roundtable hopes “to deliver value to all of them, for the future success of our companies, our communities and our country.” Id.
Despite the good intentions of the Business Roundtable in making this statement, this article hopes to illustrate that socially conscious business leaders of publicly traded companies should not allow this statement to influence their decision-making. If a business leader starts to consider other stakeholders’ interest beyond those of their investors, their decisions will contravene current legal precedent and likely result in the commencement of shareholder litigation. Rather, if business leaders are determined to do social good and do not want to wait for legal precedent to change, counsel should explore the steps required to incorporate or certify a company as a benefit corporation.
The Legal Definition of a Corporation’s Purpose: Shareholder Primacy
According to the Business Roundtable’s press release, the new definition of a corporation’s purpose stems from their recognition that companies will fail if they do not do a better job in assisting struggling Americans. Id. Andrew Winston, a contributor to the Harvard Business Review, agrees with this rationale, stating that, “[b]usiness leaders are feeling pressure to rethink the role of business in society.” Andrew Winston, Is the Business Roundtable Statement Just Empty Rhetoric?, Harv. Bus. Rev. (Aug. 30, 2019). Specifically, Winston argues that social norms and expectations by company stakeholders are changing and pressuring companies to consider their interests. Id. However, regardless of Winston’s support, the Business Roundtable statement has been met with skepticism. Specifically, some believe that this new definition is nothing but an empty promise. Kevin Moss & Eliot Metzger, With New Business Roundtable Statement, Are 200 CEOs Stuck in Yesterday’s Corporate Sustainability?, World Resource Inst. (Aug. 22, 2019). It is possible that some of this skepticism originates from the idea that the Business Roundtable’s new definition violates legal precedent establishing the purpose of a corporation.
In the seminal case of Dodge v. Ford Motor Company, the court held that “[a] business corporation is organized and carried on primarily for the profit of the stockholders.” Dodge v. Ford Motor Co., 204 Mich. 459, 507 (1919). In this case, the Ford Motor Company, led by Ford’s president Henry Ford, declined to offer special dividends to its shareholders so that the company could use those funds for the benefit of society. Id. at 463-70. Ford stated, “[m]y ambition . . . is to employ still more men; to spread the benefits of this industrial system to the greatest possible number, to help them build up their lives and their homes. To do this, we are putting the greatest share of our profits back into the business.” Id. at 468.
The Dodge brothers, shareholders of the Ford Motor Company who benefited greatly from the special dividends that Ford now wished to cut, initiated a shareholder lawsuit against the corporation asking the court to instruct the company to provide them the special dividends. Id. at 460. The court held in favor of the Dodge brothers, reasoning that:
. . . the purpose of any [corporation] under the law is earnings—profit. Undistributed profits belong to the corporation . . . it is clear that the agents of a corporation, and even the majority, cannot arbitrarily withhold profits earned by the company, or apply them to any use which is not authorized by the company’s charter.
Id. at 497-501 (internal quotations and citations omitted). In other words, the court held that Ford’s decision to stop paying special dividends in order to use the funds for a humanitarian purpose was contradictory to the purpose of a corporation—to generate profits for its shareholders. Id.
The precedent established in Dodge still applies today. Malone v. Brincat, 722 A.2d 5, 9 (Del. 1998) (“The board of directors has the legal responsibility to manage the business of a corporation for the benefit of its shareholder owners.”). In fact, the topic of shareholder primacy is one that some scholars have been fascinated with over the past century. Robert J. Rhee, A Legal Theory of Shareholder Primacy, Harv. L. Sch. F. on Corp. Governance and Fin. Reg. (Apr. 11, 2017). For instance, in Professor Robert J. Rhee’s article, A Legal Theory of Shareholder Primacy, published on Harvard Law School’s Forum on Corporate Governance and Financial Regulation, he discussed whether shareholder primacy is actual law as opposed to simply being a norm. Id. By conducting “a systematic empirical review of judicial discussion of shareholder profit maximization,” Rhee concluded that “shareholder primacy rests on a legal foundation, and [is] not some general notion of collective social belief.” Id.
A Likely Increase in Shareholder Litigation
As the Business Roundtable’s new statement of a corporation’s purpose extends beyond investors in contravention of Dodge, it is likely that there will be an increase in shareholder litigation in response. In fact, some investors expressed their concern immediately after the Business Roundtable released their statement. Council of Institutional Investors Responds to Business Roundtable Statement on Corporate Purpose, Council of Institutional Inv. (Aug. 19, 2019). For example, the Council of Institutional Investors (“CII”), a nonprofit association of U.S. asset owners, claimed that, “[t]he statement undercuts notions of managerial accountability to shareholders.” Id. The CII argues that “boards and managers need to sustain a focus on long-term shareholder value” because, “[a]ccountability to everyone means accountability to no one.” Id.
