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BENEFIT CORPORATIONS: HOW TO ENFORCE A
MANDATE TO PROMOTE THE PUBLIC INTEREST
Briana Cummings*
A new trend has emerged within the past decade: corporations that seek
to turn a profit while affirmatively promoting the public interest. To accommodate this trend, six states have recently enacted legislation creating the
benefit corporation, a for-profit entity that is legally obligated to promote both
a “specific public benefit” of its choosing and the “general public benefit.”
Of all the legal and practical challenges facing successful implementation of this new legislation, perhaps the trickiest—and most important—is
the need to ensure accountability to this public purpose mandate. This Note
argues that the principal components of the accountability scheme adopted by
benefit corporation legislation—(1) certification from an independent third
party and (2) annual reports to the public—are ill-suited to the regulation of
social welfare objectives. Drawing on lessons learned from the use of similar
top-down regulatory mechanisms in corporate, nonprofit, and government
contexts, this Note explains why the addition of bottom-up and horizontal
mechanisms for “mission accountability” may help foster the capacity and
internal motivation necessary for benefit corporations to achieve their public
benefit obligations.
INTRODUCTION
Social enterprise1—the use of market-based strategies to promote
the public good2—is “one of the . . . fastest growing areas of small business today.”3 First used in the 1980s and 1990s to designate nonprofits
* J.D. Candidate 2012, Columbia Law School.
1. Social enterprises are also referred to as blended enterprises, Dana Brakman Reiser,
Blended Enterprise and the Dual Mission Dilemma, 35 Vt. L. Rev. 105, 105 (2010)
[hereinafter Brakman Reiser, Blended Enterprise]; blended value organizations; hybrid social
ventures, Robert A. Katz & Antony Page, The Role of Social Enterprise, 35 Vt. L. Rev. 59,
61–62 (2010); for-benefit corporations, Alissa Mickels, Beyond Corporate Social
Responsibility: Reconciling the Ideals of a For-Benefit Corporation with Director Fiduciary
Duties in the U.S. and Europe, 32 Hastings Int’l & Comp. L. Rev. 271, 281 (2009); double
bottom line corporations, Anthony Bisconti, The Double Bottom Line: Can Constituency
Statutes Protect Socially Responsible Corporations Stuck in Revlon Land?, 42 Loy. L.A. L.
Rev. 765, 805 (2009); triple bottom line corporations, Stephen J. Haymore, Note, Public(ly
Oriented) Companies: B Corporations and the Delaware Stakeholder Provision Dilemma,
64 Vand. L. Rev. 1311, 1313 n.7 (2011); and multiple bottom line corporations, Thomas Kelley,
Law and Choice of Entity on the Social Enterprise Frontier, 84 Tul. L. Rev. 337, 347 (2009)
[hereinafter Kelley, Law and Choice].
2. Linda O. Smiddy, Corporate Creativity: The Vermont L3C & Other Developments
in Social Entrepreneurship, 35 Vt. L. Rev. 3, 5 (2010).
3. John C. Weiss III, Commentary, Profits for Nonprofits: An Oxymoron?, Daily Rec.
(Balt.), Feb. 20, 2004, at IIA.
578
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that use earned income strategies, the term “social enterprise” has begun
more recently to encompass for-profit corporations4—and for-profit venture capitalists5—pursuing social welfare objectives. Social enterprise is
on the rise at top business schools like Harvard and Stanford6 and has
been called “one of the hottest movements” among young people in the
United States.7 A newspaper search uncovered 1,400 articles with the
term “social entrepreneur” from 1997 to 2006, up from 94 between 1986
and 1996.8
Social entrepreneurs complain, however, about “legal and structural
limits on their ability to pursue social aims.”9 In response, Maryland and
Vermont enacted legislation in the spring of 2010 to provide them with a
new “off-the-rack legal form”10: the benefit corporation.11 California,
Hawaii, New Jersey, and Virginia followed suit in 2011.12 As of this writ4. Katz & Page, supra note 1, at 59–61, 90; see also Mickels, supra note 1, at 281
(noting “for-benefit corporations” are defined in part as being “free[] to engage in any
legitimate business activity” and able to “accept debt and equity investments”).
5. Janet E. Kerr, Sustainability Meets Profitability: The Convenient Truth of How the
Business Judgment Rule Protects a Board’s Decision to Engage in Social Entrepreneurship,
29 Cardozo L. Rev. 623, 654–59 (2007) [hereinafter Kerr, Sustainability] (describing
“venture philanthropists”); see also Thomas Kelley, Rediscovering Vulgar Charity: A
Historical Analysis of America’s Tangled Nonprofit Law, 73 Fordham L. Rev. 2437, 2463
(2005) [hereinafter Kelley, Rediscovering] (noting social enterprise and venture
philanthropy are two sides of same phenomenon).
6. Katz & Page, supra note 1, at 60.
7. David Gergen, The New Engines of Reform, U.S. News & World Rep., Feb. 20,
2006, at 48, 48.
8. Kerr, Sustainability, supra note 5, at 629–30.
9. Katz & Page, supra note 1, at 78, 85; see also Kelley, Law and Choice, supra note 1,
at 341, 352–66 (explaining “cobbled-together” forms “tend to be expensive to create,
burdensome to maintain, and . . . legally insecure” (citations omitted)); Gail A. Lasprogata
& Marya N. Cotten, Contemplating “Enterprise”: The Business and Legal Challenges of
Social Entrepreneurship, 41 Am. Bus. L.J. 67, 98–111 (2003) (describing “the business and
legal challenges that arise when nonprofit organizations pursue entrepreneurial
strategies”); Hadley Rose, The Social Business: The Viability of a New Business Entity Type,
44 Willamette L. Rev. 131, 134–45 (2007) (advocating creation of new legal entity); Celia
R. Taylor, Carpe Crisis: Capitalizing on the Breakdown of Capitalism to Consider the
Creation of Social Businesses, 54 N.Y.L. Sch. L. Rev. 743, 746–63 (2009) (arguing “current
laws impair” social enterprise and “creation of new entity forms is needed”); infra note 52
(noting limits on nonprofits’ ability to pursue commercial activities).
10. Katz & Page, supra note 1, at 77, 93.
11. Act of Apr. 13, 2010, 2010 Md. Laws 97 (codified at Md. Code Ann., Corps. &
Ass’ns §§ 5-6C-01 to -07 (LexisNexis 2007 & Supp. 2011)); Act of May 19, 2010, 2010 Vt.
Acts & Resolves 228 (codified at Vt. Stat. Ann. tit. 11A, §§ 21.01–21.14 (2010 & Supp.
2011)).
12. Act of Oct. 9, 2011, ch. 728, 2011 Cal. Legis. Serv. 5886, 5886–93 (West); Act of
July 8, 2011, 2011 Haw. Sess. Laws 682 (codified at Haw. Rev. Stat. §§ 420D-1 to -13 (West
Supp. 2011)); Act of Mar. 1, 2011, ch. 30, 2011 N.J. Laws 203 (codified at N.J. Stat. Ann.
§§ 14A:8-1 to -2, -4 to -5 (West 2011)); Act of Mar. 26, 2011, 2011 Va. Acts 1146 (codified at
Va. Code Ann. §§ 13.1-782 to -791 (2011));. see also S.B. 1463, 2009–2010 Leg. Sess., at 98
(Cal. 2010), available at http://www.leginfo.ca.gov/cgi-bin/postquery?bill_number=sb_
1463&sess=PREV&house=B&author=desaulnier (on file with the Columbia Law Review) (last
visited Feb. 23, 2012) (authorizing flexible purpose corporations); W. Derrick Britt, R.
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ing, legislation enabling benefit corporations has passed both houses in
New York,13 and has been introduced in Colorado, Michigan, Pennsylvania, North Carolina, and Oregon.14
A benefit corporation looks like a standard corporation in almost all
respects but one: It is legally obligated to promote the public interest.
The benefit corporation legislation is devoted largely to establishing a
means for enforcing this new obligation. This Note argues that the legislation’s framework for enforcing benefit corporations’ new “public benefit” obligation—through new private rights of action for shareholders,
certification and regular monitoring by an independent third party, and
regular public disclosure of practices and results—may fail to promote,
and may in some cases even impede, meaningful accountability for social
performance. Instead of a monitoring scheme focused on compliance
with fixed outcomes or procedures, and conducted solely by a generalpurpose certification entity and the public at large, this Note proposes an
accountability framework that emphasizes organizational learning and
adaptability and that complements external accountability to oversight
bodies with internal accountability and accountability to professional
peers and stakeholders.
Part I explains the reasons for the emergence of for-profit social enterprise, the perceived need for new corporate forms to accommodate it,
and the benefit corporation legislation’s efforts to meet that need. Part II
describes the broader trend of using transparency-based accountability
approaches to regulate corporate, nonprofit, and government entities;
explains the theoretical basis for this approach; and critiques its application to benefit corporations. Part III proposes an alternative accountability framework.
I. MAKING FOR-PROFIT SOCIAL ENTERPRISE POSSIBLE
In Part I.A, this Note first describes the for-profit social enterprise
trend in general and the factors that brought it about, then explores the
creation of benefit corporations in particular. Part I.B explains the legal
and practical problems facing for-profit social enterprise. Part I.C details
the legislation’s proposed solution to these problems.
Todd Johnson & Susan H. Mac Cormac, Cal. Working Grp. for New Corp. Forms,
Frequently Asked Questions: Proposed Amendments to the California Corporations Code
for a New Corporate Form: The Flexible Purpose Corporation 1 (2010), available at http:/
/www.primakers.net/files/FAQ%20re%20the%20Flexible%20Purpose%20Corp.doc (on
file with the Columbia Law Review) (explaining flexible purpose corporations).
13. S.B. 7855, 233d Leg. Sess. (N.Y. 2010) (authorizing incorporation of benefit
corporations).
14. S.B. 11-005, 68th Gen. Assemb., 1st Reg. Sess. (Colo. 2011); S.B. 359, 96th Leg.,
Reg. Sess. (Mich. 2011); S.B. 26, Gen. Assemb., 2011 Sess. (N.C. 2011); H.B. 419, Gen.
Assemb., 2011 Sess. (N.C. 2011); H.B. 2745, 76th Leg. Assemb., 2011 Reg. Sess. (Or. 2011);
S.B. 433, 2011–2012 Reg. Sess. (Pa. 2011).
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A. The Drive for Corporations with Double Bottom Lines
1. Beyond Corporate Social Responsibility. — The notion that corporations have a moral obligation to protect the public interest, though often
disputed,15 is arguably as old as the corporate form itself.16 In the United
States, business methods have long been used in the service of socially
responsible,17 public,18 and philanthropic19 ends; the corporate social responsibility (CSR) movement—made more visible by companies like Ben
and Jerry’s and The Body Shop20—has been on the rise since the 1970s.21
Unlike previous efforts to combine profit-making with public problem solving, however, double bottom line corporations neither treat social responsibility as incidental to profit-making (as do both corporate
philanthropy22 and CSR23) nor see profit-making as incidental to the pur15. Proponents of “shareholder theory” argue “there is one and only one social
responsibility of business—to . . . engage in activities designed to increase its profits so long
as it [does so] . . . without deception or fraud.” Milton Friedman, Capitalism and Freedom
133 (40th anniversary ed. 2002). Proponents of “stakeholder theory” believe corporations
should be obligated to consider the interests of nonshareholders affected by the
corporations’ actions. Compare Stephen M. Bainbridge, In Defense of the Shareholder
Wealth Maximization Norm: A Reply to Professor Green, 50 Wash. & Lee L. Rev. 1423,
1424–25 (1993) (describing shareholder theory as “mainstream” in corporate law), and
Taylor, supra note 9, at 748 (“[T]he profit-maximizing model of the corporate form
remains firmly in place.”), with Mickels, supra note 1, at 297 (noting growing public
support for stakeholder view), and Lumen N. Mulligan, What’s Good for the Goose Is Not
Good for the Gander: Sarbanes-Oxley-Style Nonprofit Reforms, 105 Mich. L. Rev. 1981,
2003–04 (2007) (calling stakeholder theory “the preeminent contemporary normative
theory of business ethics”).
16. See Lisa M. Fairfax, Doing Well While Doing Good: Reassessing the Scope of
Directors’ Fiduciary Obligations in For-Profit Corporations with Non-Shareholder
Beneficiaries, 59 Wash. & Lee L. Rev. 409, 412 n.12, 430–33, 436–37 (2002) [hereinafter
Fairfax, Doing Well] (describing longstanding debate between shareholder and
stakeholder theories); Mulligan, supra note 15, at 2002–03 (same).
17. See D. Gordon Smith, The Shareholder Primacy Norm, 23 J. Corp. L. 277, 290–91
(1998) (noting frequency of business decisions that take into account stakeholder interests
that do not enhance shareholder profit).
18. See Kelley, Rediscovering, supra note 5, at 2462 (describing long history in United
States of entrepreneurial solutions to social problems); Smiddy, supra note 2, at 7 (noting
postcolonial period when privately owned enterprises financed and built many U.S.
turnpikes and bridges).
19. See Kelley, Law and Choice, supra note 1, at 347–48 (describing corporate
philanthropy going back to early twentieth century).
20. Mickels, supra note 1, at 274.
21. See Kevin T. Jackson, Global Corporate Governance: Soft Law and Reputational
Accountability, 35 Brook. J. Int’l L. 41, 48–52 (2010) (giving history of CSR).
22. See Brakman Reiser, Blended Enterprise, supra note 1, at 107 (explaining that
even largest corporate philanthropy, Google.org, “is not really a form of blended
enterprise . . . [because] Google makes only a small scale commitment to pursue social
goals in relation to its profit-making/taking pursuits”); Katz & Page, supra note 1, at 91
n.195 (noting Delaware corporate law puts ceilings on corporate donations to charity).
23. Mickels, supra note 1, at 277 (describing CSR as “do no harm” approach); Taylor,
supra note 9, at 745 (same); see also Kelley, Law and Choice, supra note 1, at 350–52
(distinguishing CSR from social entrepreneurship); Janet E. Kerr, The Creative Capitalism
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suit of social welfare objectives (as does a nonprofit engaging in commercial activities24). Instead they seek to serve two “co-equal”25 masters (two
bottom lines) at once26—to “expressly measure[] [their] success both in
terms of [their] financial performance . . . and [their] success in advancing a social mission.”27 Some have therefore described this new corporate
form as an entirely new “fourth sector,”28 joining the ranks of the “big
three” sectors of government, business, and nonprofits.29 Others have described it as a convergence of the three.30
2. The Forces Behind the Double Bottom Line Idea. —
a. Pressures on the Private Sector. — Pressures to merge profit-making
and public pursuits come from both the private (corporate) and public
(government and nonprofit) sectors. From the corporate side, conscientious consumers, investors, business partners,31 and potential employees32 are motivating corporations to prove outstanding citizenship33 as a
means to distinguish themselves in an increasingly competitive global
marketplace.34 In polls, American consumers have identified a company’s
social responsibility as an increasingly important factor in their purchasSpectrum: Evaluating Corporate Social Responsibility Through a Legal Lens, 81 Temp. L.
Rev. 831, 855–60 (2008) [hereinafter Kerr, Creative Capitalism] (same).
24. Kelley, Law and Choice, supra note 1, at 339 (describing nonprofits as “run[ning]
commercial activities on the side in order to cross-subsidize their charitable operations”).
25. Smiddy, supra note 2, at 5.
26. See Brakman Reiser, Blended Enterprise, supra note 1, at 105 (“[A]chieving and
governing truly blended enterprise means consistently serving two masters . . . .”).
27. Katz & Page, supra note 1, at 86.
28. See Kelley, Law and Choice, supra note 1, at 338–41 (describing emerging fourth
sector); Mickels, supra note 1, at 279–80 (same).
29. See David J. Siegel, The Promise of Intersectoral Collaboration, in Organizing for
Social Partnership 47, 50–51 (2010) (describing “big three” sectors).
30. See id. at 51 (giving examples of multinational corporations resembling
government in their reach and power, and of colleges and universities, though technically
nonprofits, being “likened for some time to business enterprises”).
31. See Ernst & Young, Climate Change and Sustainability: Seven Questions CEOs
and Boards Should Ask About “Triple Bottom Line” Reporting 3–7 (2010), available at
http://www.ey.com/Publication/vwLUAssets/Seven_things_CEOs_boards_should_ask_
about_climate_reporting/$FILE/Seven_things_CEOs_boards_should_ask_about_climate_
reporting.pdf (on file with the Columbia Law Review) (describing sustainability reports);
Jackson, supra note 21, at 83 (describing government procurement policies favoring
suppliers privately certified for CSR).
32. See Kerr, Creative Capitalism, supra note 23, at 864 (noting Economist survey that
found attracting potential employees was a chief benefit to businesses of having defined
corporate responsibility policy).
33. Allison M. Snyder, Holding Multinational Corporations Accountable: Is NonFinancial Disclosure the Answer?, 2007 Colum. Bus. L. Rev. 565, 570–71, 599, 603–04
(noting “growing use of voluntary disclosure by corporations”).
34. See Kerr, Creative Capitalism, supra note 23, at 855 (noting firms’ “‘incentive to
create a consumer demand for social responsibility so that they can distinguish their goods
in the market’” (quoting Larry E. Ribstein, Accountability and Responsibility in Corporate
Governance, 81 Notre Dame L. Rev. 1431, 1453 (2006))).
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ing decisions.35 Investors, too, fearing potential penalties and liabilities
associated with poor social or environmental performance,36 or wanting
to promote social change as an end in itself,37 are increasingly screening
corporations’ nonfinancial performance. In 2007, more than $2.7 trillion—about 11% of all assets under professional management in the
United States—were invested in portfolios screened for social responsibility.38 Internationally, 381 major global financial institutions, representing
assets of $14 trillion, signed the U.N. Principles for Responsible
Investment in 2008.39 A number of publicly available investment products
have launched in response to this trend: the Dow Jones Sustainability
Indexes in 1999;40 the Financial Times Stock Exchange’s FTSE4Good in
35. See Stephen C. Jones & Paul R. McIntyre, LexisNexis Expert Commentaries,
Increased Awareness of Global Warming Is Changing the Climate of Corporate Fiduciary
Obligations 1 (2008), 2008 Emerging Issues 2480 (Lexis) (on file with the Columbia Law
Review) (noting that in 2008 consumer spending on green products and services was
estimated at $500 billion). But see Snyder, supra note 33, at 584–85 (“[M]ost consumers
are still unwilling to pay premiums for ‘ethical consumption.’” (quoting Dara O’Rourke,
World Bank Grp., Opportunities and Obstacles for Corporate Social Responsibility
Reporting in Developing Countries, at vi (2004))).
36. See Ernst & Young, supra note 31, at 8 (stating analysts since 1997 “have issued
more favorable ratings to companies that have sustainability strategies in place,” believing
such strategies “creat[e] value and reduc[e] uncertainty about future . . . profitability”);
John W. Bagby, Paula C. Murray & Eric T. Andrews, How Green Was My Balance Sheet?:
Corporate Liability and Environmental Disclosure, 14 Va. Envtl. L.J. 225, 337 (1995)
(“Environmental liabilities have grown to such immense proportions that they are
important to most investors’ decisions . . . .”).
