Kinder corporations pose different profits

April 07, 2010|By Jay Hancock

Maryland is poised to become the first state in the country to recognize a kind of company that would be authorized to devote significant profits to society, the environment and other causes that have nothing to do with its shareholders' wallets.

I don't know whether the idea of "benefit corporations" will take off. The record of old-fashioned, greedy corporations in raising everyone's living standards has been pretty impressive over the past three centuries.

But look no further than the past two years of recession to see the deep flaws of traditional capitalism. And for its part, the "nonprofit" charity sector often reveals its own fraudulence and dysfunction.

Benefit corporations are a revolutionary attempt to blend the best attributes of each and dump the faulty parts. Unlike nonprofits, a "B" corporation would pay taxes and have shareholders calling the shots. Unlike traditional corporations, benefit corporations would be shielded from shareholder lawsuits demanding every last penny be pinched in profits.

"If you're pro-business and pro-markets, or pro-environment and pro-consumer, this legislation is something that you want to support because it's putting business in the driver's seat of solving our social and environmental problems," says Jay Coen Gilbert, co-founder of B Lab, a Pennsylvania outfit that certifies benefit corporations. "And it's getting government out of the way."

Regular corporations can spend profits on charity, employee welfare and so forth, but only up to a point. In a landmark case nearly a century ago, courts ruled that companies must work primarily to maximize shareholder profits.

In that case, Ford Motor Co. had canceled some dividends because boss Henry Ford said he wanted to give workers a raise and open new plants instead.

"My ambition is to employ still more men, to spread the benefits of this industrial system to the greatest possible number, to help them build up their lives and their homes," Ford said at the time. "To do this we are putting the greatest share of our profits back in the business."

Ford probably also wanted to squeeze his minority partners, the Dodge brothers, who were using Ford dividends to capitalize a rival company. In any case, the Michigan Supreme Court sided with the Dodges, ruling that directors can exercise only limited "business judgment" to spend profits on social welfare.

Since then the business-judgment standard has sharply limited the diversion of corporate profits for nonessential purposes. (There is, of course, one exception. Publicly traded businesses can't spend large sums feeding hungry people, but they can legally give away enormous portions of their profits to senior executives in the form of "compensation.")

The Maryland measure, passed overwhelmingly by House and Senate, would let companies consider the interests not just of shareholders but of workers, suppliers, customers, the community and "the local and global environment." Being one of the first states to recognize benefit corporations (Vermont also is working on a measure) could help Maryland become a B-corporation headquarters, says Del. Brian J. Feldman, the Montgomery County Democrat who sponsored the House bill.

A "B" corporation could choose to pay all employees a living wage or donate half its profits to a wildlife conservancy. It could keep a factory in the United States instead of shipping jobs to China. Had Black & Decker been a benefit corporation, its directors would have been within their rights to reject the takeover by Stanley Works because of the harm done to employees and Maryland.

I hear guffawing. Why would anybody invest in a company not devoted to big profits? How would benefit corporations compete against rivals that devote all their capital to selling the best products at the lowest price? How would B corporations compete against nonprofits, which don't pay taxes?

Coen Gilbert points to studies suggesting that companies taking care of their employees and community also do better for shareholders. Plenty of folks are eager to finance new benefit corporations, he says. B Lab has certified 300 across the country. (So far, all B corporations are privately held. Maryland would be the first to codify benefit corporation status in law.)

B corporations might be able to motivate employees now working for companies that abuse them. The structure is perfect for social entrepreneurs who want to maintain ownership of philanthropical ventures. (There are no shareholders of traditional nonprofits.)

So maybe benefit corporations won't replace the S&P 500 as the foundation of the U.S. economy. They're still an exciting hybrid of the two corporate extremes worth trying out. Given the recent record, it's not like you can say corporate governance as usual is working really well.

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