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Next Phase for Benefit Corporation Governance Begins

Ten or so years ago, the founders of B Lab, a tiny new nonprofit, had an audacious idea. They wanted to create a system that would allow for-profit businesses to account for their impact on all their stakeholders.

In the current environment, businesses are viewed as accountable primarily for the financial return they provide to investors (assuming they stay within the bounds of the law). That’s why business accounting tells us how much profit a company produces and what the financial value of its assets and liabilities are — but tells us nothing about its effect on its customers’ or workers’ lives, or on the environment that we live in.

To address this lacuna, the founders of B Lab began to develop a system of questions that would assess the impact that a business had on each of these stakeholders. That system eventually became the B Impact Assessment, which has been used by more than 50,000 businesses around the world.

But developing a system of measurement and management was not all they did.

B Lab decided that the law that governed business didn’t accommodate a business that wanted to embed positive impact on stakeholders into its core. The default rule in the law (especially in the United States) often requires companies to treat the financial interests of shareholders as paramount — and other interests as subordinate at best, and immaterial at worst (“shareholder primacy”). And in some situations, that default rule could not even be changed.

The audacious part of their project was the decision to change the law, by creating contract language to change the default rule where possible, and by drafting and seeking to pass new legislation where shareholder primacy was legally mandated.

More specifically, it was determined that the corporate law in many states included an unalterable mandate that financial return to shareholders was the primary goal for corporations. States with this rigid shareholder primacy regime included Delaware, the corporate domicile of most public companies in the U.S.

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Frederick H. Alexander, “Next Phase for Benefit Corporation Governance Begins,” Westlaw Journal Securities Litigation & Regulation (December 11, 2017)

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