37. See Jackson, supra note 21, at 93 n.362 (explaining factors behind rise in ethical
investing, including current role of “the socially conscious generation of the 1960s” in
making investment decisions); Jones & McIntyre, supra note 35, at 10 (describing investor
groups pressuring companies to respond to climate change); David Monsma & John
Buckley, Non-Financial Corporate Performance: The Material Edges of Social and
Environmental Disclosure, 11 U. Balt. J. Envtl. L. 151, 190 (2004) (describing use of
investment pressure on companies to persuade government of South Africa to end
apartheid).
38. Kelley, Law and Choice, supra note 1, at 358–59 (citing Soc. Inv. Forum, 2007
Report on Socially Responsible Investing Trends in the United States 1, 7, 8 (2008)). Some
mutual funds now engage exclusively in socially responsible investing (SRI). Kerr, Creative
Capitalism, supra note 23, at 851 n.127.
39. Press Release, United Nations Global Compact, Principles for Responsible
Investment Initiative: Signatories Double in One Year; Institutional Investors “Taking
Implementation to the Next Level” (June 17, 2008), http://www.unglobalcompact.org/
NewsAndEvents/news_archives/2008_06_17a.html (on file with the Columbia Law Review);
see also Justine Nolan, Corporate Accountability and Triple Bottom Line Reporting:
Determining the Material Issues for Disclosure 2 & n.8 (Univ. of New S. Wales Faculty of
Law Research Series, Working Paper No. 15, 2007) [hereinafter Nolan, Corporate
Accountability], available at http://law.bepress.com/unswwps/flrps/art15 (on file with the
Columbia Law Review) (noting rise in “ethical investing” is “indicative of international
trends”). But see Snyder, supra note 33, at 584 (noting SRIs “constitute only a small
portion of total investments”).
40. Dow Jones Sustainability Indexes, http://www.sustainability-index.com (on file
with the Columbia Law Review) (last visited Feb. 23, 2012).
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2001;41 and the Global Impact Investing Rating System (GIIRS), endorsed by the Obama Administration in 2011.42
As a result, corporations are more and more weaving social and environmental performance into their efforts to increase the bottom line.
Though some debate the profits to be made through good corporate citizenship,43 GlaxoSmithKline gained “a major competitive advantage” after
it started selling 90% of its vaccines at or below cost in developing countries; similarly, Toyota’s brand value increased 47% in the five years after
it released the Prius hybrid car in the United States.44 These shifts in
consumer and investor preferences have stimulated a “new peak” in social
and environmental reporting45: In 2007, companies around the world
filed more than 2,300 environmental and social reports, up from only 26
such reports in 1992.46
b. Pressures on the Nonprofit and Public Sectors. — While the private
sector has become more attentive to goals traditionally associated with
the nonprofit and public sectors, these latter two sectors have increasingly
experimented with the methods traditionally associated with the private
sector. From the nonprofit side, unpredictable shifts in foundations’
funding preferences, funding cuts beginning during the Reagan
Administration,47 and the impact of the recent economic crisis on chari41. FTSE4Good Index Series, http://www.ftse.com/Indices/FTSE4Good_Index_
Series/index.jsp (on file with the Columbia Law Review) (last visited Feb. 23, 2012).
42. Anne Field, Obama Gives Big Boost to Global Rating System for Social
Enterprises, True/Slant (Apr. 27, 2010, 3:42 PM), http://trueslant.com/annefield/2010/
04/27/obama-gives-big-boost-to-global-rating-system for social-enterprises/ (on file with
the Columbia Law Review).
43. Compare Kerr, Sustainability, supra note 5, at 660–64 (citing research finding
“social and environmental performance is positively correlated with financial
performance”), and Cynthia A. Williams, The Securities and Exchange Commission and
Corporate Social Transparency, 112 Harv. L. Rev. 1197, 1284 (1999) [hereinafter Williams,
Transparency] (“[S]ocial, consumer, and investor trends with respect to the corporation’s
relationship with society can eventually affect a company’s profitability . . . .”), with Aaron
K. Chatterji & Barak D. Richman, Understanding the “Corporate” in Corporate Social
Responsibility, 2 Harv. L. & Pol’y Rev. 33, 34 (2008) (noting “inescapable tension . . .
between pursuing beneficial social outcomes and striving for maximum profits” and lack of
empirical “evidence showing that good deeds lead to good profits”).
44. Kerr, Sustainability, supra note 5, at 629.
45. Snyder, supra note 33, at 570–71, 599, 603–04.
46. Wachovia Bank, The Greening of America 9 (2008), available at https://www.
wachovia.com/common_files/GreeningOfAmerica_031908_sm.pdf (on file with the
Columbia Law Review); see also Ernst & Young, supra note 31, at 4 (reporting more than
two-thirds of Fortune Global 500 companies publish sustainability or corporate
responsibility report); David Hess, Regulating Corporate Social Performance: A New Look
at Social Accounting, Auditing, and Reporting, 11 Bus. Ethics Q. 307, 311–13 (2001)
(noting “recent resurgence of the social reporting movement in Europe” after worldwide
lag during 1980s and 1990s); Jackson, supra note 21, at 71 (noting U.N. Global Compact
“boasts over 3,500 corporate signatories”).
47. See Lasprogata & Cotten, supra note 9, at 68, 71 (noting Reagan Administration’s
policy of privatization and devolution of federal funding to states created “fiscal crisis” for
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table donations48 have pushed the nonprofit sector to the free market to
survive.49 New variants that were not around twenty-five years ago include
nonprofits with for-profit subsidiaries and for-profits with nonprofit adjuncts.50 For-profits, which do not face the same limits on debt and equity
financing,51 commercial activity,52 and accumulating reserves as do nonprofits, are viewed as better able not only to generate resources53 but also
to deploy them efficiently.54 The health care industry, for example, which
was once entirely not-for-profit, experienced a “dramatic shift” to forprofit control in the 1990s.55 In large part due to rising health costs and
declining Medicare reimbursements, 15% of hospitals were for-profit entities by 1998.56
nonprofits over past three decades); Weiss, supra note 3 (describing “severely diminished
support” for nonprofits).
48. See Betsy Nelson, Commentary, Philanthropy Is Growing and Changing, Daily
Rec. (Balt.), June 12, 2009, at 10A (“[A]n economic crisis . . . has eroded the resource base
of both nonprofits and philanthropies and simultaneously increased the demand for those
very resources.”).
49. Kelley, Rediscovering, supra note 5, at 2450–60; see also Kara Kridler, Charity
Starting at Home: Nonprofits Launch For-Profit Ventures for Funding, Daily Rec. (Balt.),
June 2, 2004, at 1A, 3A (noting “nonprofits throughout the country [are] looking for ways
to diversify [their] revenue stream[s]” because “charitable donations [have been] slow to
recover after the economic slowdown”).
50. Nelson, supra note 48.
51. See Treas. Reg. § 1.501(c)(3)-1(d)(1)(ii) (as amended in 2008) (prohibiting taxexempt public charities from being “organized or operated for the benefit of private
interests such as . . . shareholders”); Model Nonprofit Corp. Act Third Edition § 6.40(a)
(2008) (prohibiting nonprofits from paying dividends); Henry B. Hansmann, The Role of
Nonprofit Enterprise, 89 Yale L.J. 835, 838 (1980) (providing definitive discussion of
nondistribution constraint).
52. See, e.g., Kelley, Rediscovering, supra note 5, at 2472–87 (discussing legal
restrictions on nonprofits’ commercial activity); Lasprogata & Cotten, supra note 9, at
74–86 (same).
53. See, e.g., Chatterji & Richman, supra note 43, at 33 (noting “belief that
corporations have the financial resources, human capital, and global influence to advance
progressive causes”).
54. See Gerald Grace, Education Is a Public Good: On the Need to Resist the
Domination of Economic Science, in Education and the Market Place 125, 125–36 (David
Bridges & Terence H. McLaughlin eds., 1994) (describing argument that public education
“would be delivered more efficiently and effectively to its consumers” if government left its
control to “‘hidden hand’ of market forces”); Martha Minow, Public and Private
Partnerships: Accounting for the New Religion, 116 Harv. L. Rev. 1229, 1243–44 (2003)
(arguing for-profit competition may improve social services); Lewis D. Solomon, The Role
of For-Profit Corporations in Revitalizing Public Education: A Legal and Policy Analysis, 24
U. Tol. L. Rev. 883, 925–26 (1993) (arguing for-profit competition may stimulate more
creative and efficient school systems); Taylor, supra note 9, at 747 (“[B]ecause of their
potential for efficiency and economies of scale, corporations are uniquely positioned to
promote social welfare.”).
55. Fairfax, Doing Well, supra note 16, at 415–18 & n.23.
56. Id.
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Government services, too, including prisons, foster care, and welfare
systems, are increasingly being operated by private, for-profit entities.57
K-12 education was among the last major industries controlled by the
public sector; by 2002, for-profit entities ran about 250 public schools,
serving more than 120,000 students and accounting for about 10% of the
total amount spent on education.58
A shortage of funds is not the only reason for the increasing attention to for-profits as potential vehicles to achieve social objectives. Many
see corporations as “so pervasively powerful and comparatively unregulated, in many cases even displacing governments, that society will be well
ordered only if those ultra-powerful corporations look beyond the interests of their owners and respond directly to society’s needs.”59 For example, corporations can evade government efforts to regulate wages or pollution by moving operations overseas. In 2000, therefore, the United
Nations launched the Global Compact to reach out to corporations as an
essential partner in the effort to prevent human rights violations,60 and
the 2002 World Summit on Sustainable Development encouraged government, business, and nonprofits to work together to reduce global
poverty.61
B. The Call for New Legal Forms
The benefit corporation is not the first effort to introduce new corporate forms to support for-profit social enterprise. In 2004, for example,
England created the community interest company (CIC);62 in 2008,
Vermont enacted the low-profit limited liability corporation (L3C).63 L3C
57. Lisa M. Fairfax, Achieving the Double Bottom Line: A Framework for
Corporations Seeking to Deliver Profits and Public Services, 9 Stan. J.L. Bus. & Fin. 199,
200, 207–11 (2003) [hereinafter Fairfax, Achieving].
58. Fairfax, Doing Well, supra note 16, at 418–19.
59. Kelley, Law and Choice, supra note 1, at 349; see also Chatterji & Richman, supra
note 43, at 37, 45 (noting “domestic governments have become increasingly unable to
control the social consequences of market forces” because of globalization).
60. Justine Nolan, The United Nations’ Compact with Business: Hindering or
Helping the Protection of Human Rights?, 24 U. Queensl. L.J. 445, 446–48 (2005)
[hereinafter Nolan, United Nations].
61. Siegel, supra note 29, at 47.
62. Companies (Audit, Investigations and Community Enterprise) Act, 2004, c. 27,
§ 26 (U.K.); see also Community Interest Company Regulations, 2005, S.I. 2005/1788, art.
3, ¶ 1 (U.K.) (laying out “community interest test”); Taylor, supra note 9, at 764–66
(explaining CICs).
63. Act of Apr. 30, 2008, 2008 Vt. Acts & Resolves 91 (codified at Vt. Stat. Ann. tit. 11,
§ 3001(27) (2010)). The L3C form does not really satisfy the “two masters” definition of a
double bottom line corporation, see supra notes 22–30 and accompanying text, since “L3C
legislation makes clear that although the company may make money, its profit-making
activities must serve its charitable purpose.” Smiddy, supra note 2, at 6. See I.R.C. § 4944(c)
(2006) (providing that no significant purpose of L3C enterprise can be generating profit);
Treas. Reg. § 53.4944-3(a)(1)(ii) (1972) (same). For an explanation of the L3C form, see
generally Robert Lang, Ams. for Cmty. Dev., What Is the L3C?: Basic Explanation (2010),
available at http://www.americansforcommunitydevelopment.org/downloads/WhatIsThe
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legislation is now pending or has already been adopted in a number of
states.64
Part I.B explains why Maryland, Vermont, New Jersey, Virginia,
Hawaii, and California have attempted to create an entirely new corporate form, rather than follow these existing models. Part I.B.1 explains
the legal barriers to corporations pursuing multiple bottom lines. Part
I.B.2 describes the most important practical barriers to this dual mission—namely, the difficulty raising capital and the need to ensure fidelity
to nonfinancial goals—and explains why these practical barriers have not
yet been adequately resolved by earlier innovations.65
1. Legal Barriers to Multiple Bottom Lines. — Despite the common perception that corporate directors are legally bound to maximize shareholder wealth,66 existing law in many respects permits directors to take
into account nonshareholder interests. Neither the Securities and
Exchange Commission (SEC),67 nor the Model Business Corporation
Act,68 nor corporate statutory law in Delaware69 or any other state70 requires corporate officers to maximize shareholder wealth. In some scenarios, case law imposes a fiduciary duty to prioritize shareholders’ financial
interests above nonshareholder interests,71 but this duty is largely restricted to a narrow set of scenarios (primarily corporate takeovers or reorganizations)72 and, in thirty-three states, has been superseded by soL3C.pdf (on file with the Columbia Law Review); Kelley, Law and Choice, supra note 1, at
371–76.
64. Lang, supra note 63, at 1; see, e.g., Act of Jan. 15, 2009, 2009 Mich. Pub. Acts 249
(codified at Mich. Comp. Laws § 450.4102(m) (2009)).
65. For a list of sources giving a more comprehensive view of the problems facing forprofit social enterprise, see supra note 9.
66. See Dodge v. Ford Motor Co., 170 N.W. 668, 684–85 (Mich. 1919) (ordering Ford
to pay out shareholder dividends rather than use money to make more affordable cars for
public); Stephen M. Bainbridge, Corporation Law and Economics § 9.2 n.1, at 410 (2002)
(“Dodge . . . establish[ed] . . . [the] basic rule . . . that the board [of directors] has a duty
to maximize shareholder wealth.”); Einer Elhauge, Sacrificing Corporate Profits in the
Public Interest, 80 N.Y.U. L. Rev. 733, 736 (2005) (critiquing view that “traditional
fiduciary duties require corporate managers to . . . maximize corporate profits”).
67. Monsma & Buckley, supra note 37, at 201.
68. See Model Bus. Corp. Act § 3.01(a) (2010) (describing permissible corporate
purposes).
69. See Del. Code Ann. tit. 8, § 102(a)(3) (2001 & Supp. 2010) (permitting corporate
charters to state that firm’s purpose “is to engage in any lawful act or activity”).
70. See Lynn A. Stout, Why We Should Stop Teaching Dodge v. Ford, 3 Va. L. & Bus.
Rev. 163, 169 (2008) (“Do [state corporation codes] . . . limit the corporate purpose to
shareholder wealth maximization? . . . [T]he answer is ‘not just “no” but “hell no.”’”).
71. See, e.g., Paramount Commc’ns Inc. v. QVC Network Inc., 637 A.2d 34, 43–44
(Del. 1993) (requiring directors to maximize shareholder gains when controlling share in
company changes hands); Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d
173, 182 (Del. 1986) (requiring same when company goes up for sale).
72. See, e.g., Paramount Commc’ns Inc. v. Time Inc., 571 A.2d 1140, 1142, 1150–51
(Del. 1990) (holding directors may consider nonshareholder interests in business
reorganizations that do not involve change of control); Unocal Corp. v. Mesa Petroleum
Co., 493 A.2d 946, 954 (Del. 1985) (holding same in context of defending against takeover
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called “constituency statutes.”73 Constituency statutes, also known as
“stakeholder” statutes or “nonshareholder” statutes, explicitly allow corporate directors and officers to consider nonshareholder interests in the
context of a takeover struggle, and also, in most constituency statutes, in
ordinary business decisions.74 Even in states with constituency statutes
that do not apply to ordinary business decisions, or in states (most notably Delaware) without any constituency statute at all, directors who consider nonshareholder interests are effectively insulated from liability by
the business judgment rule, under which courts almost always defer to
any business decision made with deliberation and in good faith.75 As a
result of this rule, one scholar observed “there is no modern case in
which a court has overturned a manager’s decision because that decision
placed public interests above shareholder interests.”76
2. Practical Barriers to Multiple Bottom Lines. — Probably more significant than the legal challenges facing corporations with multiple bottom
lines are the practical ones: raising capital and ensuring fidelity to both
“masters.”
a. Attracting Capital. — Double bottom line corporations struggle to
raise capital because they do not fit the settled categories and expectations of existing sources of capital. On the one hand, they usually cannot
promise business investors market-rate returns. On the other hand, foundations and governments are leery of giving grants to a profit-making entity.77 Individuals and corporations may also hesitate to contribute to forprofit social enterprises, especially since only their donations to nonprofits are tax-deductible.78
attempts); Shlensky v. Wrigley, 237 N.E.2d 776, 780 (Ill. App. Ct. 1968) (holding Chicago
Cubs directors’ decision not to schedule night games so as to protect surrounding
neighborhood did not violate duty to shareholders); Fairfax, Doing Well, supra note 16, at
434–59 (noting although “[c]ourts never formally rejected the shareholder primacy
model,” they seem in practice to have moved away from it); Judd F. Sneirson, Green Is
Good: Sustainability, Profitability, and a New Paradigm for Corporate Governance, 94 Iowa
L. Rev. 987, 1003 (2009) (claiming post-Dodge cases finding duty to maximize shareholder
wealth “are few and far between and relatively obscure”). But see Taylor, supra note 9, at
760 (describing successful shareholder suit against socially conscious Ben & Jerry’s
founders for resisting lucrative purchase offer from Dutch conglomerate Unilever).
73. For a list, see Fairfax, Doing Well, supra note 16, at 460 n.285.
74. Id. at 412 n.11, 462–64.
75. Id. at 439–40; see also Kerr, Sustainability, supra note 5, at 633–39 (arguing “social
entrepreneurship fulfills the board’s fiduciary duties [and] is protected by the business
judgment rule”).
76. Fairfax, Doing Well, supra note 16, at 440 (citing William H. Simon, What
Difference Does It Make When Corporate Managers Have Public Responsibilities?, 50
Wash. & Lee L. Rev. 1697, 1698 (1993)). But see Taylor, supra note 9, at 760 (describing
successful shareholder suit against Ben & Jerry’s for refusing lucrative purchase offer).
77. See Kelley, Law and Choice, supra note 1, at 352–55 (noting difficulties for-profit
entities face obtaining funding from government and foundations).
78. See I.R.C. § 170(c) (2006) (permitting donors to deduct contributions to charities
from their income taxes).
