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A bill introduced in California’s state Senate last week holds enormous potential to give sustainable business a push by making it — well, legal.
Under current law in California and most other states, companies can be sued by their shareholders or investors for taking environmental or social measures that negatively affect shareholders’ financial returns. The proposed bill would enable a new form of for-profit corporation, encouraging and expressly permitting companies to pursue other things besides simply making money.
This is no small matter. The legal issue of fiduciary responsibility has long been seen as a barrier to companies taking more proactive social and environmental measures. In many cases, it has given companies a fig leaf to avoid taking substantive measures to, say, clean up pollution or avoid sourcing from sweatshops. Indeed, the requirement for companies to put profits above all else has been blamed for much of society’s ills — at least the kind allegedly propagated by business. And the alternatives have been a cold cup of tea: to become a nonprofit organization, a hybrid model championed by social entrepreneurs, or some other legal entity frowned upon by capital markets. That pretty much guarantees that these "good" companies are destined to remain small.
For years, groups of socially responsible investors, social and environmental activists, and others have tried to change this state of affairs, with little success. Maryland and Vermont recently enacted measures to allow “for-benefit” companies, such as those advocated by the nonprofit group B Lab, and a few other states are considering them. However well-intentioned, these laws are limited in scope in that they focus principally on smaller, privately held firms.
Getting large publicly held companies to change has been all but impossible, which is why SB 201, the Corporate Flexibility Act of 2011 (download - pdf), introduced in California’s State Senate on February 8, is of such significance. It would authorize and regulate the formation and operation of a new form of corporate entity known as a “flexible purpose corporation.”
Under SB 201, “Any company establishing in California will be permitted to negotiate to include a social and environmental mission that is given equal weight, perhaps even greater weight, than profits,” Susan H. Mac Cormac, who co-led a working group that helped draft the bill, told me recently. “We have given additional protection to boards and management if they do that. We also have a metric for shareholders to enforce the social and environmental mission, just the same as shareholder value.” It’s a model, she says, that can be used by both public and private companies.
SB 201 differs from the “for-benefit” statutes in at least one significant way: It doesn’t proscribe what a company must do. The Maryland and Vermont laws, in contrast, spell out the requirements of a “benefit corporation” — a checklist that hews largely to B Labs’ model for sustainable business.
There are good arguments for both approaches. On the one hand, a set of criteria sets a standard for what a company must do to be “beneficial.” On the other, it lets legislators and regulators set those criteria, a process that often ends up muddled or worse. Unfortunately, traditional California corporations are not able to amend their articles to “embed” environmental and social criteria without considerable risk, thereby creating an issue for California corporations seeking “B Corporation” status.
Cormac, who co-chairs the 550-lawyer Business Department as well as the Cleantech Group at the law firm Morrison & Foerster, has been working on these issues for the better part of a decade. As co-chair of the California Working Group for New Corporate Forms, she and a small team spent nearly 18 months deliberating and drafting this proposed new division of the California Corporations Code. Along the way, the group solicited comments from an advisory committee comprised of members of the California legal and communities.
"We have the conservative folks behind us from the chamber of commerce," she says. "We have a lot of support and have spent a lot of time working with folks to get it right."
Cormac admits that big corporations aren’t likely to quickly adopt this new legal form should it become law. “The companies that could easily do this are the ones where there’s a really strong link between their profitability and their sustainability — the Methods or Revolution Foods of the world,” she says.
Even if SB 201 passes, it will be just one step in a longer journey to transform mainstream business to pursue environmental and social goals as aggressively as they do financial ones. To gain traction, these companies will need the support — or the demands — of institutional investors, such as large pension funds, embracing
flexible purpose corporations. It will take leadership companies, government agencies, universities and other large buyers of goods and services to adopt policies giving procurement preference to these companies. And it may well take preferential tax treatment for flexible purpose corporations, or other policy mechanisms, such as fast-track permitting or reduced oversight.
All of which is only one part of the puzzle, says Cormac. “I’ve looked at every part of the system, and it’s not just corporate structure that ties it to profitability. It’s executive compensation with stock options. It’s the analysts on Wall Street and the quarterly reports, and a whole confluence of factors that lead to this unholy emphasis on shareholder value.”
