NEW YORK, Jan 31 (Reuters Breakingviews) - U.S.
companies can do plenty of good without the latest legal fad.
So-called benefit corporations allow boards to establish social
goals alongside the profit motive and, at least theoretically,
avoid lawsuits over lagging stock prices. But directors can
already use their business judgment to justify activities like
saving the whales.
The idea is that investors who share a company's stated
non-financial aims could buy stock and then judge the firm's
performance according to standards set by third parties. Plenty
of private companies have signed on. Outdoor-apparel firm
Patagonia, for example, became a California benefit corporation
on the first possible day in January. No public company has yet
switched, in part because it would require a shareholder vote.
The new structure was dreamed up in 2009 by a Philadelphia
lawyer whose client, B Lab, wanted a bigger market for its
system of rating how well companies meet social and
environmental objectives. In addition to California, New York
and five others states have passed laws allowing companies to
give those goals priority.
Another part of the rationale is that a corporate charter
specifying social responsibility as a goal might shield a
company from stock-drop lawsuits, which typically focus narrowly
on shareholder value. But this is where the argument for benefit
corporations gets weak.
The business judgment rule in U.S. corporate law generally
protects boards that believe they are acting in a company's best
interests, making all sorts of environmental and community
activities justifiable. And except for certain situations when a
company is sold, there's no legal duty to maximize share value.
So directors can already do good deeds without much fear of
being sued successfully. What's more, nothing stops regular
companies from specifying social goals in their certificates of
incorporation.
Even publicly minded shareholders, though, want decent
returns. Otherwise, they could just contribute to charity.
Benefit corporations may severely limit their appeal by giving
investors few options for asserting their financial interests.
There's plenty of room for socially responsible corporate
behavior under current law. That makes benefit corporations look
like a solution in search of a problem.
CONTEXT NEWS
-- California's law allowing so-called benefit corporations
went into force on Jan. 1, and New York's will become effective
on Feb. 10.
-- The two major U.S. states are among seven that have
enacted laws allowing for-profit companies to adopt a new legal
structure that lets boards of directors stress objectives. The
laws are designed to protect companies from investor lawsuits
that target lagging stock prices without reference to other
activities.
-- Maryland was the first state to adopt such a law, on Oct.
1, 2010. It has since been followed by New Jersey, California,
New York and three other states. Four more states have
introduced bills that have not yet passed.social or
environmental goals alongside financial
(Reporting by Reynolds Holding, a Reuters Breakingviews
columnist. The opinions expressed are his own.)
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