by Kellie Delaney
No one will be surprised to learn that Patagonia—the outdoor clothing and equipment company—was the first one at the California Secretary of State’s office when the doors opened for business on January 3, to file for status as a benefit corporation the minute a new law enabling them to do so went into effect. A company like Patagonia had already embedded environmental consciousness into the corporation long before they adopted the new corporate form. For a company whose website sells environmentalism as prominently as it sells parkas and backpacks, it’s a no-brainer to become a benefit corporation.
But what difference is this new corporate form really going to make when it comes to the duties of corporate directors in more “traditional” corporations? For one thing, it may help to avoid shareholder lawsuits when the board openly weighs in on the company’s social mission even if this doesn’t always maximize shareholder returns. While the business judgment rule—a judicial standard of review that insulates directors from liability when they make decisions with the best available information, exercising reasonable diligence and good faith—already arms directors with considerable discretion to take action (or not) to mitigate climate change risks, it’s not a barrier to lawsuits initiated by shareholders. How much more discretion will directors of a benefit corporation have and is discretion really the point?
Sure it is. If the directors had voted, two years ago, to enter into a 20-year power purchase agreement (PPA) and install a small solar farm onsite at their corporate headquarters, the business judgment rule would almost certainly protect them from liability to shareholders if the deal meant that shareholders would have to wait five years to see any positive returns on the investment. In fact, while the decision benefits the environment immediately after the project is installed, the capital investment carries risks that could significantly dilute investor returns in the short term. Under traditional corporate rules, as long as the directors used a rational process to evaluate both the environmental issues and the long-term potential for shareholder value, their decision might still pass scrutiny under the business judgment rule. But being a benefit corporation could end the lawsuit before it got up the steps of the courthouse. Benefit corporations—at least in theory—enable directors exercise greater discretion to balance shareholder interests against other goals. In California, by statute, a benefit corporation must measure its sustainability goals against a third party standard.
Sure, the benefit corporation is partly about the corporate identity, culture, focus, and values. So this may build in more corporate responsibility and accountability. Besides, options like solar energy are becoming more viable all the time. But it provides a concrete target and requires the corporation to apply an objective measure. It’s not a license to throw shareholder profits under the bus but one way to ensure that the corporate vision stays aligned with those values. That sounds like old-fashioned good corporate stewardship. And the idea is catching on. Who can argue with that idea?
Kellie Delaney is a California attorney and writer interested in climate change issues and the potential of clean technologies. In addition to her law practice, she helps develop legal process solutions for M&As, complex litigation, and corporate governance.