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Benefit Corporations and the Public Interest
By Julia D. Mahoney
In the past five years, more than half the states have passed laws that allow firms to elect to be “benefit”
or “public benefit” corporations. While the precise terms of these statutes vary, the basic vision is the
same. The benefit corporation is to be a new kind of “for profit” entity, one charged with benefitting
society as well as making money for shareholders. To help achieve this goal, benefit corporations agree to
meet enhanced standards of accountability and transparency. Benefit corporations are taxed precisely the
same as C corporations.
The chief impetus for benefit corporations is the concern that “shareholder primacy”—the notion that
corporate fiduciaries must put the interests of equity owners ahead of those of other firm constituencies
and the public at large—constrains corporations from pursuing worthy missions. Whether this is in fact true
is a matter of debate. Corporations have long donated to charities, sponsored community activities and
underwritten cultural events. And some firms, such as ice cream maker “Ben & Jerry’s” and natural
cosmetics purveyor The Body Shop, make social responsibility a key part of their “brand.”
At the same time, the law has never been clear with respect to how far corporations can go when it comes
to doing good. Cases that address the limits of fiduciary power to give away corporate property are few and
far between, in large part because corporate giving tends to be both small in relation to firm size and
consonant with the pursuit of shareholder value. This ambiguity fuels the perceived need for statutes that
permit corporations to opt to be governed by a specific mandate directing those in charge to balance the
pecuniary needs of shareholders with the well-being of corporate stakeholders (including employees and
community members) and benefit to the public.
But will these efforts to combine in a single entity the pursuit of profits with other aims succeed? Or is it
inviting trouble to ask a single firm to deliver the sorts of services traditionally entrusted to government
and nonprofit organizations while making shareholders richer? After all, one might argue, it is hard enough
to monitor an entity that is supposed to be doing just one thing. Keeping track of success on multiple
fronts looks like a daunting task.
Right now, benefit corporations have so little in the way of a track record that it is not yet possible to
assess their impact. A careful reading of the relevant laws, however, suggests that the differences between
public benefit corporations and ordinary ones are likely to turn out to be mostly cosmetic. While in concept
benefit corporations have obligations that go beyond getting financial returns for their shareholders, in
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practice shareholders retain a form of primacy. No other groups—not even the putative beneficiaries of
whatever “public purpose” a benefit corporation chooses to further—have any rights to compel the firm to
pursue its social mission. Nor can anyone other than shareholders oblige those who run benefit
corporations to comply with transparency and accountability requirements. The most important departure
from standard corporate law is a provision in Delaware’s public benefit corporation law that in a change in
control situation directors are not bound to prioritize shareholder financial interests, thus allowing the
consideration of the interests of the public and other corporate constituencies. But even the effect of this
provision is likely to be a limited one, given the continued dominance of shareholders.
Billed as a great investment opportunity for—in the words of Governor Jack Martell of Delaware around the
time he signed Delaware’s public benefit law —“the growing number of investors who increasingly want to
make money and make a difference,” benefit corporations have stirred excitement as a promising
institutional innovation with “millennial” appeal. But to date all that can be said for sure about their
practical effect is that their directors and officers may have more leeway than other corporate fiduciaries to
allocate firm resources to non-shareholders. Exactly how courts will respond to shareholder suits seeking
to force benefit corporations to take specific actions to “balance” shareholder financial interests with social
missions must for now remain a matter of conjecture. That said, it is hard to imagine courts departing in
any significant way from standard corporate governance principles, which allot the power to make ordinary
business decisions to boards of directors.
In the final analysis, public benefit corporations may do no more than apply a sheen of coolness and social
responsibility to the pursuit of profit. That raises the troubling possibility that shareholders of benefit
corporations may feel they have done their part for society merely by investing their money and thus
neglect charitable activities and political participation. Also worrisome is the prospect that the opacity that
results from empowering fiduciaries to pursue multiple goals may make it harder to detect serious abuses
that divert or destroy shareholder wealth. Only time will tell if benefit corporations will succeed in fulfilling
their promise.
Julia D. Mahoney is the John S. Battle Professor of Law at the University of Virginia. Among the courses
she teaches are Corporations, Nonprofit Institutions, Property and the Monetary Constitution.