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b. Fidelity to Mission. — The second major problem facing hybrid
corporations is finding a way to prevent neglect of the social bottom line
if the company assumes new leadership (the “‘legacy problem’”),79 if
controlling shares are acquired by someone who wants to prioritize profitmaking,80 or in response to market pressures.81 This problem of “locking
in assets” to a corporation’s dual mission has not been solved by existing
business forms like the closely held corporation, partnership, or limited
liability company: Though these forms have greater flexibility than publicly held corporations to pursue nonprofit-making activities, their vulnerability to changes in leadership or ownership leaves little assurance that
they will remain committed to these public-interest activities over time.82
Both the CIC and L3C forms try to solve the asset lock problem by restricting payout of dividends; in both cases, this restriction has turned off
would-be investors, thus exacerbating the capital formation problem.83
In addition to locking in assets, accountability mechanisms are
needed to prevent “greenwashing”—that is, corporations making “‘grandiose statements of corporate citizenship’”84 to enhance their profiles,
79. Katz & Page, supra note 1, at 95–97 (quoting Susan H. Mac Cormac et al., The
Emergence of New Corporate Forms: The Need for Alternative Corporate Designs
Integrating Financial and Social Missions, in Summit on the Future of the Corporation:
Paper Series on Corporate Design 88, 97 (Allen White & Marjorie Kelley eds., 2007),
available at http://www.corporation2020.org/SummitPaperSeries.pdf (on file with the
Columbia Law Review)); Kelley, Law and Choice, supra note 1, at 359–61 (“Dedicated social
entrepreneurs fear that if . . . multiple-bottom-line organizations become financially
successful . . . [they] might be purchased by new owners who are dedicated exclusively to
generating profits.”). The most famous example is Ben & Jerry’s, a socially responsible
corporation whose owners were required by a court to sell to the highest bidder. See
Taylor, supra note 9, at 760 (describing purchase of Ben and Jerry’s).
80. Smiddy, supra note 2, at 10 (explaining equity investors can vote on significant
company matters and elect company managers). But see Fairfax, Achieving, supra note 57,
at 225–28 (arguing shareholders pose no threat to corporation’s social mission because in
practice they just rubber stamp whatever directors decide to do).
81. Fairfax, Achieving, supra note 57, at 228–32, 238; see also Fairfax, Doing Well,
supra note 16, at 466, 470–72 (describing evidence that, after converting to for-profit
status, hospitals reduced charitable services and schools cut costs at expense of student
learning).
82. Brakman Reiser, Blended Enterprise, supra note 1, at 107–08.
83. See id. at 107–14 (explaining why CIC and L3C forms have trouble raising
capital); Elizabeth Schmidt, Vermont’s Social Hybrid Pioneers: Early Observations and
Questions to Ponder, 35 Vt. L. Rev. 163, 186–89 (2010) (explaining same based on
interviews of early users of L3C form); see also Regulator of Cmty. Interest Cos., Dep’t for
Bus. Innovation & Skills, Summary of the Responses to the Consultation on the Dividend
and Interest Caps 8 (2009), available at http://www.bis.gov.uk/assets/bispartners/
cicregulator/docs/consultations/09-1645-community-interest-companies-consultationcaps-summary-of-responses.pdf (on file with the Columbia Law Review) (describing
financiers’ complaints that dividend caps in CICs “unduly limit[ ] incentive to those that
might make an equity investment”).
84. Oliver F. Williams, The UN Global Compact: The Challenge and the Promise, 14
Bus. Ethics Q. 755, 762 (2004) (quoting S. Prakash Sethi, Global Compact Is Another
Exercise in Futility, Fin. Express (New Delhi, India), Sept. 7, 2003, available at http://www.
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without actually accomplishing much for people in need85—and to simply prevent directors from using the pretense of pursuing nonshareholder interests to advance their own personal interests without any
accountability.86
C. The Benefit Corporation Solution: Accountability to Mission
The benefit corporation statutes address the legal barriers to double
bottom lines by protecting directors of benefit corporations from liability
for considering nonshareholder interests, both in the ordinary course of
business and in the context of takeovers.87 The aim is to remove any lingering doubt left by constituency statutes about the scope of benefit corporations’ liabilities.88
The bulk of the legislation, however, addresses the practical barriers
to successful hybrid corporations, by providing a framework for “mission
accountability”—that is, for monitoring and enforcing benefit corporations’ effective pursuit of their public interest mission.89 In this way, the
financialexpress.com/news/global-compact-is-another-exercise-in-futility/91447/0 (on file
with the Columbia Law Review)).
85. Kelley, Law and Choice, supra note 1, at 348; see also Mickels, supra note 1, at 277
n.43 (noting criticism of corporate “philanthropists” who “‘[m]ake as much money as
[they] can, even if they exploit the poor to do so—but then donate a tiny portion of the
profits for social causes’” so they can brag about their generosity (quoting Muhammad
Yunus, Creating a World Without Poverty 16 (2007))); Nolan, United Nations, supra note
60, at 462 (noting it has “consistently been alleged that a number of companies are simply
using their participation in the [U.N.] Global Compact as a marketing tool”); John Tyler,
Negating the Legal Problem of Having “Two Masters”: A Framework for L3C Fiduciary
Duties and Accountability, 35 Vt. L. Rev. 117, 143 (2010) (noting “concern about possible
abuse [of the L3C form] and wariness about the potential to mislead both the public and
foundations”).
86. Fairfax, Doing Well, supra note 16, at 433; see also Sneirson, supra note 72, at
1015 (describing same concern).
87. Md. Code Ann., Corps. & Ass’ns § 5-6C-07(C) (LexisNexis Supp. 2011); Vt. Stat.
Ann. tit. 11A, § 21.09(a)(3) (Supp. 2011); see also Dave Gram, States Move to Let Firms
Pursue Social Mission, UTSanDiego.com (Apr. 11, 2010), http://utsandiego.com/news/
2010/apr/11/states-move-to-let-firms-pursue-social-mission (on file with the Columbia Law
Review) (describing Vermont’s benefit corporation legislation as enabling socially
responsible companies like Ben & Jerry’s to avoid takeover motivated by finances alone).
Benefit corporations are therefore required to incorporate in a state with a constituency
statute. Brakman Reiser, Blended Enterprise, supra note 1, at 115.
88. Benefit Corp Info. Ctr., Legal FAQs [hereinafter Benefit Corp, Legal FAQs],
http://benefitcorp.net/for-attorneys/legal-faqs (on file with the Columbia Law Review) (last
visited Jan. 20, 2012) (“[T]he lack of case law regarding [constituency] statutes leaves . . .
directors . . . with a lack of clarity about how a court would rule if directors made a decision
based on broader considerations than just the highest offer.”); see also supra notes 73–74
and accompanying text (describing constituency statutes).
89. For an explanation of “mission,” or “performance,” accountability, see Robert D.
Behn, Rethinking Democractic Accountability 9–10 (2001) (presenting concept in
government context); Dana Brakman Reiser, Enron.org: Why Sarbanes-Oxley Will Not
Ensure Comprehensive Nonprofit Accountability, 38 U.C. Davis L. Rev. 205, 208, 212–15,
226–30 (2004) [hereinafter Brakman Reiser, Enron.org]; Alnoor Ebrahim, The Many
Faces of Nonprofit Accountability 9–10 (Harvard Bus. Sch., Working Paper No. 10-069,
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legislation aims not only to lock in assets to benefit corporations’ dual
commitments and prevent greenwashing, but also to help these businesses raise capital—at least from some sources90—by signaling to socially
responsible investors, consumers, donors, and potential employees and
business partners91 that a certified benefit corporation is in fact producing social and environmental returns worthy of financial support.92 This
Part lays out the accountability framework created by the benefit corporation legislation, focusing on for what (Part I.C.1) and to whom (Part I.C.2)
the corporations are made accountable.
1. Accountable for What? — Under existing law, corporate and nonprofit directors already owe fiduciary duties of care, good faith, and loyalty.93 In neither the corporate nor the nonprofit context, however, can
these traditional duties effectively enforce social and environmental obligations. The duties of care and good faith concern how decisions are
2010) (distinguishing performance and mission accountability and noting relationship
between them).
90. The signaling approach will not work for foundations, which are limited to
making qualified “program-related investments” (PRIs). See Smiddy, supra note 2, at 6, 13
n.21 (noting that, in contrast to other companies, “[c]ompanies organized as an L3C
would meet specified criteria qualifying them as eligible to be the recipient of PRIs made
by foundations”).
91. See supra Part I.A.2.a (describing desire of consumers, investors, suppliers, and
employees to support socially responsible businesses).
92. See, e.g., Lawmakers Back “Benefit Corporations,” Wash. Post, Mar. 31, 2010, at
A13 (“House bill sponsor . . . said . . . that [the Maryland benefit corporation legislation]
creates the ‘socially and environmentally-conscious branding that hundreds of
corporations’ are seeking.”); Letter from Michael H. Shuman to Jamie Raskin, Senator,
Md. Senate (Feb. 24, 2010), available at http://www.bcorporation.net/resources/bcorp/
documents/Shuman-testimony.pdf (on file with the Columbia Law Review) (arguing
proposed benefit corporation legislation in Maryland would help conscientious consumers
“find and selectively purchase [benefit corporations’] goods and serves [sic]” and help
“attract[] like-minded investors”); Field, supra note 42 (“The underlying goal [of the
benefit corporation certification system] is all about raising money . . . .”); see also Katz &
Page, supra note 1, at 71–74, 93–94 (suggesting “active monitoring and accountability” of
for-profit social enterprises as means to signal their social returns to “employees willing to
accept below-market compensation” as well as to “mission-sympathetic” investors, donors,
and consumers); Kelley, Law and Choice, supra note 1, at 361, 367 (noting “[s]ocial
entrepreneurs believe that to succeed in gaining support . . . from the various sources of
capital they need access to—charitable, governmental, and private—they must create a
recognizable brand” that inspires “confidence that a corporation’s expressed commitment
to nonfinancial bottom lines is more than mere marketing”). But see Chatterji & Richman,
supra note 43, at 50 (“While social investing and consumption have been increasing in
recent years . . . it is still unclear whether consumer and investor based strategies . . . have
the potential to engage a broad swath of society.”).
93. See, e.g., Del. Code Ann. tit. 8, § 141(j) (2001) (applying same enabling rules to
business and nonprofit corporations); Model Nonprofit Corp. Act § 8.30 (2008)
(explaining nonprofit directors’ fiduciary duties); Linda Sugin, Resisting the
Corporatization of Nonprofit Governance: Transforming Obedience into Fidelity, 76
Fordham L. Rev. 893, 894 (2007) (“The ALI Principles of the Law of Nonprofit
Organizations explicitly adopted fiduciary obligations for nonprofit directors that were
based on the principles applicable to business boards.”).
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made, not what their substantive content is;94 the duty of loyalty requires
only that directors place the corporation’s interests above their own personal interests.95 Under existing law, then, directors escape liability as
long as they do “not act with complete disregard to the consequences of
their decisions”96 and do not steal.97 Some say nonprofit directors owe
the additional duty of obedience to mission—that is, the duty to carry out
the mission of the organization as expressed in the legal documents creating it—but neither the Revised Model Nonprofit Corporation Act nor the
American Law Institute’s (ALI’s) Draft Principles recognizes this duty.98
The benefit corporation legislation adds in two ways to these duties.
First, going beyond most constituency statutes, it requires directors to consider the impact of a proposed buyout not just on shareholders but on all
stakeholders (employees, suppliers, customers, and the wider community).99 Second, and more importantly, it requires them, in the ordinary
course of business, to create a “material, positive impact,” both with respect to any “specific public benefit” they espouse and with respect to the
“general public benefit.”100 This latter obligation is meant to guard
against a company pursuing a single narrow public good, such as clean94. Model Bus. Corp. Act § 8.30 & cmt. (2010) (“Section 8.30 sets forth the standards
of conduct for directors by focusing on the manner in which directors perform their
duties, not the correctness of the decisions made.”); Fairfax, Doing Well, supra note 16, at
439 n.157 (“Most states have enacted statutes to this effect.”).
95. See Principles of the Law of Nonprofit Orgs. § 310 cmt. (a)(1) (Tentative Draft
No. 1, 2007) (requiring directors, under duty of loyalty, to act in organization’s best
interests and to handle conflicts of interest appropriately); Harvey J. Goldschmid, The
Fiduciary Duties of Nonprofit Directors and Officers: Paradoxes, Problems, and Proposed
Reforms, 23 J. Corp. L. 631, 646–49 (1998) (describing duty of loyalty as concerned only
with fraud, self-dealing, and conflicts of interest).
96. Sugin, supra note 93, at 911, 913 (explaining “the duty of care and the duty of
loyalty are composed largely of procedural or structural elements, as opposed to
substantive ones”); see also In re Walt Disney Co. Derivative Litig., 825 A.2d 275, 289 (Del.
Ch. 2003) (alleging breach of good faith when “defendant directors consciously and
intentionally disregarded their responsibilities” (emphasis omitted)); Kerr, Creative
Capitalism, supra note 23, at 835–39 (describing limited scope of duties of care and good
faith).
97. Katz & Page, supra note 1, at 95.
98. Sugin, supra note 93, at 897; see also Principles of the Law of Nonprofit Orgs.
§ 300 cmt. g(3) (“These Principles . . . do not employ the terminology of a duty of
obedience.”).
99. Md. Code Ann., Corps. & Ass’ns § 5-6C-07(a)(1) (LexisNexis 2007 & Supp. 2011);
Vt. Stat. Ann. tit. 11A, § 21.09(a)(1) (2010 & Supp. 2011); see also Fairfax, Doing Well,
supra note 16, at 461 n.290 (explaining most states’ constituency statutes use permissive
language); Taylor, supra note 9, at 750 (“[C]orporate constituency statutes have not
fulfilled the promise they initially seemed to offer.”); Benefit Corp, Legal FAQs, supra note
88 (“Constituency statutes are permissive . . . . The objective of Benefit corporation
legislation is to . . . require directors to consider non-financial interests.” (emphasis
added)); supra notes 74–76 and accompanying text (discussing constituency statutes).
100. Md. Code Ann., Corps. & Ass’ns §§ 5-6C-01(c)–(d), 5-6C-06; Vt. Stat. Ann. tit.
11A, §§ 21.03(a)(4), 21.08(a)–(c).
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ing up a river, while ignoring its effect on the public in every other
respect.101
The legislation declines to define “material positive impact,” “specific public benefit,” or “general public benefit,” for fear of chilling market innovation to develop performance standards and deterring businesses from incorporating under this new form.102 Instead, it leaves
definition of these terms in the short term to the courts and in the long
term to market forces leading to recognized standards for assessing
performance.103
2. Accountable to Whom? — Having created these obligations, the legislation then sets out a framework for enforcing them. First, it gives shareholders and directors standing to sue to enforce them. Second, it gives an
independent third-party auditor the power to grant or withhold certification. Third, it requires benefit corporations to give an account of their
performance to the public at large.
a. Accountability to Shareholders. — Shareholders and directors are
given standing to commence or maintain a “benefit enforcement proceeding” for “failure to pursue the general public benefit purpose of the
benefit corporation or any specific public benefit purpose set forth in its
articles of incorporation.”104 Shareholder suits have historically played a
limited role in corporate accountability, however, both because of procedural hurdles105 and because of substantive rules like the business judgment rule.106 In the nonprofit context, too, lack of financial incentive or
standing and collective action problems have made shareholder suits an
ineffective tool for mission accountability.107 Perhaps in recognition of
this, the benefit corporation legislation devotes much more attention to
101. Benefit Corp, Legal FAQs, supra note 88.
102. Id.; see also Md. Code Ann., Corps. & Ass’ns § 5-6C-01(d) (suggesting a “specific
public benefit” may include “providing . . . beneficial products or services,” “promoting
economic opportunity . . . beyond the creation of jobs in the normal course of business,”
“preserving the environment,” “improving human health,” “promoting the arts, sciences,
or advancement of knowledge,” “increasing the flow of capital to entities with a public
benefit purpose,” or “accomplish[ing] any other . . . benefit for society or the environment”
(emphasis added)); Vt. Stat. Ann. tit. 11A, § 21.03(a)(6) (giving largely identical
suggestions).
103. Benefit Corp, Legal FAQs, supra note 88.
104. Vt. Stat. Ann. tit. 11A, §§ 21.09(e), 21.13.
105. Fairfax, Achieving, supra note 57, at 221–25, 241.
106. Id. at 241 (“One can expect that the courts’ traditional reluctance to overturn
corporate decisions [because of business judgment rule] would apply with even greater
force in the context of double bottom line companies . . . .”); see supra notes 75–76 and
accompanying text (explaining business judgment rule).
107. Mulligan, supra note 15, at 1988; see also Jaclyn A. Cherry, Update: The Current
State of Nonprofit Director Liability, 37 Duq. L. Rev. 557, 571 (1999) (explaining damages
from derivative actions flow back to nonprofit itself); Sugin, supra note 93, at 906–08
(arguing shareholders lack incentive to enforce interests of broader public); Denise Ping
Lee, Note, The Business Judgment Rule: Should It Protect Nonprofit Directors?, 103
Colum. L. Rev. 925, 935 (2003) (discussing collective action problems).
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outlining the auditing and reporting requirements for the new corporate
form than the shareholder lawsuit provisions.
b. Accountability to a Third-Party Auditor. — Perhaps the most important prong of the legislation’s accountability framework,108 certification,
requires that a benefit corporation spell out its public interest values in its
charter; fulfill certain reporting requirements (discussed below); and submit to third-party auditing of its societal impact, as measured against an
independent “third party standard.”109 Certification standards and performance evaluations are currently provided by many third-party
standards organizations, including Global Reporting Initiative (GRI),
Greenseal, Underwriters Laboratories, ISO2600, Green American, and B
Lab,110 the nonprofit that drafted the benefit corporation legislation in
Maryland and Vermont.111 To receive and maintain “B” certification,
benefit corporations must earn at least eighty out of two hundred points
on the B Impact Assessment.112
c. Accountability to the Public. — Finally, the legislation makes benefit
corporations accountable to the public in two ways. First, the B label itself
serves a “branding” function to alert the public that the benefit corporation has undergone scrutiny.113 Second, benefit corporations must publish an annual Benefit Report online.114 The report must disclose (1) the
findings from the third-party audits; (2) board minutes showing the directors discussed the impact of their decisions on employees, suppliers, consumers, the community, the environment, and other stakeholders; and
108. See Taylor, supra note 9, at 760 (“[T]he B corporation ‘model’ amounts to little
more than a new certification scheme . . . .”).
109. Md. Code Ann., Corps. & Ass’ns § 5-6C-01(e) (LexisNexis 2007 & Supp. 2011);
Vt. Stat. Ann. tit. 11A, § 21.03(a)(4).
110. Benefit Corp Info. Ctr., List of Standards, http://benefitcorp.net/selecting-athird-party-standard/list-of-standards (on file with the Columbia Law Review) (last visited
Feb. 23, 2012).