Given the clear conflict between the legal purpose of a corporation and the Business Roundtable’s new statement, it is more than likely that litigation on this issue will soon follow. As the Business Roundtable’s statement was only made a few months ago, it is not surprising that a court has not yet ruled on this issue. However, if and when a court does weigh in, it will be interesting to see both whether or not the court will continue to uphold Dodge and what the court’s reasoning is for its decision. Regardless, until this issue is settled, corporate counsel should be advising boards and managers to continue to make decisions based on benefiting their shareholders. Otherwise, they risk opening a company up to shareholder litigation.
The Benefit Corporation
One legally sound alternative corporate counsel could recommend to business leaders who want to make more socially conscious decisions is to incorporate or certify their firm as a benefit corporation. A benefit corporation is like most traditional corporations in that it is a for-profit entity. However, it has “modified obligations committing it to higher standards of purpose, accountability and transparency.” What is a Benefit Corporation?, B Lab (last visited Dec. 24, 2019). As discussed above, traditional public corporations are legally required to use profit-maximization as the primary lens for decision making. Dodge v. Ford Motor Co., 204 Mich. at 497. A benefit corporation is not constrained by such an obligation, rather “they are required to consider all stakeholders in their decisions.” What is a Benefit Corporation?, B Lab (last visited Dec. 24, 2019) (emphasis added). Currently, 31 U.S. jurisdictions, including Delaware, California, and Massachusetts, have passed benefit corporation legislation. To date, there are nearly 5,000 benefit companies registered in the U.S. Benefit Corporation 101, B Lab (last visited Dec. 24, 2019).
Given Andrew Winston’s argument that consumers are often demanding companies to be more socially conscious, this particular corporate structure has unsurprisingly led to some very successful companies. Patagonia, a retail clothing company, is perhaps the most well-known and successful benefit corporation in the U.S. In January 2012, Patagonia became the first California company to sign up for benefit certification (“B certification”), which requires a firm to have an “explicit social or environmental mission, and a legally binding fiduciary responsibility to take into account the interests of workers, the community and the environment as well as its shareholders.” Corporate Partnership: Certified B Corporation, Patagonia (last visited Dec. 24, 2019).
Since moving to benefit corporation status, Patagonia has seen great financial success. Patagonia Revenue, Craft (last visited Dec. 24, 2019). In 2013, revenue for the company was listed at $570 million. By 2017, it grew to $1 billion. Id. This success is largely attributed to the fact that consumers are drawn to a company that sells “a product that is made by an environmentally friendly company in an environmentally friendly manner.” Poonkulali Thangavelu, The Success of Patagonia’s Marketing Strategy, Investopedia (July 7, 2015). Patagonia also stands out amid its competitors by releasing statements each year about its environmental and social initiatives. Further, Patagonia is Fair Trade Certified, which means that it is committed to providing a living wage and safe working conditions to its employees. Why Fair Trade, Fair Trade USA (last visited Dec. 24, 2019).
Patagonia’s success makes incorporating or certifying as a benefit corporation an attractive option for socially conscious business leaders. However, not all U.S. jurisdictions have passed legislation that allows for the creation of a benefit corporation. Benefit Corporation 101, B Lab (last visited Dec. 24, 2019). Additionally, although accountability can attract socially conscious consumers and investors, it can also be a double-edged sword; considering the interests of all of a company’s stakeholders is a more complicated endeavor than only considering the interests of a company’s shareholders.
Regardless of the potential hurdles that might arise if a firm incorporates as a benefit corporation, there are plenty of resources regarding this topic that are available to corporate lawyers and socially conscious business leaders. Specifically, benefitcorp.net provides information detailing the advantages of becoming a benefit corporation, the pathways to becoming one, and which state legislatures allow them. B Lab (last visited Dec. 24, 2019).
Conclusion
The Business Roundtable’s recent statement regarding a corporation’s purpose is well-intentioned. However, given that it has already caused concern within investor communities, business leaders should not immediately attempt to embody the new statement. Rather, if business leaders or entrepreneurs are adamant in organizing a for-profit company that serves a multi-faceted social purpose, then it is preferable for them to follow in the steps of Patagonia and seek certification or incorporation as a benefit corporation.