111. Kelley, Law and Choice, supra note 1, at 366–67. B Lab, “[d]edicated to using
the power of business to solve social and environmental problems,” has three primary
initiatives: advancing public policies such as the benefit corporation legislation, creating
the B Corporation certification system, and developing the Global Impact Investing
Ratings System (GIIRS). Certified B Corp., B Lab, BCorporation.net [hereinafter B Lab],
http://www.bcorporation.net/new-about (on file with the Columbia Law Review) (last
visited Jan. 20, 2012); see supra note 42 and accompanying text (noting Obama
Administration’s endorsement of GIIRS).
112. B Corp Certification Certification Overview, BCorporation.net, http://www.
bcorporation.net/Certification-Overview (on file with the Columbia Law Review) (last
visited Feb. 23, 2012). B Lab’s rating system, the B Lab Impact Assessment, was originally
launched in 2007. Version 3.0 was launched in spring 2011. Certified B Corp., B Lab
Governance, BCorporation.net, http://www.bcorporation.net/Governance (on file with
the Columbia Law Review) (last visited Feb. 23, 2012).
113. See supra notes 90–92 and accompanying text (describing signaling function of
certification).
114. Md. Code Ann., Corps. & Ass’ns § 5-6C-08; Vt. Stat. Ann. tit. 11A, §§ 21.10, 21.14.
The report must also be delivered to all shareholders and the Secretary of State. Md. Code
Ann., Corps. & Ass’ns § 5-6C-08; Vt. Stat. Ann. tit. 11A, §§ 21.10, 21.14.
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(3) the statement of an independent Benefit Director indicating how the
board reached each material decision.115 In this way, the report is intended to create accountability both for process (how decisions are
reached) and for results (as measured in the third-party audits).116
II. THE TRANSPARENCY PANACEA
The benefit corporation legislation follows a transparency-based accountability model. Part II.A describes the current popularity of this
model and the theory behind it. Part II.B argues that, by applying this
model to corporate social performance, the benefit corporation legislation may be taking the wrong approach regarding both for what and to
whom benefit corporations should be accountable.
A. Public Disclosure: The New Accountability Paradigm
This Part discusses the broader transparency-based accountability
trend. Part II.A.1 describes the current popularity of auditing and disclosure strategies across sectors. Part II.A.2 explains the theoretical framework underlying the use of these strategies.
1. The Trend. — Justice Louis Brandeis famously called sunlight “the
best of disinfectants” nearly a century ago117 and U.S. securities laws have
relied on record-keeping and disclosure since the stock market crash of
1929.118 A series of corporate119 and nonprofit120 accounting scandals in
the 1990s, however, and the economic collapse of 2007–2008121 stimulated “palpable public demand” for “greater transparency and accountability from institutions that have significant political, economic, or social
power”122 and, consequently, an unprecedented surge in disclosure115. Md. Code Ann., Corps. & Ass’ns § 5-6C-08; Vt. Stat. Ann. tit. 11A, § 21.10, 21.14.
116. Benefit Corp, Legal FAQs, supra note 88.
117. Louis D. Brandeis, Other People’s Money and How the Bankers Use It 92 (1914).
118. Adam Sulkowski & Steven White, Financial Performance, Pollution Measures,
and the Propensity to Use Corporate Responsibility Reporting: Implications for Business
and Legal Scholarship, 21 Colo. J. Int’l Envtl. L. & Pol’y 491, 492–93 (2010).
119. See Monsma & Buckley, supra note 37, at 173 n.77 (citing Enron, WorldCom,
and Arthur Andersen scandals); see also Donald C. Langevoort, Internal Controls After
Sarbanes-Oxley: Revisiting Corporate Law’s “Duty of Care as Responsibility for Systems,” 31
J. Corp. L. 949, 954 (2006) [hereinafter Langevoort, Internal Controls] (explaining factors
leading to these scandals).
120. See James J. Fishman, Improving Charitable Accountability, 62 Md. L. Rev. 218,
219 n.1 (2003) (discussing misconduct by nonprofit directors); Lasprogata & Cotten, supra
note 9, at 72–73 (citing scandals at United Way of America and Red Cross); Mulligan,
supra note 15, at 1982 (noting U.S. “nonprofit sector . . . recently has been pummeled with
a spate of . . . scandals”).
121. See Sugin, supra note 93, at 893–94 (describing outcry over excessive executive
compensation); Jones & McIntyre, supra note 35, at 10 (describing regulatory fallout of
subprime mortgage crisis and global credit market collapse).
122. Langevoort, Internal Controls, supra note 119, at 965.
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based accountability reforms.123 In 2002, Congress passed “the most significant federal securities legislation since the 1930s,”124 the SarbanesOxley Act, which imposes extensive disclosure, corporate governance,
and auditing requirements on large publicly traded corporations.125 On
its heels followed a series of Sarbanes-Oxley-like proposals for nonprofits126 by the IRS,127 state legislatures,128 and others.129 Unifying these
reforms are the requirements of public financial disclosure and thirdparty auditing.130
Many see in this emerging “transparency trend”131 a promising
means to improve accountability for social and environmental perform123. See Ebrahim, supra note 89, at 12 (“Disclosure statements and reports are
among the most widely used tools of accountability . . . .”); Jones & McIntyre, supra note
35, at 10 (“Changes [in corporate regulation] over the last decade have related primarily to
disclosure obligations . . . .”).
124. Publisher’s Editorial Staff 2008, LexisNexis, Closely Held Corporations and
Nonprofits: Implications of Adopting SOX Governance Measures 1 (2008), 2008 Emerging
Issues 2990 (Lexis) [hereinafter Closely Held Corporations] (on file with the Columbia Law
Review).
125. Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, pmbl., 116 Stat. 745, 745
(codified in scattered sections of 15, 18, 28, and 29 U.S.C. (2006)) (describing statute as an
“Act [t]o protect investors by improving the accuracy and reliability of corporate
disclosures made pursuant to the securities laws”); see also Brakman Reiser, Enron.org,
supra note 89, at 243 (describing Sarbanes-Oxley as response to “spate of for-profit
corporate scandals”).
126. Closely Held Corporations, supra note 124, at 3–5.
127. In 2008, the IRS overhauled Form 990, which requires public disclosure of
nonprofits’ investments, expenses, compensation, activities, etc. Adrian Burns, Dramatic
Changes in Nonprofit Sector Usher in 990 Overhaul, Business First (Columbus) (July 17,
2008, 4:27 PM), http://www.bizjournals.com/columbus/stories/2008/07/21/focus1.html
(on file with the Columbia Law Review); see I.R.C. § 6104 (2006) (explaining disclosures
required by Form 990); I.R.C. § 6104(d)(1)(A), (B) (requiring completed Form 990s to be
publicly available); Peter Swords, Nonprofit Coordinating Comm. of N. Y., How to Read
the IRS Form 990 and Find Out What It Means (May 2006), http://www.npccny.org/Form
_990/990.htm (on file with the Columbia Law Review) (providing nontechnical overview of
990 Form); see also IRS and Financial Documentation, GuideStar, http://www2.guidestar.
org/rxg/about-us/irs-and-financial-documentation.aspx (on file with the Columbia Law
Review) (last visited Feb. 23, 2012) (presenting disclosures required by Form 990).
128. California, Connecticut, Kansas, Maine, and New Hampshire enacted such
reforms. Mulligan, supra note 15, at 1992. Massachusetts and New York are considering
more aggressive proposals. Closely Held Corporations, supra note 124, at 4. Much of the
financial documentation states require from nonprofits is available online. Mulligan, supra
note 15, at 1990.
129. See, e.g., Marion R. Fremont-Smith, The Search for Greater Accountability of
Nonprofit Organizations: Recent Legal Developments and Proposals for Change, 76
Fordham L. Rev. 609, 609 (2007) (arguing law of charities is moving toward corporate
model of accountability that focuses on audits and financial controls); Panel on the
Nonprofit Sector, Strengthening Transparency, Governance, Accountability of Charitable
Organizations: A Final Report to Congress and the Nonprofit Sector 4–8 (2005), available
at http://www.fmaonline.net/media/Executive%20Summary.pdf (proposing SarbanesOxley-like regulations for nonprofits).
130. Mulligan, supra note 15, at 1983, 1992.
131. Monsma & Buckley, supra note 37, at 158–59.
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ance—not only by nonprofits,132 government,133 and hybrid organizations,134 but also traditional for-profits.135 In 2001, for example, France
became the first country to mandate systematic disclosure of social and
environmental performance by major corporations.136 Recent statutes
and guidelines in Australia,137 England,138 and South Africa139 require
social performance disclosures by corporations or investment funds. In
the United States, most corporate social and environmental reporting is
still voluntary,140 though some of the federal securities laws explicitly require environmental disclosure,141 additional mandates for disclosure of
climate change-related risks may be on the horizon,142 and many argue
132. See, e.g., Sugin, supra note 93, at 924 (arguing “[a]dditional disclosure
requirements may be the most effective mechanism for enforcing obedience” to mission by
nonprofit directors).
133. See, e.g., Patricia M. Broadfoot, Education, Assessment and Society 104 (1996)
(noting assessments and public disclosure of their results “have grown during the past
decade . . . into one of the most prominent features of many governments’ educational
strategy”).
134. See, e.g., Fairfax, Achieving, supra note 57, at 201–02, 246–52 (proposing
nonfinancial performance of double bottom line corporations be monitored by
independent audit committee modeled on financial audit committees required by SEC,
New York Stock Exchange, and NASDAQ).
135. See, e.g., Don Tapscott & David Ticoll, The Naked Corporation 62–93 (2003)
(arguing transparency is panacea to cure all corporate ills); Larry Cata Baker, From Moral
Obligation to International Law: Disclosure Systems, Markets and the Regulation of
Multinational Corporations, 39 Geo. J. Int’l L. 591, 593 (2008) (advocating mandatory
disclosure to promote “moral” behavior by transnational corporations); Sarah Dadush,
Profiting in (Red): The Need for Enhanced Transparency in Cause-Related Marketing, 42
N.Y.U. J. Int’l L. & Pol. 1269, 1312–36 (2010) (arguing cause-related marketing should be
subject to more reporting requirements).
136. Loi 2001-420 du 15 mai 2001 de nouvelles regulations économiques [Law 2001420 of May 15, 2001 on New Economic Regulations], Journal Officiel de la République
Française [J.O.] [Official Gazette of France], May 16, 2001, pp. 7776, 7798; see also Lucien
J. Dhooge, Beyond Volunteerism: Social Disclosure and France’s Nouvelles Régulations
Economiques, 21 Ariz. J. Int’l & Comp. L. 441, 445 (2004) (concluding this law reveals
growing imperative for social disclosure).
137. Financial Services Reform Act 2001 (Cth) s 1013D(1)(1) (Austl.) (requiring
institutions offering financial products with investment component to disclose extent to
which environmental or social considerations are taken into account in selecting
investments).
138. Occupational Pension Schemes (Investment, and Assignment, Forfeiture,
Bankruptcy etc.) Amendment Regulations, 1999, S.I. 1999/1849, art. 2, ¶ 4(b) (U.K.)
(requiring trustees of pension funds to disclose extent to which they take social and
environmental considerations into account in their investment strategies).
139. Code of Corporate Practices and Conduct of 2002 § 5.1.1 (S. Afr.) (requiring all
companies listed on Johannesburg Stock Exchange to report annually on social and
environmental policies and practices).
140. See supra notes 45–46 and accompanying text (describing corporations’
voluntary social and environmental reporting).
141. Monsma & Buckley, supra note 37, at 158; Tracy Soehle, SEC Disclosure
Requirements for Environmental Liabilities, 8 Tul. Envtl. L.J. 527, 551 (1995).
142. Jones & McIntyre, supra note 35, at 6.
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these laws should require disclosure of social performance as well.143 To
facilitate this type of disclosure, NGOs, nonprofits, and government have
developed hundreds of new social and environmental performance
codes.144
2. The Theory Behind Social Reporting. — This model of mission accountability has been called SAAR (social auditing, accounting, and reporting), or simply social reporting.145 The major components of this
model are (1) “verification by independent auditors,” who should
“evaluat[e] . . . a company’s performance against certain standards” and
“include a report of their findings in the company’s published social report”; (2) “an annual, publicly disclosed report”; and (3) an incentive
mechanism, such as “the development of a compliance label given to corporations who produce social reports that meet certain minimum requirements . . . . Corporations could use these labels on their products or
in their promotional literature.”146 This approach is in essence the same
taken by the benefit corporation legislation.147
143. See Eric Engle, What You Don’t Know Can Hurt You: Human Rights,
Shareholder Activism and SEC Reporting Requirements, 57 Syracuse L. Rev. 63, 66 (2006)
(arguing SEC should require companies to report human rights, environmental, and labor
relations practices because that information is material to investment decisions); Cyrus
Mehri, Andrea Giampetro-Meyer & Michael B. Runnels, One Nation, Indivisible: The Use
of Diversity Report Cards to Promote Transparency, Accountability, and Workplace
Fairness, 9 Fordham J. Corp. & Fin. L. 395, 439–42 (2004) (arguing SEC should require
Diversity Report Cards to promote transparency and accountability through disclosure of
hiring, compensation, and promotion practices); Williams, Transparency, supra note 43, at
1284–89 (arguing SEC should require corporate disclosures of social, environmental, and
labor practices).
144. Ebrahim, supra note 89, at 16; see Bond, Quality Standards, Codes and
Initiatives, Bond.org.uk, http://www.bond.org.uk/pages/quality-standards-codes-andinititatives-2.html (on file with the Columbia Law Review) (last visited Feb. 23, 2011)
(providing links to codes); Indep. Sector, Compendium of Standards, Codes, and
Principles of Nonprofit and Philanthropic Organizations, IndependentSector.org, http://
www.independentsector.org/issues/accountability/standards2.html (on file with the
Columbia Law Review) (last visited Feb. 23, 2011) (same). Well-known guidelines include
the Organisation for Economic Co-operation and Development (OECD) Guidelines for
Multinational Enterprises (1976); the International Labor Organisation (ILO) Tripartite
Declaration of Principles Concerning Multinational Enterprises and Social Policy (1977),
Nolan, Corporate Accountability, supra note 39, at 10; the Global Reporting Initiative’s
(GRI) Sustainability Reporting Guidelines, Global Reporting Initiative, Sustainability
Reporting Guidelines (2011), available at https://www.globalreporting.org/
resourcelibrary/G3.1-Guidelines-Incl-Technical-Protocol.pdf (on file with the Columbia
Law Review); the SA8000 standard, Soc. Accountability Int’l, Social Accountability 8000
(2008), available at http://www.sa-intl.org/_data/n_0001/resources/live/2008StdEnglish
Final.pdf (on file with the Columbia Law Review); and Social Return on Investment (SROI),
Sara Olsen & Alison Lingane, Social Return on Investment: Standard Guidelines 7 (2003)
(unpublished working paper), available at http://repositories.cdlib.org/crb/wps/8/ (on
file with the Columbia Law Review).
145. Hess, supra note 46, at 308.
146. Id. at 307–08, 310, 316, 320–21.
147. See supra Part I.C.2.b (describing auditing, accounting, and certification
requirements in benefit corporation legislation).
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The SAAR approach embodied in the benefit corporation legislation
relies not just on (1) third-party audits and (2) public disclosure, but also
on two additional pieces: (3) performance-based sanctions tied to market
pressure and (4) “objective,” standardized, and quantitative performance
metrics.148
These last two pieces are critical. The SAAR approach—as distinct
from other disclosure-based models149—seeks to regulate corporate behavior by threatening reputational, rather than legal, sanctions,150 on the
belief that “consumer pressure is the quickest, cheapest, and least adversarial enforcement mechanism for private codes of conduct.”151 Corporations are presumed to value their reputations so highly152 that if forced to
be transparent, the threat of media exposure and public opprobrium will
keep them in line.153 Mandatory disclosure functions in this model to
prevent the information asymmetries between companies, consumers,
and investors that lead to market failure.154
148. See Ebrahim, supra note 89, at 13 (explaining disclosure statements and reports
are “external approaches to accountability, enforced through punitive threats such as the
loss of nonprofit status”).
149. See Michael C. Dorf & Charles F. Sabel, A Constitution of Democratic
Experimentalism, 98 Colum. L. Rev. 267, 314–23 (1998) (describing theory of democratic
experimentalism that requires actors with local knowledge to share with those facing
similar problems).
150. See Hess, supra note 46, at 308–09, 313, 321 (arguing social reporting is better
alternative than traditional “command and control regulation,” such as Clear Air Act
Amendments of 1977 and Occupational Safety and Health Act of 1970); Jackson, supra
note 21, at 88–99 (describing “reputational accountability” as alternative to “legal
accountability” as means to induce CSR); Mulligan, supra note 15, at 1990 (explaining
disclosure requirements are motivated by lack of state and federal funding and hope of
fostering “public oversight”); Stuart Rees, The Fraud and the Fiction, in The Human Costs
of Managerialism 15, 15–16 (Stuart Rees & Gordon Rodley eds., 1995) [hereinafter
Human Costs] (describing trend of “managerialism” as trying to “cut back on the
responsibilities of government and rely on market forces” and “competition”); Sugin,
supra note 93, at 893–94 & n.4 (describing public reporting as alternative to government
regulation).
151. Veronica Besmer, The Legal Character of Private Codes of Conduct: More than
Just a Pseudo-Formal Gloss on Corporate Social Responsibility, 2 Hastings Bus. L.J. 279,
306 (2006).
152. See Hess, supra note 46, at 313 (describing corporation’s reputation as an
increasingly valuable asset); Monsma & Buckley, supra note 37, at 177 n.95 (noting that in
2004 study of directors attending 34th World Economic Forum in Davos, Switzerland,
“ninety-two percent . . . perceived reputation as important to their corporate strategies”).
153. See Hess, supra note 46, at 313, 321 (“Disclosure can . . . help to improve
corporate behavior due to any corporation’s desire to avoid negative publicity . . . .”);
Jackson, supra note 21, at 86 & n.319 (describing successful media campaigns against
companies that used sweatshops); Langevoort, Internal Controls, supra note 119, at 965
(“Institutions (and their leaders) that inappropriately conceal or dissemble are punished
more harshly in the news media and in markets of various sorts . . . .”).
154. See, e.g., David W. Case, Corporate Environmental Reporting as Informational
Regulation: A Law and Economics Perspective, 76 U. Colo. L. Rev. 379, 414–27 (2005)
(arguing environmental disclosures reduce information asymmetries and increase
opportunities for efficient bargaining); Chatterji & Richman, supra note 43, at 40 (noting
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A common criticism of this model is that collecting and reporting
data is excessively burdensome,155 particularly for small companies,156
produces no information useful for improving practices,157 and diverts
resources from achieving the corporation’s mission.158 These costs, critics
argue, do not come with concomitant gains in accountability, first, because the public is too overloaded with information to pore through extensive corporate disclosures159 and, second, because they cannot always
make sense of the material disclosed anyway.160 To mitigate these
impact of information asymmetries on markets and on corporate social responsibility);
Monsma & Buckley, supra note 37, at 182 & n.113 (same); Snyder, supra note 33, at
577–79 (same).
155. See Langevoort, Internal Controls, supra note 119, at 966–68, 971–72
(explaining how auditors, attorneys, management consultants, and others who gain
financially from increased corporate reporting exaggerate amount of reporting necessary
under Sarbanes-Oxley to risk-averse corporate directors); Donald C. Langevoort,
Monitoring: The Behavioral Economics of Corporate Compliance with Law, 2002 Colum.
Bus. L. Rev. 71, 117 (“Monitoring-based systems have unexpectedly serious (and probably
immeasurable) costs, which society should not impose without strong reason.”).
156. See Ebrahim, supra note 89, at 15 (“A . . . concern raised by small nonprofits is
that their limited staff and resources are stretched too thin by evaluation and reporting
requests of funders . . . .”); Closely Held Corporations, supra note 124, at 7 (discussing
concerns about costly Sarbanes-Oxley disclosure requirements being imposed on small
companies).
157. See Jennifer A. O’Day, Complexity, Accountability, and School Improvement, 72
Harv. Educ. Rev. 293, 300, 302 (2002) (arguing under current accountability regimes
“[t]eachers and schools are constantly bombarded by information,” much of it “irrelevant
to the improvement of instruction and learning”); Ebrahim, supra note 89, at 21
(“[O]nerous data requirements can lead nonprofits to develop monitoring and evaluation
systems that . . . are of limited value for internal learning and decision making.”).
158. Robert Behn calls this interference of monitoring and accountability
requirements with “basic program operating capacity” the classic “accountability dilemma.”
Behn, supra note 89, at 10–12, 15; see also Langevoort, Internal Controls, supra note 119,
at 966–68, 971–72 (arguing Sarbanes-Oxley has led to “labor-intensive formalism” that
focuses on “routines and details deep within the organization without enough attention to
their overall strategic significance” and thus to “misallocation of . . . resources”); Sugin,
supra note 93, at 894 (“Audit requirements . . . are expensive for organizations, diverting
both resources and attention from . . . programs.”).
159. See Katie Cunningham & Marc Ricks, Why Measure: Nonprofits Use Metrics to
Show that They Are Efficient. but What If Donors Don’t Care?, Stan. Soc. Innovation Rev.,
Summer 2004, at 44, 47–51 (finding donor interest in financial accountability negligible);
Mulligan, supra note 15, at 1997–99, 2001 (“[T]hese [nonprofit] disclosure documents
seem fated to languish in the basements of state attorneys generals’ offices.”); Troy A.
Paredes, Blinded by the Light: Information Overload and Its Consequences for Securities
Regulation, 81 Wash. U. L.Q. 417, 419 (2003) (arguing average investor experiences
information overload).
160. See Hess, supra note 46, at 311–12 (noting corporations stopped disclosing their
social activities in 1980s because of “the inability of the public to understand and
appreciate the reports”); Mulligan, supra note 15, at 2000 (“[H]aving vast amounts of data
without the resources to intelligently review and employ it is of no value . . . .”). A
counterargument to this criticism might be that mandatory reporting is useful as a
mechanism to generate internal attention to the things the corporation is required to
report on, whether or not the public pays any attention. Reporting requirements in a
SAAR/benefit corporation model, however, might not serve this function very well. See
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problems, the SAAR approach views the independent auditor not just as
inspector, but also, primarily, as information trader—analogous to the
role played in financial markets by independent raters of securities—
filtering disclosures for consumers, investors, and donors.161 The auditor’s social performance metrics should be “objective” (so consumers can
trust them),162 standardized (so consumers can compare results across
companies),163 and quantifiable (so they are quick and easy to understand).164 The benefit corporation legislation likewise requires that benefit corporations be evaluated against a set of mission-related standards
that are (1) “objective” (developed externally by an “independent third
infra Part II.B.2.c (describing how external accountability models undermine intrinsic
motivation).
161. See Mulligan, supra note 15, at 2000 (“[D]isclosure . . . is normatively valuable
only when institutions are established . . . that enable interested parties to make use of the
data to further some other ends . . . .”); Snyder, supra note 33, at 582–84, 611
(“[D]isclosure fails as a market mechanism . . . [g]iven the . . . lack of intermediaries to
translate the data . . . .”).
162. See Besmer, supra note 151, at 306 (arguing for “objectively verifiable standard”
to enhance effectiveness of “consumer pressure . . . [as an] enforcement mechanism”);
Kerr, Creative Capitalism, supra note 23, at 848 (arguing it is “critical” to “employ an
objective framework” to evaluate corporate claims of social responsibility).
163. See Chatterji & Richman, supra note 43, at 39 (noting “the proliferation of
codes” for measuring nonfinancial performance causes “confusion among consumers”);
Nicole Dando & Tracey Swift, Transparency and Assurance: Minding the Credibility Gap,
44 J. Bus. Ethics 195, 195–96 (2003) (arguing for common metric for social, ethical, and
environmental performance data to enhance value of corporate disclosures); Leila Janah,
The Many Bottom Lines of Businesses, TechCrunch (July 18, 2010), http://techcrunch.
com/2010/07/18/the-many-bottom-lines-of-businesses/ (on file with the Columbia Law
Review) (same); see also Simon Zadek, Peter Pruzan & Richard Evans, Building Corporate
Accountability 42 (1997) (arguing quality of social performance codes should be judged,
in part, by their comparability); Nolan, Corporate Accountability, supra note 39, at 8
(noting use of GRI guidelines as required by King II Report in South Africa “is
expected . . . [to] lead to greater standardization in disclosure practices”).
164. See Clark C. Abt, The Social Audit for Management 45–46 (1977) (attempting to
create social balance sheet by placing dollar values on firm’s “social assets” and “social
liabilities”); Case, supra note 154, at 438 (arguing GRI reporting system’s
“‘standardization, comparability, and computerization’” results in “enhanced . . .
monitoring and benchmarking” (quoting Bradley C. Karkkainen, Information as
Environmental Regulation: TRI and Performance Benchmarking, Precursor to a New
Paradigm?, 89 Geo. L.J. 257, 290 (2001))); Kerr, Sustainability, supra note 5, at 642–43
(“[T]he ability to numerically measure . . . social impact is crucial . . . .”); Snyder, supra
note 33, at 591, 612 (criticizing GRI’s social performance guidelines as using “broad
qualitative language” that is difficult to aggregate and compare and that requires “prose”
to communicate, and advocating the “readily understandable format” of “objective
calculations”); Social Footprint: Measuring Corporate Sustainability Performance, Bus.
Credit, June 2006, at 38, 38 (launching first nonfinancial reporting method able to
mathematically calculate bottom-line impact of corporations on society); Olsen & Lingane,
supra note 144, at 6 (noting first step of SROI approach is to “quantify [the] non-financial
impact of operations per unit”).
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party”); 165 (2) standardized; (3) quantifiable; 166 and (4) translated into
the simple, consumer-friendly “B” label.167
These four pieces of the basic SAAR approach—third-party audits,
public disclosure, standardized measures of performance, and marketbased sanctions—are visible in recent efforts to regulate a range of industries, such as Total Quality Management (TQM) in business,168
“standards-based reform” in public education,169 and federal nursing
home regulations.170 Much of the discussion of the benefit corporation
model that follows therefore draws on lessons learned from implementing substantially similar approaches to accountability in these other
contexts.
B. The Illusory Promise of External Auditing, Standard Metrics, and Market
Pressure
Most current criticisms of the SAAR model focus on the challenges
of implementing it properly.171 For example, one implementation challenge is ensuring the objectivity and independence of the third-party au165. See supra notes 109–110 and accompanying text (describing “independent third
party standard” requirement).
166. See infra notes 180–188 and accompanying text (describing focus on
quantitative standards in audits of benefit corporations).
167. See supra Part I.C.2.b (describing B Lab’s “B” certification standard).
168. See Craig Bremner, Picturing Contemporary Management, in Human Costs,
supra note 150, at 243, 244–45 (describing TQM as measuring compliance with
quantifiable, “objective” standards to ensure quality outcomes). One of the questions on
the B Lab assessment tool is “Do you use an established methodology for quality assurance
[such as] TQM . . . ?” Certified B Corp., The B Impact Assessment 2010: Version 2.0 at 11
(2010) [hereinafter B Impact Assessment], available at http://www.bcorporation.net/
resources/bcorp/documents/2010-B-Impact-Assessment%20%281%29.pdf (on file with
the Columbia Law Review).
169. See O’Day, supra note 157, at 294 (“The most widespread and well-developed
policy approach [to school accountability in United States] . . . is the outcomes-based
bureaucratic model . . . evident in most states and districts and codified in extreme form in
the . . . federal . . . No Child Left Behind Act (NCLB) of 2001.”); Terry M. Moe, Politics,
Control, and the Future of School Accountability 16 (2002) (unpublished manuscript) (on
file with the Columbia Law Review) (noting large business organizations like Business
Roundtable remain major backers of standards-based education reform movement, which
“mirrors their own emphasis on managerial efficiency”); see also Broadfoot, supra note
133, at 235–36 (noting similar education reforms in England make “increasingly explicit
[the] role of parents as ‘consumers’ of education” in combination with “quality assurance
and control devices”).
170. See William Hovey, The Worst of Both Worlds: Nursing Home Regulation in the
United States, Pol’y Stud. Rev., Winter 2000, at 43, 46–47 (describing federal nursing home
regulations in Omnibus Budget Reconciliation Act of 1987 as involving standards,
performance assessments, and sanctions).
171. Other criticisms of the benefit corporation legislation are that it does not solve
the “asset lock” problem, Kelley, Law and Choice, supra note 1, at 369, that it relies on a
shallow source of capital—socially responsible investors—to solve the capital formation
problem, id., and that it does not go beyond the “do no harm” requirements of CSR,
Taylor, supra note 9, at 761.
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ditors.172 Another is resolving the considerable—and until now intractable—technical difficulties involved in obtaining valid and reliable social
outcome metrics.173
Part II.B argues that even without these implementation challenges,
however, the benefit corporation’s SAAR approach is poorly suited to
achieving meaningful accountability to mission. It argues that because
there are important distinctions between a social bottom line and a financial bottom line, the benefit corporation legislation misconceives both for
what (Part II.B.1) and to whom (Part II.B.2) benefit corporations should
be held accountable.
1. Accountability for What. — The social reporting model appeals because it looks so much like management strategies long used to regulate
corporations’ financial performance: standards, measurement, and market competition. Social “outputs,” however, are fundamentally different
from financial ones; indeed, “it could be argued that the raison d’être of
the public service was that its ‘outputs,’ to use the current jargon, were so
different from those of the market that they required different management styles.”174 Standards, measurement, and reporting may play useful
roles in regulating benefit corporations’ social performance, but only,
this Note argues, to the extent these tools are adapted to those qualities
of social goals that distinguish them from financial goals.
a. Quantitative Process and Performance Standards. — The first of these
qualities is that achievement of social goals can often be meaningfully
measured only over the long term, not in quarterly or even annual reports. Second, social goals are complex and “normally highly resistant to
quality reduction.”175 Third, and as a corollary to both the long-term nature of social projects and their complexity, standards for social performance are highly subject to change, as new information is gained or priorities shift. For example, Morgan Stanley was sued for sex discrimination
shortly after it was included on a list of “100 Best Employers for Working
Moms.”176 Similarly, a group that wants to improve graduation rates in
low-income communities may decide that reaching this goal requires
shifting its strategy from research and advocacy to organizing tutoring
172. See Brakman Reiser, Blended Enterprise, supra note 1, at 115 (noting incentives
for B Lab to be lax in its audits); Chatterji & Richman, supra note 43, at 36–37 (describing
phenomenon of “regulatory capture”).
173. See, e.g., Broadfoot, supra note 133, at 13 (noting “size and quality of the critical
literature that now exists about the shortcomings of assessment procedures”); Sugin, supra
note 93, at 919 (“Measuring effectiveness may be the most intractable problem that
charities have.”); Ebrahim, supra note 89, at 14 (noting nonprofits’ concerns about “the
difficulty, reliability, and expense” of measuring long-term outcomes). These difficulties
are most visible in the education and healthcare sectors, where “[s]tandards and their
certification are most ubiquitous and longstanding.” Id. at 16.
174. Brian Easton, The Rise of the Generic Manager, in Human Costs, supra note
150, at 39, 40–41.
175. Brakman Reiser, Enron.org, supra note 89, at 217.
176. Chatterji & Richman, supra note 43, at 34 & n.7.
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and counseling programs.177 Finally, achievement of social goals often
depends on adaptation to individualized, nonreplicable situations. Making an accurate medical diagnosis, for example, often requires the ability
to treat unpredictable cases or make new discoveries.178 Education, too,
“‘since it deals in the first place with organisms, and in the second place
with individualities, is not analogous to a standardizable manufacturing
process.’”179 For all of these reasons, social performance defies meaningful assessment with reference to fixed, determinate, or uniform criteria.
As noted above, however, the social reporting approach in general,
and the benefit corporation accountability framework in particular, heavily concentrates on quantitative standards. For example, B Lab suggests
that a benefit corporation’s annual report to the public should include
such indicators of “mission-related performance” as: “[q]uantifiable
targets related to your mission,” “[q]uantifiable results from your mission
(e.g., lbs of carbon offset),” and “[c]onsistent variables of measurement
which allow comparisons to previous years.”180 Similarly, the following
measures of mission-related performance are typical of those in B Lab’s
auditing survey:
• What % of the company is owned by full-time employees?
• What % of management is from previously excluded
populations?
• What % of employees participated in company-organized
community service days last year?
• What was the average annual % of net profits or net revenues
that your company gave to charity in the last two fiscal
years?181
Answers to these items are assigned point values, which are aggregated to produce a single numerical score.182
The likely consequences of this mismatch between the long-term,
complex, evolving, and qualitative nature of social goals and the fixed,
reductionistic, quantitative nature of B Lab’s standards for measuring
their achievement are two-fold. First, the quantitative nature of B Lab’s
177. Brakman Reiser, Enron.org, supra note 89, at 228–29. Whether this shift
“constitute[s] a meaningful deviation from the nonprofit’s mission . . . cannot be made by
calculation or objective logic alone.” Id.
178. J.S. Carroll & A.C. Edmondson, Leading Organizational Learning in Health
Care, 11 Quality & Safety Health Care 51, 53 (2002).
179. Raymond E. Callahan, Education and the Cult of Efficiency: A Study of the Social
Forces that Have Shaped the Administration of Public Schools 121 (1962) (quoting
Benjamin C. Gruenberg, Some Economic Obstacles to Educational Progress, Am. Teacher,
Sept. 1912, at 90).
180. B Impact Assessment, supra note 168, at 4.
181. Id. at 6, 13–15.
182. Certified B Corp., Become a B Corp, BCorporation.net [hereinafter Become a B
Corp], http://www.bcorporation.net/become-a-b-Corp (on file with the Columbia Law
Review) (last visited Feb. 23, 2012).
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standards could restrict the universe of what can qualify as a “B”-worthy
corporate social mission, since some objectives (e.g., planting trees, serving a given number of “community service days”) are more quantifiable
than others (e.g., teaching good citizenship).
Second, exclusive reliance on quantitative standards can make it impossible to identify how best to achieve a given mission.183 When it comes
to performance of social goals, many “critical sources” of failure escape
definition or measurement in technical or quantitative terms.184 “For instance, the Columbia space shuttle disaster of 2003 was attributed primarily to the culture at NASA, which was seen to have changed little from
that which prevailed at the time of the Challenger disaster seventeen
years earlier.”185 Similarly, research attributes corporate crime to various
kinds of organizational failure, such as incompatible corporate goals, failures of communication, and organizational culture.186 In the context of
regulating safety in a nuclear power plant, many of the most important
questions are questions of degree—such as “how well the duty holder has
carried out the risk management process and how effective its controls
are”—rather than “tick-a-box” questions such as, “Have workers been
trained?,” “Is personal protective equipment . . . available?,” and “[Has]
the duty holder . . . gone through the risk management process[?]”187 As
Andrew Hopkins explained, major accidents have occurred even when
workers have been trained and provided with protective equipment;
neither training nor equipment is of any avail if it is not the right kind or
quality of training or equipment.188
b. Objective Process and Performance Standards. — Another quality that
distinguishes benefit corporations’ “public benefit” goals from traditional
stakeholder maximization goals is that different constituencies often desire different—and sometimes conflicting—social “outputs.”189 Even different constituencies that in general terms want the same output—e.g., to
“improve mental health” or “increase diversity in the workplace”—may
183. Franco Furger, Accountability and Systems of Self-Governance: The Case of the
Maritime Industry, Law & Pol’y, Oct. 1997, at 445, 446.
184. Id. at 446.
185. Andrew Hopkins, Beyond Compliance Monitoring: New Strategies for Safety
Regulators, Law & Pol’y, Apr. 2007, at 210, 212–13.
186. Furger, supra note 183, at 446 (“An approach to risk management based
essentially on technical requirements may miss the social and organizational nature of
many environmental risks.”); see also Carroll & Edmondson, supra note 178, at 51, 53
(“[N]ot all problems can be reduced to technical solutions.”).
187. Hopkins, supra note 185, at 210–13.
188. Id. at 210, 213 (citations omitted).
189. See Jackson, supra note 21, at 66 (noting danger of stakeholders “engag[ing] in
power-wars over their respective interests”); Mulligan, supra note 15, at 1986
(“[C]ompeting constituencies often push nonprofit corporations to seek differing
goals . . . [making] articulati[on] [of] . . . a coherent mission . . . more difficult.”);
Ebrahim, supra note 89, at 14 (“[T]he question of what should be evaluated may vary
according to . . . stakeholder[] . . . .”); see also Taylor, supra note 9, at 761 (noting
possibility of intracorporation disagreement about goals).
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define this output differently. For example, one problem with ultra vires
lawsuits to enforce nonprofit directors’ duties is “the potential for divergent positions within a state about what constitutes ‘charitable’ or ‘exempt’ activity.”190 Defining and implementing “public benefit” purposes
therefore involves the inescapably subjective and in most cases political
tasks of (1) prioritizing among competing interests and (2) choosing
among divergent understandings of how these interests should be conceptualized, measured, and pursued.
The benefit corporation legislation, however, holds benefit corporations accountable to purportedly value-neutral standards. It does this not
only explicitly—by requiring “objective” performance standards set by an
“independent” third party191—but also implicitly. That is, by requiring
benefit corporations to accommodate all stakeholder interests at once,
and not indicating how benefit corporations are to prioritize among different stakeholders, the legislation trivializes possible conflicts among
them.192 Moreover, by leaving it to the “market” to determine performance criteria,193 the legislation requires that standards be developed that,
if not entirely value-neutral, are at least widely enough accepted to be
beyond the need for public debate.194
The benefit corporation legislation therefore presents a second mismatch between its performance standards (value-neutral) and benefit
corporations’ social mission (value-laden). The potential consequences
of this mismatch can be predicted by looking at other contexts where a
similar mismatch occurs. Education reform is one such context. As in the
benefit corporation context, policymakers implementing standards-based
reform in public education have tried to “take education out of the realm
of opinion.”195 For example, the National Education Goals Panel declared that “‘national content standards should address only the core academic areas’ . . . and not ‘non-academic areas such as values, beliefs,
[and] . . . attitudes.’”196 As in the benefit corporation context, this effort
190. Tyler, supra note 85, at 156.
191. See supra note 109 and accompanying text (discussing third-party auditing
standards).
192. See Md. Code Ann., Corps. & Ass’ns § 5-6C-08 (LexisNexis 2007 & Supp. 2011)
(requiring benefit corporations to break their assessment tools into separate sections for
questions relating, respectively, to employees, suppliers, and community members); Vt.
Stat. Ann. tit. 11A, § 21.10, 21.14 (2010) (same); Hess, supra note 46, at 317 (“To ensure
that the corporation is meaningfully considering all stakeholder groups, . . . the social
report should be divided into separate sections for each group.”); see also B Impact
Assessment, supra note 168, at 1 (showing “B Impact Assessment,” with standards in areas
of “Accountability,” “Employees,” “Consumers,” “Community,” and “Environment”).
193. See supra text accompanying notes 102–103 (discussing planned role of market
forces in shaping standards).
194. See Broadfoot, supra note 133, at 124 (noting use of standardized assessments
“require[s] a considerable measure of agreement over . . . objectives.”)
195. Callahan, supra note 179, at 87.
196. Diane Ravitch, National Standards in American Education: A Citizen’s Guide 166
(The Brookings Inst. ed., 1995) (quoting Statement on Voluntary National Education
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to purge mission statements and performance standards of “opinions”
and “values” seems futile: Decisions about what is worth knowing and
teaching are inherently decisions about what people value.197
Many argue that this reliance on purportedly noncontroversial performance standards masks the “value assumptions” behind education reform efforts and that this, in turn, has short-circuited explicit discussion
about competing values.198 These critics argue that research and policy
debates about accountability in education have thus centered on the
technical issues of implementation of assessment tools to the exclusion of
achieving a value consensus about the educational goals to be assessed.199
What is wrong with stripping values from the public debate about a
social project? One problem with taking the end-goal as a given is that
doing so may freeze in time the “ideological and political commitments”
embedded in this goal and “chill the[ir] evolution and development.”200
In the education context, American public school curricula—framed in
terms of purportedly timeless “academic” standards—have remained stagnant for decades. In the meantime, not only have values evolved, but the
economy has also transformed and globalized, and new research on
Content Standards, in Promises to Keep: Creating High Standards for American Students,
Report on the Review of Education Standards from Goals 3 and 4 Technical Planning
Group to the National Education Goals Panel 68, 68 (1993)). Similarly, Virginia “Governor
Douglas Wilder said that he would not support ‘value-based education’ . . . [and the]
Michigan legislature . . . mandate[ed] the development of a state ‘model . . . curriculum,’
which ‘shall not include attitudes, beliefs, or value systems.’” Id. (quoting H.B. 5121, 87th
Leg., Reg. Sess., § 1278(1) (Mich. 1993)).
197. See Broadfoot, supra note 133, at 236 (“[W]hat is ‘worth’ knowing, and hence
every aspect of educational policy, is essentially a value question.”).
198. Id. at 123, 163, 226, 230–31 (arguing reliance on purportedly objective standards
masks potential disagreement about them and thus “excludes explicit discussion of
different . . . options in terms of competing values”); see also Rees, supra note 151, at 24
(“[I]n many circles management is presented as unable to engage in debate about
objectives because, by its focus on rationality and efficiency, it stands beyond political and
moral controversy.”).
199. Broadfoot, supra note 133, at 226; see also John I. Goodlad, A Place Called
School: Prospects for the Future 290 (1984) (“My own conclusion, as a long-term student
of curriculum reform, is that there has not been intensive, sustained attention to the
content of elementary and secondary education for some time.”); Neil Postman, The End
of Education: Redefining the Value of School 26 (1995) (“There was a time when
educators became famous for providing reasons for learning; now they become famous for
inventing a method.”); Landon E. Beyer & Michael W. Apple, Values and Politics in the
Curriculum, in The Curriculum: Problems, Politics, and Possibilities 3, 3-11 (Landon E.
Beyer & Michael W. Apple eds., 2d ed. 1998) (arguing standards-based accountability
movement in education has provoked much less analysis of content of new state curriculum
standards than it has research on methods of ensuring teachers’ implementation of these
standards in classroom); Decker F. Walker & Jon Schaffarzick, Comparing Curricula, 44
Rev. Educ. Res. 83, 108 (1975) (noting based on review of research that “we so rarely, so
sporadically, and so feebly consider what matters to address and what to emphasize in
schools”).
200. Brakman Reiser, Enron.org, supra note 89, at 229.
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human learning (and on other countries’ very different content standards) has accumulated.201 As two scholars of curriculum put it:
Perhaps if as many people in schools, in government, and in
foundations asked as insistently for evidence that schools were
attempting to teach worthwhile and defensible things as ask
whether the schools have taught what they set out to teach, we
would have more and better research and maybe even better
schools.202
Einstein warned about this “‘[p]erfection of means, but confusion of
ends,’”203 and “[t]he film Dr. Strangelove brilliantly satirized” this phenomenon in its depiction of “the absorption of a bomber crew in the
exacting technical procedure of dropping nuclear weapons on a
country.”204
2. Accountability to Whom. —
a. Accountability to Oversight Bodies and the Market. — The benefit corporation model holds corporations accountable to the public at large, or
the “marketplace.” As Hess explains, SAAR is “consistent with the idea of
a Marketplace of Morality.”205 Under this theory, “market participants essentially ‘vote’ on appropriate corporate behavior with their purchase decisions. . . . For the marketplace of morality to work efficiently, . . . corporations must understand and be responsive to the moral preferences
within capital, consumer, and labor markets . . . .”206 Similarly, the benefit corporation legislation leaves it to third-party evaluators and the courts
in the short term and to “the market” in the long term to give content to
the terms “general public benefit” and “specific public benefit”—that is,
to define the standards by which benefit corporations’ performance will
be measured.207
b. Accountability to Service Deliverers and Their Intended Beneficiaries. —
In addition to the diffuse public, however, benefit corporations have two
201. See, e.g., David Perkins, Smart Schools 22–23 (1992) (describing research
showing knowledge students acquire in school is often “inert”—inaccessible to them
outside specific context in which they originally learned it).
202. Walker & Schaffarzick, supra note 199, at 108; see also, e.g., Curtis C. McKnight
et al., The Underachieving Curriculum: Assessing U.S. School Mathematics from an
International Perspective 89 (1987) (reporting results of large-scale quantitative
comparison showing that U.S. curriculum varies substantially from world trends in its slow
pace, repetitiveness, fragmentation, and emphasis of breadth over depth, and that these
features have remained remarkably resistant to change over time); William Schmidt,
Richard Houang & Leland Cogan, A Coherent Curriculum: The Case of Mathematics, Am.
Educator, Summer 2002, at 1, 3 (concluding based on extensive comparative study that
U.S. curriculum “is highly repetitive, unfocused, unchallenging, and incoherent”).
203. Albert Einstein, The New Quotable Einstein 117 (Alice Calaprice ed., 2005)
(quoting broadcast recording for science conference in London, Sept. 28, 1941).
204. Stanley Milgram, Obedience to Authority: An Experimental View 7 (1975).
205. Hess, supra note 46, at 323–24.
206. Id. at 323; see also Thomas W. Dunfee, The Marketplace of Morality: First Steps
Toward a Theory of Moral Choice, 8 Bus. Ethics Q. 127 (1998) (presenting theory).
207. See supra note 103 and accompanying text (describing use of “market” to shape
performance standards).
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other distinct constituencies: (1) the more targeted beneficiaries of the
corporation’s “specific public benefit” and (2) the employees of the corporation. These two constituencies arguably belong in an effective accountability framework for public-oriented organizations.
First, those targeted by a corporation’s “specific public benefit” arguably have a greater moral claim than do those not directly targeted
(i.e., “independent third parties” or the diffuse public) to be involved in
defining standards for performance. For example, traditional large-scale
development programs in the 1980s, involving expensive infrastructure
projects like dams and power plants, were “largely designed and implemented without the participation of the target populations, and often not
only failed to achieve their desired result, but caused serious adverse consequences in the communities in which they were implemented.”208
Second, even when the organization’s activities implicate the diffuse
public (e.g., through its environmental performance) certain specific
constituencies and the service providers themselves may be more competent than “independent third parties” or the broader public to set standards for performance. For example, when asked to identify the causes of
a safety incident at a nuclear power plant, employees were readily able to
pick out a number of important causes, including complexity in layers of
management, confusion about who had checked what already, politeness
toward new hires that may have interfered with communication, and the
failure of specialists to consider the impact of their work on the whole.209
Outsiders, by contrast, find it hard to know the right questions to ask;
their efforts to hold organizations accountable often create make-work
rather than meaningful inquiry.210 Courts, recognizing their own institutional incompetence to arbitrate disputes about an organization’s adherence to its social mission, have already shown a desire to defer to the
judgments of nonprofit directors in defining their own organizational
mission.211
208. Taylor, supra note 9, at 766 n.117.
209. John S. Carroll, Organizational Learning Activities in High-Hazard Industries:
The Logics Underlying Self-Analysis, 35 J. Mgmt. Stud. 699, 707 (1998); see also Karin
Solondz, The Cost of Efficiency, in Human Costs, supra note 150, at 211, 218 (arguing that
for this reason “[i]t is not in the employer’s own best interest to reduce the bargaining
position of the employee to the point where the employee is not able to help ensure and
contribute to the quality of the employer’s own product”).
210. Susan Sturm, The Architecture of Inclusion: Advancing Workplace Equity in
Higher Education, 29 Harv. J.L. & Gender 247, 267 & n.81 (2006) (noting courts’ difficulty
conducting audits of affirmative action policies). For example, “the subtle and structural
dynamics producing women’s under-participation” in certain professions may be absent
from “current judicial and administrative definitions of discrimination.” Id. at 262.
211. See, e.g., In re Multiple Sclerosis Serv. Org. of N.Y., Inc., 496 N.E.2d 861, 865,
868 (N.Y. 1986) (finding nonprofit directors had power to determine scope of
organization’s mission and were not bound to purposes stated in its founding documents);
Sugin, supra note 93, at 902 (“[In re MSSO] should stand for [the] important
principle[] . . . that courts defer to the directors’ judgment about the charitable goals of
the organization . . . .”).
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c. Balancing Accountability to Different Stakeholders. — Both Hess’s
SAAR model and the benefit corporation legislation seem to conflate the
“marketplace” and “stakeholders”: For example, after describing the
“marketplace of morality,” Hess concludes, “In summary, the goal of the
regulatory system should be to guide corporations in being responsive to
the expectations and demands of its [sic] stakeholders.”212 Others have
noted, however, that “upward accountability” to the “public and oversight
bodies” not only is distinct from, but can in some cases also interfere with,
“internal accountability” on the part of those carrying out a social project,213 as well as “downward accountability” to their intended beneficiaries (“the stakeholders”).214
Exclusive accountability to independent third parties or the public at
large can interfere with “accountability to self and colleagues”215 in two
ways. First, it can undermine the ability of the service deliverers themselves to define their own mission.216 For example, when statewide curriculum standards were introduced in American public education in the
1990s,217 they were drafted by state legislators, who, under pressure from
their constituents, simplified the wording of the standards and removed
such politically charged terms as “environment,” “mental and physical
health,” “stewardship,” “construct meaning,” “analyze and evaluate,” “aesthetic,” “ethics,” and “social responsibilities.”218 The result, many complained, were state curriculum frameworks that served more as public relations documents than as research-based guides to good teaching.219 A
teacher involved in writing the Missouri state standards complained, “In
212. Hess, supra note 46, at 322–24.
213. See Broadfoot, supra note 133, at 223 (distinguishing “‘bureaucratic’
accountability” from “‘professional’ accountability to self and colleagues for maintaining
self-imposed standards”).
214. Ebrahim, supra note 89, at 13 (distinguishing “upward” accountability “to the
public and oversight bodies” from “downward accountability to stakeholders”); see also
Broadfoot, supra note 133, at 223 (distinguishing “bureaucratic accountability” from
“‘moral’ accountability, the responsiveness of the system to clients”).
215. Broadfoot, supra note 133, at 223.
216. See Sugin, supra note 93, at 900–03 (noting one problem with ultra vires suits to
enforce nonprofit’s duty of obedience to its original mission is that they deter flexible
responses to changing circumstances).
217. See U.S. Dep’t of Educ., Making a Difference: No Child Left Behind, ED.gov,
www.ed.gov/nclb/overview/importance/difference/index.html (on file with the Columbia
Law Review) (last visited Feb. 23, 2011) (providing information and statistics about
curriculum standards under No Child Left Behind).
218. Margaret Placier, Michael Walker & Bill Foster, Writing the “Show-Me”
Standards: Teacher Professionalism and Political Control in U.S. State Curriculum Policy,
32 Curriculum Inquiry 281, 294–96 (2002); see also Susan Ohanian, One Size Fits Few:
The Folly of Educational Standards 76 (1999) (criticizing California state standards for
systematically excluding terms such as enjoy or discover in favor of more banal terms like
identify or use); Henry B. Maloney, The Little Standards that Couldn’t, Eng. J., Jan. 1997, at
86, 88 (1997) (criticizing national language arts standards for taking technical rather than
personal or aesthetic approaches to literature or writing).
219. Placier et al., supra note 218, at 296.
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no other discipline are professionals asked to define their jobs in language that is clearly understandable to the lay person at all levels.”220
Second, once the mission is defined, upward accountability can undercut service deliverers’ ability to achieve this mission. Specifically, organizations’ overriding interest in avoiding market-based sanctions produces a number of perverse incentives.221
For example, reporting requirements tied to sanctions give organizations the incentive to “[m]uddy[] their own informational environments,”222 which prevents them from identifying problems and “revealing and closely scrutinizing their mistakes”223:
A comprehensive review of research on organizational response
to threat . . . uncovered [a] dominant and often maladaptive
pattern[] . . . . [R]ather than expanding their use of information to find solutions to the problem, threatened organizations
and individuals actually restrict their information processing, relying instead on previously held internal hypotheses and expectations . . . . We can expect individual and system learning to be
constrained under these conditions, as well as . . . examination
of existing practice and assumptions.224
For example, a culture of blame in the healthcare industry led to “an
epidemic of underreported preventable injuries.”225 In the nuclear
power industry, “it took a decade of experience with problem reporting
systems to realise that blaming individuals did not make the problems go
away, but instead discouraged employees from reporting them.”226 Studies of upward accountability models in education similarly
reveal a fairly unidirectional (top-down) flow of information
throughout the system. . . . When information did flow the other
way (from schools . . . up into the system), it focused on whether
people were carrying out prescribed tasks. . . . [S]chools [were]
220. Id. at 294.
221. O’Day, supra note 157, at 312–13 (noting negative incentives in standards-based
education reform focused schools’ attention “on getting off or staying off probation”); see
also Langevoort, Internal Controls, supra note 119, at 966–67 (noting fear of shareholder
suits and government audits can exert powerful influence over corporate behavior no
matter how unlikely they are to occur).
222. Langevoort, Internal Controls, supra note 119, at 958; see also Sturm, supra note
210, at 317–18 (arguing targeting failures and mistakes for sanctions reduces
comprehensiveness and quality of information organizations gather and use in
decisionmaking).
223. Ebrahim, supra note 89, at 21.
224. O’Day, supra note 157, at 312–13 (citation omitted).
225. Paul Barach & Steven D. Small, How the NHS Can Improve Safety and Learning:
By Learning Free Lessons from Near Misses, 320 BMJ 1683, 1683–84 (2000), available at
http://www.ncbi.nlm.nih.gov/pmc/articles/PMC1127461/pdf/1683.pdf (on file with the
Columbia Law Review) (stating “culture of blame and superficial analysis” causes “[f]ree
lessons from near misses and more expensive ones from litigation [to be] largely lost”).
226. Carroll & Edmondson, supra note 178, at 52.
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reacting to directions imposed from above and outside the
school rather than reflecting on internal practices.227
In short, “disclosure does not necessarily force introspection and internal change.”228 On the contrary, evidence suggests that disclosure requirements, when tied to market pressures or other threats of sanctions,
can impede innovation and adaptation.229 As Alnoor Ebrahim put it,
“[d]isclosure statements and reports . . . enforced through punitive
threats . . . are of limited use for enhancing downwards accountability.”230
To the extent that combining disclosure requirements with
performance-based sanctions does in fact encourage organizations to suppress information, focus on short-term results, and do the minimum necessary to comply with external requirements, they work to the detriment
of the intended beneficiaries (“stakeholders”) of a social project.231 Adding quantitative performance metrics into the mix adds another wrinkle.
When reporting requirements are not only tied to sanctions but are
also—like B Lab’s—focused on easily quantifiable, short-term results,
they discourage the pursuit of goals that are less easily quantified or that
are not measured at all.232 Such reporting requirements may fail to capture the most meaningful aspects of a corporation’s social performance—
all the more so because it is so easy for organizations to game the data
disclosed to auditors or the public (i.e., by making cosmetic changes with227. O’Day, supra note 157, at 311.
228. Snyder, supra note 33, at 595, 599 (emphasis added).
229. O’Day, supra note 157, at 312–13; see also Jackson, supra note 21, at 103
(describing companies following “the bare minimum in terms of compliance with
requirements foisted upon them by Western contractors”); Mulligan, supra note 15, at
2001 (arguing disclosure regimes “may lead to . . . the loss of freedom to make innovative
decisions”); E. Rustique-Forrester, Exploring the Policy Influence of England’s National
Curriculum on School Exclusion: A Dilemma of Intended Entitlement and Unintended
Exclusion?, in The National Curriculum and Its Effects 121, 139 (Cedric Cullingford &
Paul Oliver eds., 2001) (“Among the most deeply felt effects of the National Curriculum
[in England] on schools and teachers is a climate . . . in which teachers . . . have few
incentives and opportunities for attempting innovative, school-based solutions.”); Sturm,
supra note 210, at 269–70 (arguing compliance accountability models discourage
institutions from experimenting with creative solutions).
230. Ebrahim, supra note 89, at 12–13, 23 (emphasis added).
231. See A. V. Kelly, The National Curriculum: A Critical Review 49 (1990) (noting
high score on external assessment system “need not reflect” that organization “is doing its
best” for its intended beneficiaries).
232. See Tricia Connell, English: Meaning More, Not Less, in The National
Curriculum and the Primary School: Springboard or Straitjacket? 15, 15–17 (Jeni Riley ed.,
1992) (noting compliance with national curriculum in England may lead teachers to
ignore “unspecified, but no less critical aspects of language . . . due to excessive concern
for quantifiable outcomes”); O’Day, supra note 157, at 312–13 (noting under standardsbased reform policies, “schools exhibited an emphasis on strategies to produce immediate
increases in test scores, often to the neglect of longer-term success”); Sturm, supra note
210, at 269–70 (noting external monitoring systems lead organizations to focus on easily
quantifiable results); Ebrahim, supra note 89, at 25 (noting disclosures tend to focus on
short-term results).
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out any substantive improvements)233 and because, as discussed above,
they have every incentive to do so. For example, an organization can easily change titles to make it look like it has more minorities in management positions.234 B Lab’s audits of benefit corporations lend themselves
very much to this kind of manipulation: They are one-shot, short-term,
occur only every few years, and rely on documentation provided by the
benefit corporations themselves.235
In all of these ways, this accountability model may not only inhibit
internal improvement, but may also, in some respects, cause a decrease in
organizational effectiveness. For example, in the education context, the
combination of quantitative performance metrics and negative sanctions
has led teachers and schools to triage assistance to students nearest test
score cut-off points,236 to expel students who might bring down test
scores,237 to favor superficial rote learning over in-depth or individualized238 instruction, and generally “to teach in ways that [go] against their
own notions of ‘good’ educational practice.”239 In these ways, “commercial competitiveness . . . cloud[s] professional judgment, the essence and
prime motive of which is, or ought to be, a concern with the needs of the
client (rather than the ‘consumer’).”240
III. AN ALTERNATIVE APPROACH TO MISSION ACCOUNTABILITY
FOR BENEFIT CORPORATIONS
Part III proposes revisions to the benefit corporation legislation that
respond to the criticisms presented above. Part III.A presents an alternative theoretical model regarding for what benefit corporations should be
accountable and to whom. Part III.B applies this theoretical model to the
benefit corporation context.
A. An Alternative to the SAAR Theoretical Model
Part II.B critiqued the benefit corporation legislation for holding
benefit corporations accountable (1) to an independent oversight body
and the “market” (2) for attaining quantifiable and purportedly valueneutral standards for both process and outcomes. Part III.A proposes
benefit corporations be held accountable as well (1) to self, professional
peers, and the targeted beneficiaries of “specific public benefit” (2) for
233. See Sturm, supra note 210, at 266 (explaining results on external audits are easily
manipulated).
234. Id.
235. See Become a B Corp, supra note 182 (describing B Lab’s auditing system).
236. O’Day, supra note 157, at 312–13.
237. See Rustique-Forrester, supra note 229, at 121, 125–26 (suggesting England’s
National Curriculum “might provide possible explanations for the general rise” in
expulsions and suspensions).
238. Id. at 121–22, 130, 143.
239. Id. at 136.
240. Kelly, supra note 231, at 49.
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maintaining “processes that can engender systematic critical reflection
and adaptation.”241 Part III.A.1 explains this new “for what” framework;
Part III.A.2 explains this new “to whom” framework.
1. An Alternative Framework for “Accountable for What”: Adaptive
Learning. — An adaptive learning framework is concerned with assessing,
first and foremost, an organization’s capacity for organizational learning.242 This requires not just regular monitoring of performance against
mission,243 but also habits of observation, reflection, and analysis,244 a
questioning attitude,245 proactive efforts to seek out hidden problems,246
the use of failures and mistakes as triggers for action,247 creativity and
innovation,248 repeated trials and critical scrutiny of their results, acknowledgement of doubt, collaborative inquiry and mission development, conflict management, psychological safety,249 and robust communication across different levels of hierarchy and occupational
specialties250 and across different peer organizations.251
Under this model, organizations are accountable not only for fixed
results and fixed procedures, but also, first, for establishing and following
processes for defining what those results and procedures should be and
241. Ebrahim, supra note 89, at 10.
242. See id. at 20–22 (describing concept of “adaptive learning”).
243. Id. at 21 (“As an accountability mechanism, adaptive learning focuses internally
on organizational mission rather than externally on accountability to funders . . . .”).
244. See Carroll, supra note 209, at 702 (describing “four ordered learning processes”
of observing, reflecting, creating, and acting).
245. Id. at 709 (describing root cause analysis).
246. Id. at 701 (describing need in high-hazard industries like nuclear power and
chemical process plants to identify problems before they produce catastrophic
consequences); see also Carroll & Edmondson, supra note 178, at 52 (“Safety and quality
are enhanced by finding latent failures . . . .”).
247. See Sturm, supra note 210, at 295 (“Organizational catalysts at [the University of
Michigan] create occasions for women and men concerned about gender to meet, . . .
learn from mistakes, and take action . . . .”).
248. See Carroll, supra note 209, at 702 (describing “creating” as one of processes of
ordered learning and defining it as “imagining, designing, planning, deciding”).
249. See Carroll & Edmondson, supra note 178, at 52 (“Organisations that value long
term rather than short term performance . . . cultivate a variety of skills or disciplines to
support learning, including acknowledgement of doubt, collaborative inquiry, personal
and shared visioning, conflict management, team learning, and systems thinking.”).
250. See Carroll, supra note 209, at 700–01 (explaining “employees at different levels
in the hierarchy . . . ‘know’ different things about how work is done,” especially in complex
organizations where “no one person can know . . . both the ‘big picture’ and the details”);
see also Carroll & Edmondson, supra note 178, at 55 (noting “powerful status differences”
in healthcare organizations “inhibit open inquiry and collaborative learning”); Hopkins,
supra note 185, at 217 (“The best companies have safety staff at several different points of
the hierarchy . . . .”). For example, before the Moura coal-mine explosion, miners had
reported detecting a “tarry” smell, an indication of coal burning. Management dismissed
the reports and the burning coal eventually ignited a methane gas explosion. Hopkins,
supra note 185, at 215.
251. See infra Part III.A.2.b (describing corporate accountability to individuals within
organization and in peer organizations).
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how they should be measured and, second, for continuously adapting organizational efforts to achieve them. Instead of being “objective,”
predominantly quantitative, and standardized, standards under this
model are explicitly subjective; internally generated (in conjunction with
peers, stakeholders, and regulators); justified on the basis of articulated
reasons and research; and subject to continuous review.252
This approach recognizes that those attempting to address social
problems “are unlikely to know how best to achieve their goals and what
to measure along the way”253 and that they need to be adaptable not just
in how they pursue their goals, but also in what specific goals they set—
that they need “enough flexibility so that resources can be deployed away
from social missions that are ineffective or no longer necessary.”254 It
thus provides a framework both for developing performance targets that
are better suited than SAAR to “[o]rganisations that value long term
rather than short term performance and care about a wide[] range of
outcomes (performance, safety, quality, environment) and stakeholders
(shareholders, employees, customers, suppliers, community, society).”255
Because it is based on “capacity building” rather than compliance,256 this
approach also better enables corporations to meet those targets than do
the quantitative, results-oriented metrics of the SAAR model.257
This adaptive learning accountability framework has been implicitly
or explicitly adopted in a range of other contexts, in the private, nonprofit, and government sectors. For example, in the private sector, analysis of the Three Mile Island (TMI) nuclear power plant meltdown revealed that
information to prevent the . . . disaster was available from several sources—similar prior incidents at other plants, recurrent
problems with the same equipment at TMI, and the critique of
engineers that operators had been taught to do the wrong thing
in particular circumstances—yet nothing had been done to incorporate this information into operating practices.258
252. Ebrahim, supra note 89, at 10.
253. Id.
254. Katz & Page, supra note 1, at 92–93; see also Sugin, supra note 93, at 920
(arguing for creation of “duty of fidelity” in nonprofit context that “would not prevent the
board from amending its organizational documents” to respond to changing conditions).
255. Carroll & Edmondson, supra note 178, at 52.
256. See Ebrahim, supra note 89, at 24–25 (contrasting “[c]ompliance-driven
accountability” with “strategy-driven accountability”); see also O’Day, supra note 157, at
311 (“[B]ureaucratic school accountability mechanisms . . . foster compliance . . . over
system learning.”); Sturm, supra note 210, at 316–23 (describing “capacity building”
approach).
257. See supra Part II.B.1.a (describing how quantitative measures alone may not
provide information necessary to improve performance).
258. Carroll & Edmondson, supra note 178, at 52.
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As a result, “[l]earning [has become] a central activity in the nuclear
power industry.”259
In the nonprofit sector, a recent report on “disturbingly high levels
of preventable medical errors” in the National Health Service (NHS) in
Britain attributed this pattern to the NHS being a “passive” rather than
“active” learning organization, lacking the “structure, processes, and
mindset” to rise to the next level of performance.260 The report called for
“splic[ing] safety culture and learning into the organisational genome of
the NHS,”261 concluding that the kind of standardization that is needed
is not telling surgeons how to operate, but rather developing systems of
communication and work practices.262
Similarly, in the government sector, recognizing the limits of safety
management systems that rely on “compliance with various regulations
and codes,” the Norwegian government has developed an approach to
regulating petroleum companies that requires them to develop “safety
cultures,” which they define as “a reporting culture, a just culture, a flexible culture, and a learning culture.”263 To create a learning culture, companies “must develop better mechanisms for detecting and responding to
information about things that may be going wrong, or about to go wrong,
and they must develop different styles of decision making.”264 The
Norwegian regulators thus focus more on organizational design than on
compliance with rules and regulations.265
2. An Alternative “Accountable to Whom” Framework: Internal
Accountability, Professional Accountability, and Downward Accountability. — As
argued in Part II.B.3, the benefit corporation model is driven primarily by
upward accountability to external auditors, the courts, and “the market,”
and does not provide sufficiently for three additional sources of accountability: (1) the corporation itself, (2) its professional peers, and (3) its intended beneficiaries.
a. Internal Accountability. — Hess argues that the “primary goal” of
the SAAR approach “is to ‘utilize the law to compel firms to behave “morally.”’”266 Research from psychology, economics, and other fields, however, suggests that “[t]he law can no more enforce success on charities
259. Carroll, supra note 209, at 701, 703 (explaining need in high-risk nuclear power
and chemical process industries to “learn efficiently from precursors and minor
incidents . . . due to the catastrophic costs of severe accidents” (citations omitted)).
260. Barach & Small, supra note 225, at 1683–84.
261. Id. at 1684; see also Carroll & Edmondson, supra note 178, at 51 (noting need
for systems in hospitals that foster “cycle of action and reflection” to “increas[e] the
capacity for effective organizational action through knowledge and understanding”).
262. Barach & Small, supra note 225, at 1683–84.
263. Hopkins, supra note 185, at 216–17 (emphasis added).
264. Id. at 217.
265. Id.
266. Hess, supra note 46, at 310 (quoting After Legal Instrumentalism? Strategic
Models of Post-Regulatory Law, in Dilemmas of Law in the Welfare State 299, 320
(Gunther Teubner ed., 1986)).
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than it can enforce profits on business.”267 As a number of scholars have
pointed out, “accountability has both an external dimension in terms of
‘an obligation to meet prescribed standards of behavior’ . . . and an internal one motivated by ‘felt responsibility;’”268 to be effective in the context
of social goals, external accountability must align both with individuals’
intrinsic motivation269 and institutions’ internal accountability
framework.270
Internal accountability is indispensable not just because humans are
hardwired to perform best when their motivation is internal,271 but also
for practical reasons. First, as explained in Part II.B.2.c, the most important “sources of learning” may be “analysis of an organization’s own experiences and internal debates rather than . . . benchmarking . . . or
other external sources of information.”272 Second, no monitoring
scheme can possibly be comprehensive enough, nor enforcement mechanism effective enough, to compel optimal social performance. For example, “[d]emands for permitting the unionization of garment workers . . .
accelerated the outsourcing trend,”273 leaving American workers without
any jobs at all; “[h]eightened emissions regulations pushed some manufacturers to the third world”;274 and noncompliance with federal nursing
home standards “is the rule, not the exception.”275
b. Professional Accountability. — Individuals and organizations are
governed not only by an internal sense of responsibility, but also by social
267. Sugin, supra note 93, at 920.
268. Ebrahim, supra note 89, at 3 (citations omitted).
269. Charles Abelmann et al., When Accountability Knocks, Will Anyone Answer? 16
(1999) (“Accountability in these schools boils down to individual teachers’ sense of
responsibility. . . . [External] accountability structures exercised no effective influence over
individual teachers’ sense of to whom and for what they were accountable.”); see also
Langevoort, Internal Controls, supra note 119, at 971 (“Autonomy is a powerful motivator,
for both individuals and groups.”); O’Day, supra note 157, at 304 (“Motivation must
ultimately occur at the individual level.”).
270. See Abelmann et al., supra note 269, at 6 (“[H]ow a school responds to external
accountability systems is largely determined . . . by the degree of alignment between the
schools’ internal accountability mechanisms and the requirements of the external
accountability system.”).
271. See Behn, supra note 89, at 11 (“‘[The] detailed regulation of public employees
is not compatible with productivity, high morale, and innovation.’” (quoting Paul Volcker,
former chairman of Federal Reserve Board, and William Winter, former governor of
Mississippi)).
272. Carroll, supra note 209, at 701.
273. Chatterji & Richman, supra note 43, at 37.
274. Id.
275. Hovey, supra note 170, at 47–48; see also supra notes 231–240 and
accompanying text (describing failure of quantitative performance metrics and punitive
sanctions to improve organizational performance).
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and professional norms.276 In The Division of Labor in Society277 and Professional Ethics and Civic Morals,278 sociologist Émile Durkheim expounded a
theory of “moral conduct . . . grounded in . . . networks of professional
and personal ties.”279 He viewed “professional organizations and their historical forebears, the guilds and old corporations, as an important source
of self-regulating economic institutions.”280
A number of industries rely on professional associations to define
standards and peer review to ensure they are met.281 Recognizing the
limits of external accountability, businesses developed “Smart
Regulation,” a system of self-regulation and coregulation, after “it had
become apparent that neither traditional command and control regulation nor the free market provides satisfactory answers to the increasingly
complex and serious environmental problems which confront the
world.”282
As a form of external accountability, professional accountability has a
number of advantages that accountability to independent oversight bodies or the public at large does not have. First, professional accountability
is better suited to preserving intrinsic motivation:
In recent years, numerous social scientists have rediscovered the
close relationships between communicative action, group ties,
and the emergence of individual moral conduct. Contemporary
philosophers . . . , social scientists . . . , and political scientists . . .
have all offered distinctive and compelling arguments for the
importance of interpersonal communication as a basic ingredient of sustained individual accountability.283
Second, professional accountability is better suited to generating
valid metrics of performance. Because it involves members of the profes276. See Abelmann et al., supra note 269, at 3–4 (distinguishing “responsibility,”
which is “personal and individual in nature and . . . stems from the values and beliefs of
individuals,” from “expectations,” which “are collective in nature,” “shared,” and “formed
out of relationships among individuals”); Furger, supra note 183, at 447 (describing “social
rules, practices, and standards of accountability which at any given time characterize an
industry and its members”).
277. Émile Durkheim, The Division of Labor in Society (1933) [hereinafter
Durkheim, Division of Labor].
278. Émile Durkheim, Professional Ethics and Civic Morals (1957).
279. Furger, supra note 183, at 447.
280. Id. For example, the American Bar Association sets standards of conduct for
lawyers and accredits the schools that trains them; the National Fire Protection Association
has established fire protection codes for over a century; and the Institute of Nuclear Power
Operations spurred safety improvements in the nuclear power industry. Id. at 452.
281. Id. at 450; O’Day, supra note 157, at 315–16.
282. Neil Gunningham, Enforcement and Compliance Strategies, in The Oxford
Handbook of Regulation 120, 131–35 (Robert Baldwin, Martin Cave & Martin Lodge eds.,
2010).
283. Furger, supra note 183, at 449 (citations omitted); see also O’Day, supra note
157, at 317 (“[P]rofessional accountability expands the incentives for improvement, with
particular emphasis on the intrinsic motivators that bring teachers into teaching in the first
place, a commitment to students . . . and an identity as an educator.” (citation omitted)).
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sion assuming responsibility for defining standards of practice, it is
adapted to activities “too complex . . . to be governed by bureaucratically
defined rules,”284 like education, medicine, or environmental protection.
As Durkheim argued, “neither political society in its entirety, nor the
State can take over” the function of defining appropriate standards of
professional accountability: “[E]conomic life, because it is specialized and
grows more specialized every day, escapes their competence . . . . An occupational activity can be efficaciously regulated only by a group intimate
enough with it to know its functioning . . . .”285
Third, professional accountability has certain advantages in helping
an organization achieve those standards by promoting adaptive learning.
Through norms of professional interchange, mentoring, and collective
problem-solving, it can promote “the generation and spread of information.”286 Moreover, the information it produces is likely to be “more finegrained and immediate” and better suited to “meaningful interpretation[]” than information “accumulated at higher levels of
aggregation.”287
c. Downward Accountability. — Finally, in addition to fostering accountability to self and to professional peers, an accountability framework
for benefit corporations should provide accountability to those the corporation purports to benefit. In some respects, “downward accountability
mechanisms remain comparatively underdeveloped,”288 though there
have already been efforts to incorporate downward accountability in the
corporate289 and government contexts.290
284. O’Day, supra note 157, at 315.
285. Durkheim, Division of Labor, supra note 277, at 5; see supra notes 215–220 and
accompanying text (discussing how accountability to external parties can interfere with
internal accountability).
286. O’Day, supra note 157, at 316–17.
287. Id.
288. Ebrahim, supra note 89, at 23.
289. See Hess, supra note 46, at 317–19 (describing stakeholder focus groups and
surveys conducted by The Body Shop and Ben & Jerry’s).
290. For example, Pasi Sahlberg, a member of Finland’s Ministry of Education and
Culture, attributes Finland’s exceptional performance on international assessments of
student achievement to Finnish schools’ reliance on professional and downward forms of
accountability (to teachers, students, and parents), rather than upward models of
accountability. In Finland, neither external auditors nor externally imposed standardized
tests are used to compare teachers or schools to one another. Instead, teachers, students,
and parents “assess[] and . . . decid[e] how well schools, teachers, or students do what they
are supposed to do.” Pasi Sahlberg, Learning from Finland: How One of the World’s Top
Educational Performers Turned Around, Bos. Globe, Dec. 27, 2010, at A9; see also
Broadfoot, supra note 133, at 161, 165, 229 (noting “the [French Ministry of Education]
has so far resisted pressure for [student test] results to be made public and thus to provide
for inter-school . . . comparisons. . . . [S]trongly held French belief[s] [about] . . .
educational provision militate[] against the adoption of . . . market forces to stimulate”
improvement).
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B. Applying the Theory: An Alternative Accountability Framework for Benefit
Corporations
Disclosure, reporting, measurement, and external monitoring per se
are not inimical to effective mission accountability. Many argue, for example, that they can serve to stimulate internal reflection and change.291
Part III.B proposes an alternative accountability framework for benefit
corporations that—like the benefit corporation legislation—incorporates
these tools, but—unlike the benefit corporation legislation—does so in
such a way as to foster adaptive learning and internal, professional, and
downward accountability. Specifically, this alternative framework reconceptualizes three components of the benefit corporation legislation: its
use of assessment (Part III.B.1), external auditing (Part III.B.2), and incentives (Part III.B.3).
1. Reconceptualizing Assessment: Formative Evaluation. — One means to
promote adaptive learning is through monitoring schemes that incorporate formative evaluation, which is a way to gather information to improve practices. Rather than, “Are you doing X?,” formative evaluation
asks, “Is X working?” and, if you are not doing X, “How can you be
helped to do X?”
Like adaptive learning strategies, formative evaluation has been used
in the private, nonprofit, and government sectors. In the private sector,
for example, formative evaluation has become increasingly popular in the
high-hazard nuclear power and chemical processing industries, where it
is particularly important for firms to identify safety threats before regulators discover them. “[T]o identify problems, interpret the reasons for
these problems, and select corrective actions,” firms in these industries
have developed strategies like incident reviews and root cause analysis.292
Incident reviews involve “reporting, documenting, and analysing less serious incidents” to learn how processes can be improved.293 Root cause
analysis involves assembling groups of employees from different levels of
hierarchy, different functional specialties, and different plants to analyze
selected problems. These types of exercises not only help understand
causes and possible solutions better than summative evaluation; they also
proactively uncover unrelated problems that can be addressed later.294
291. See Dorf & Sabel, supra note 149, at 331 (“[R]eporting requirements not only
assure line-level accountability to management, but provide data that can be used to
benchmark problem-solving teams and efforts against one another.”); E-mail from Barbara
Schatz, Clinical Professor of Law, Columbia Law Sch., to author (Jan. 31, 2011) (on file
with the Columbia Law Review) (explaining widespread belief that IRS’s recently added
requirements that 501(c)(3) organizations report on document retention and
whistleblower policies have prompted many organizations to adopt such policies, even
though no sanctions attach for not having them).
292. Carroll, supra note 209, at 704.
293. Id.
294. Hopkins, supra note 185, at 214–15.
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In the nonprofit sector, Minneapolis Children’s Hospitals and
Clinics built learning mechanisms like blame-free event studies and safety
dialogues as a means to improve patient safety.295 In the government sector, the U.S. Army uses After Action Reviews (AAR) immediately after
training exercises or real events to give participants the opportunity to
share observations and ideas in a blame-free discussion. Introduced after
the Vietnam War, AAR “transformed the Army,” improving learning at
both an individual and organizational level.296
The benefit corporation legislation, in contrast, relies primarily on a
summative evaluation—that is, on measuring achievement of preset
benchmarks. The “B” certification process emphasizes whether an organization has performed up to par, not why it might be falling short or how
it can improve, or what “up to par” should mean.297
Summative assessment can be useful to compare efforts across benefit corporations with like missions and to suggest improvements. For example, in Finland’s school system, politicians and administrators learn
about schools’ performance by conducting sample-based learning tests
and research targeted to understanding how schools work.298 For summative assessment to be useful as a tool for adaptive learning, however, (1) it
should not be tied to sanctions,299 (2) it should not rely exclusively on
quantitative metrics, and (3) it should be complemented by formative
evaluation.
2. Reconceptualizing the Role of External Auditor: Institutional
Intermediaries and Organizational Catalysts. — Another means to promote
adaptive learning in benefit corporations would be to reconceptualize the
role of the third-party auditor. In particular, rather than require conformity to independently developed generic standards, the third-party auditor could foster more flexible adaptation to professionally developed
industry-specific standards.
How would the third-party auditor serve this function? Durkheim,
who so vigorously defended the importance of professional standards of
conduct in specialized industries,300 believed these standards developed
and spread through “professional and personal ties,” “in face-to-face interactions,” and by “members of a certain group . . . interact[ing] regularly.”301 He worried, moreover, that “[u]nlike other professionals, mod295. Carroll & Edmondson, supra note 178, at 51.
296. Id.
297. See Ebrahim, supra note 89, at 25 (“[R]eporting requirements . . . biased in favor
of easily measurable assessments of progress . . . undervalue adaptive assessments that are
essential for understanding how a nonprofit might improve its work.”).
298. Sahlberg, supra note 290.
299. See Sturm, supra note 210, at 314–16 (describing use of assessments and
evaluations as sources of information, not threats); see also supra notes 229–240 and
accompanying text (discussing consequences of attaching sanctions to disclosures).
300. See supra notes 277–280 and accompanying text (discussing Durkheim’s view of
role of professional standards).
301. Furger, supra 183, at 447.
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ern entrepreneurs were not embedded in networks of personal ties.”302
To encourage this kind of regular professional interaction, and to “drag
[individuals], in this way, into the general torrent of social life,”303 scholarship suggests a combination of two institutionalized roles, one external
to the benefit corporation304—what might be called an “institutional intermediary”305—and one internal to it—what might be called an “organizational catalyst.”306
a. Institutional Intermediary. — Like B Lab, an institutional intermediary serves as a source of external accountability for performance in relation to common metrics.307 An institutional intermediary is unlike B Lab,
however, in three critical respects. First, unlike B Lab,308 an institutional
intermediary’s role is less about “checking compliance with rules, and . . .
more about encouraging the industry to put in place its own systems of
internal control and management which are then scrutinized by regulators.”309 It thus preserves internal accountability more effectively than the
SAAR model.310 Second, an institutional intermediary—as the name suggests—fosters professional accountability by pooling knowledge between
members of an industry and “developing a community of practice to sustain . . . inquiry and learning.”311 In this way, the institutional intermediary does not just collect information from the regulated entity; it also
provides information to that entity. Third, an institutional intermediary
fosters adaptive learning by focusing on formative as well as summative
evaluation. It asks not just about performance to date, but also vision,
difficulties in implementing proposed activities, approaches to addressing
the difficulties, and preliminary findings from self-evaluations. It encourages organizations “to ask more probing questions” about their own effec-
302. Id. at 447–48.
303. Durkheim, Division of Labor, supra note 277, at 28.
304. See, e.g., O’Day, supra note 157, at 318 (noting limitation of internal
accountability in ensuring equality of provision across schools).
305. See Sturm, supra note 210, at 271–80 (introducing “institutional intermediary”
concept).
306. Id. at 287–300 (introducing “organizational catalyst” concept).
307. Id. at 271–80.
308. In developing its standards, B Lab consults with “entrepreneurs, investors,
thought leaders and academics.” Certified B Corp., How Was the B Impact Assessment
Developed?, BCorporation.net, http://www.bcorporation.net/become/BRS (follow “How
Was the B Impact System Developed?” hyperlink) (on file with the Columbia Law Review)
(last visited Feb. 13, 2012). B Lab considers “performance standards and impact metrics”
from sources such as the GRI, Wiser Business, and the Social Venture Network. Id.; see also
supra note 144 (listing some of these earlier codes).
309. Gunningham, supra note 282, at 135.
310. See O’Day, supra note 157, at 311 (“[B]ureaucratic school accountability policies
are insufficient to establish the patterns of interaction that might foster more information
sharing in low-capacity schools.”).
311. Sturm, supra note 210, at 280.
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tiveness312 and experiment with creative solutions.313 In sum, the institutional intermediary approach, which in effect tells the organization “you
draw up a plan and we will inspect you against it,” involves “far more than
passive compliance monitoring . . . . Rather it involves actively challenging the enterprise to demonstrate that its systems work in practice”314 and
“encourag[ing] internal self-critical reflection about its regulatory performance.”315 It thus serves a capacity-building, or “reciprocal accountability,” function.316
Again, existing models for an institutional intermediary can be
found in both the public and private sectors. In the government sector,
an example of an institutional intermediary is the National Science
Foundation (NSF), a federal agency that awards grants for scientific research.317 NSF recipients must commit to data-based decisionmaking, the
use of formative evaluation, and creative and experimental approaches.318 They must clearly state the conceptual framework and research foundation for experimental approaches they use, suggest the
benchmarks (both quantitative and qualitative) by which their efforts
should be measured, show how data will be used as part of an ongoing
change process, and detail a plan for sharing best practices.319 In the
private sector, the U.S. nuclear power industry established the Institute
for Nuclear Power Operations “to promote safety and reliability through
external reviews of performance and processes, training and accreditation programmes, events analysis, sharing of operating information and
best practices, and special assistance to member utilities.”320
Who should fill this role for benefit corporations? According to
Durkheim, “occupational groups” are best suited for this role.321 Others,
however, warn that the use of professional associations for this purpose
312. Hopkins, supra note 185, at 214.
313. See Sturm, supra note 210, at 271–80 (discussing how National Science
Foundation adopts accountability approach that fosters creative experimentation in
context of its ADVANCE grant program).
314. Gunningham, supra note 282, at 135–37 (referring to this approach as “meta
regulation”).
315. Id.
316. Richard F. Elmore, Bridging the Gap Between Standards and Achievement: The
Imperative for Professional Development in Education Accountability 5 (2002) (“For every
increment of performance I demand from you, I have an equal responsibility to provide
you with the capacity to meet that expectation. . . . This is the principle of ‘reciprocity of
accountability for capacity.’ It is the glue that, in the final analysis, will hold accountability
systems together.”).
317. Sturm, supra note 210, at 251.
318. Id. at 278.
319. Id. at 280–82.
320. Carroll, supra note 209, at 703.
321. See Durkheim, Division of Labor, supra note 277, at 28 (“A nation can be
maintained only if, between the State and the individual, there is intercalated a whole
series of secondary groups. . . . [O]ccupational groups are suited to fill this role, and that is
their destiny.”).
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presents the danger of collusion.322 To date, the “specific role” of professional and trade associations “as institutions that are particularly suited to
develop and maintain standards of accountability has rarely been systematically explored.”323 As alternatives to professional associations, some
suggest either a government entity or a third-party certifier, like B Lab,
“that operate[s] independently of both the state and the relevant trade
association.”324 A third-party institutional intermediary, however, would
ideally make greater use of formative evaluation and more direct use of
peer institutions to monitor and work with one another than does the
current B Lab certification approach.
b. Organizational Catalysts. — Emerging theories of regulation stress
the importance of partnering external regulators with individuals within
the organization.325 These “organizational catalysts” are ideally individuals who know the culture of the organization being regulated326 and, critically, possess “clout”327 in the organization—that is, someone with high
status, high social and intellectual capital, sufficient resources, “direct
lines of communication . . . [to] chief executives,”328 and who is otherwise strategically placed within the organization to mobilize learning and
change by communicating with peers in their cultural/professional
language.329
Organizational catalysts mobilize change by developing experiments,
analyzing their effects, and reporting on them to the external regulator;330 cultivating “communities of practice” among individuals in the organization who might otherwise lack opportunities to connect; playing an
ombudsman role, so people have someone to come forward to with
322. See Andrew A. King & Michael J. Lenox, Industry Self-Regulation Without
Sanctions: The Chemical Industry’s Responsible Care Program, 43 Acad. Mgmt. J. 698, 713
(2000) (“Overseeing parties must be outsiders . . . . Trade associations are limited as
enforcers both legally and practically, since they are ultimately governed by their
members.”).
323. Furger, supra note 183, at 449; King & Lenox, supra note 322, at 699 (“[L]ittle
research has addressed the potential for self-regulation by industry associations . . . .”).
324. King & Lenox, supra note 322, at 713; see also Sturm, supra note 210, at 328–30
(suggesting institutional intermediary could be government agency, accrediting body,
nonprofit, professional association, or foundation).
325. Hopkins, supra note 185, at 215 (“Many studies have shown that these internally
located . . . professionals are vital for organizational compliance.”); see also Sturm, supra
note 210, at 251, 287–99 (“[I]nstitutional attentiveness can be . . . achieved by creating
institutional roles that place people with knowledge, influence, and credibility in positions
to influence practice . . . .”).
326. Sturm, supra note 210, at 287–99.
327. Hopkins, supra note 185, at 215.
328. Id.
329. Sturm, supra note 210, at 287–300; see also Hopkins, supra note 185, at 215
(noting external regulators can also contribute to organizational catalysts’ clout by lending
support when organizational catalyst takes unpopular line).
330. Sturm, supra note 210, at 287–99; see also Hopkins, supra note 185, at 216 (“[A]
safety culture is a reporting culture, a just culture, a flexible culture, and a learning
culture.”).
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problems they have identified; and maintaining the momentum to act by
continuously “destabiliz[ing] . . . organizational routine.”331 In this way,
they contribute to adaptive learning and to both external332 and internal
accountability.
3. Reconceptualizing Incentive. — In a study of Responsible Care, a
“velvet glove” (i.e., sanctionless) approach to industry self-regulation instituted by the Chemical Manufacturers Association (CMA) to regulate environmental and safety performance, King and Lenox found that members
of Responsible Care improved their performance more slowly than nonmembers.333 They concluded that, when it comes to accountability models, the “iron fist” of “explicit sanctions administered by informed outsiders may be needed to avoid opportunism” and poor performance.334
As robust as this finding about Responsible Care’s ineffectiveness
may be, the hypothesis that the reason for this finding is the lack of external audits and explicit sanctions has no basis in King and Lenox’s empirical data. Nor does it have much basis elsewhere: There is still very little
supporting the hypothesis that explicit sanctions are an effective regulatory tool. This hypothesis is still “just a presumption backed by common
sense.”335 Rather than support this hypothesis, the available evidence on
the relationship between sanctions and performance suggests instead that
external sanctions actually undermine performance at both the individual
and organization levels.336
An equally plausible explanation for the Responsible Care findings—but one that King and Lenox did not consider—is that Responsible
Care is fundamentally a compliance-driven, rather than a capacitybuilding, approach. It is concerned with monitoring firms’ compliance
with certain fixed inputs, not with fostering adaptive learning or internal
accountability.337 That King and Lenox chose to attribute their findings
instead to Responsible Care’s lack of sanctions may reflect what seems to
331. Sturm, supra note 210, at 287–99.
332. See Hopkins, supra note 185, at 216 (“The benefits [of internal change agents]
are, of course, mutual. Inspectors who consult with company safety officers may be able to
identify deficiencies in company systems far more quickly than if they have to identify these
things for themselves.”).
333. King & Lenox, supra note 322, at 700, 711. The U.S. Chemical Manufacturers
Association created the Responsible Care program “to improve the environmental and
safety performance of CMA members and to thereby improve public perception of the
industry.” Id. at 699. All CMA members are required to be part of the Responsible Care
program, which includes ten guiding principles and six codes of management practices.
CMA members must annually self-assess their progress toward implementation of the
Responsible Care program’s code. Id. at 699–700.
334. Id. at 700, 713.
335. Moe, supra note 169, at 2.
336. See supra Part II.B.2.c (describing how external sanctions undermine
organizational effectiveness).
337. King & Lenox, supra note 322, at 699–700 (explaining Responsible Care’s focus
on ensuring firms’ compliance with inputs).
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be a popular bias in policy circles today toward accountability models
based on external audits and sanctions.338
As a substitute for external sanctions, incentives are needed that can
reduce the risks and increase the rewards associated with identifying
problems, gathering data, and engaging in regular self-evaluation; that
can increase the motivation deriving from a sense of personal responsibility and adherence to professional expectations; and that can, at the same
time, effectively deter irresponsible conduct.
Intrinsic motivation, an internal sense of civic responsibility, may be
one such mechanism. Informal social regulation may be another: “[T]he
few empirical investigations available indicate that the impact of informal
social regulation within the professions may well have been underestimated.”339 Renée de Nevers argues that informal sanctions, like peer
pressure and shaming (“management by embarrassment”), “can often
push companies to adhere to normative standards,” since “‘none of us
want to be viewed as a poor performer among our peers.’”340
A likely criticism of these internal and informal incentives is that they
may work well enough when the corporation being “audited” is already
pursuing its social mission in good faith and with a base level of competence, but that the whole point of “accountability” is to compel performance by those who lack such qualities. One way to address this concern
might be an approach called “responsive regulation,” in which regulators
start out by “assuming virtue (to which they respond with cooperative
measures)” but switch, if their expectations are disappointed, to responding “with progressively more punitive strategies until the regulatee conforms.”341 The thinking is that “good regulation means invoking different
responsive enforcement strategies depending upon whether one is dealing with leaders, reluctant compliers, the recalcitrant or the
incompetent.”342
Another way to address possible gaps in intrinsic motivation could be
to maintain a certification-based incentive system, but to base certification on qualitative assessments of performance against internal and
industry-specific standards, rather than on externally imposed standards expressed in terms of quantitative outputs. The key is to decouple the lethal
combination of sanctions and external standards.343
338. See supra Part II.A (describing popularity of accountability models that use
threat of punishment as incentive).
339. Furger, supra note 183, at 450–51.
340. Renée de Nevers, The Effectiveness of Self-Regulation by the Private Military and
Security Industry, 30 J. Pub. Pol’y 219, 224 (2010) (quoting Jospeh V. Ress, Hostages of
Each Other: The Transformation of Nuclear Safety Since Three Mile Island 104–05
(1994)).
341. Gunningham, supra note 282, at 120–21.
342. Id. at 126.
343. See supra Part II.B.2.c (describing how external sanctions combined with
quantitative performance metrics undermine organizational effectiveness).
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It is also possible that when intrinsic motivation and basic ability are
lacking, nothing can compel high performance—particularly in a complex social or cultural endeavor.344 In such cases, the best remedy is probably just to make sure the organization in question gets out of the field—
and this does not require extensive public disclosure or market pressure
to accomplish. Bad apples can be identified by much less administratively
burdensome—and less statistically questionable—means.
4. Putting It All Together. — There is still a place, then, for measurement, external auditing, and reporting in an effective mission accountability framework, but all need to be adapted to take into account the
unique characteristics of corporations’ “public benefit” objectives. Instead of “top-down imposition of an independent standard by a disinterested third party, backed by the ability to impose stiff sanctions,”345 accountability for benefit corporations should rely more heavily on bottomup development of explicitly subjective standards, developed jointly by
the organization itself, the industry as a whole, and key stakeholders, and
backed by internal and professional sources of accountability. Such an
accountability model would focus on measurement not just of fixed inputs or procedures, but also of structures and practices that foster adaptive learning; and it would rely on external regulators to fill a more
capacity-building rather than compliance-driven role.
CONCLUSION
The idea of applying market-based solutions to social problems has a
beguiling charm—especially, perhaps, for Americans, whose material
prosperity has historically been built on success in industry. As we broach
this new frontier of social enterprise, however, it is critical to reconsider
pervasive assumptions about the appropriateness of applying businessmodel accountability techniques to the performance of social goals.346
Experience in the nonprofit and government sectors suggests that, to be
effective, accountability for performance of social goals should emphasize
adaptive learning rather than fixed procedures or outcomes, and should
emphasize accountability to self, professional peers, and “clients,” rather
than accountability to judges, “generalist” auditors from government
agencies or nonprofits, or the market.
344. See supra Part III.A.2.a (arguing no monitoring scheme can possibly be
comprehensive enough, nor enforcement mechanism effective enough, to compel optimal
social performance).
345. Besmer, supra note 151, at 302.
346. See Sugin, supra note 93, at 894 (“We must analyze whether requiring—or even
encouraging—conformity to a business model produces meaningful results for charitable
endeavors.”).
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