I asked Cormac how she and her law firm would benefit if SB 201 became law. After all, she heads the corporate division of one of America’s larger law firms.
“This is pro bono,” she says. “We have no skin in this game.” To back it up, she explains that she is working working with law schools at Stanford, Berkeley, and UCLA to establish free legal help for companies that want to set up flexible purpose corporations. "This is a passion, not a business opportunity."
For now, it’s all about getting this bill passed — it needs to pass the gauntlet of two committees, then the full Senate, then the State Assembly and getting Governor Jerry Brown to sign it. It’s looking good, says Cormac, but we’ve all seen “sure things” blow up at the last minute.
This will take everyone’s best efforts — letters of support and all of the other usual tools of the trade. (You can send letters to Senator Mark DeSaulnier, State Capitol, Room 2054, Sacramento, CA 95814.) And it will take mainstream companies and investors standing up to be counted.
Without such a law, we’ll be stuck with business as usual — companies hamstrung by their legal obligation to put shareholders’ financial returns above all. But if bellwether California can get this passed, it will make it legally possible, once and for all, for companies to truly integrate the triple bottom line.
When people/planet/profit is
When people/planet/profit is seen as a trade-off rather than synergistic it's easy to lose sight of the big picture for sustainability. It's great to see California attempting a systematic approach to integration by removing out-dated roadblocks.
I’m writing to correct a
I’m writing to correct a couple of common misunderstandings about Benefit Corporation legislation in Joel Makower's recent post (‘California’s Bold Move to Legitimize Sustainable Business’).
The Benefit Corp model is 100% market-driven and does not ‘let legislators or regulators set criteria’ for ‘what a company must do’, as Makower incorrectly states. That process would indeed be muddled.
While Benefit Corporations are required to create benefit for society, not just shareholders, how they do so is entirely their choice. While Benefit Corporations are required to use a third party standard to assess their overall social and environmental performance, they are free to choose any third party standard that is comprehensive, credible, independent, and transparent. Government doesn’t determine public benefit – that’s up to the market.
Makower’s own ratings business, a terrific partnership between Greenbiz and Underwriters’ Laboratories, presumably would meet these requirements and benefit from the market-accelerating forces unleashed by a growing community of Benefit Corporations in search of such third party standards. After all, it isn’t much help to consumers, let alone the investors or policy makers that Makower correctly points out are needed to drive this marketplace, if companies are able to assess their own performance.
It is true that the Flexible Purpose Corporation, and perhaps the GreenBiz/UL ratings company, are more focused on the needs and constraints of large public corporations, whereas Benefit Corporation legislation meets the needs of leading sustainable businesses – often smaller and privately held, like Method and Revolution Foods, both highlighted in Makower’s post.
Rather than viewing this as as 'limited in scope', it's worth noting that Benefit Corp legislation provides legal and public recognition for the smaller privately-held businesses that are this country's engine of job growth and innovation.
Management-employee loyalty
Management-employee loyalty arrangements develop a employable workforce. As businesses, universities, states, counties, cities stumble through the recession; some find themselves in a phase of creative disassembly. Hundreds of thousands of jobs are shed. World class University of California Berkeley led by Chancellor Birgeneau ($500,000 salary) is dismissing employees, faculty via “Operational Excellence (OE)”: 2,000 fired by end of 2011. Yet many cling to an old assumption: the implied, unwritten management-employee contract.
Management promised work, upward progress for employees fitting in, employees accepted lower wages, performing in prescribed ways, sticking around. Longevity was good employer-employee relations; turnover a dysfunction. None of these assumptions apply in the 21 century economy. Businesses, universities, public institutions can no longer guarantee careers, even if they want to. Managements paralyzed themselves with a strategy of “success brings successes” rather than “successes brings failure’ and are now forced to break implied contract with employees – a contract nurtured by management that future can be controlled.
Jettisoned employees are discovering that hard won knowledge earned while loyal is no longer desired in employment markets. What contract can employers, employees make with each other?
The central idea is simple, powerful: job is a shared partnership.
• Employers, employees face financial conditions together; longevity of partnership depends on how well customers, constituencies needs are met.
• Neither management nor employee has future obligation to the other.
• Organizations train people.
• Employees create security they really need – skills, knowledge that creates employability in 21st century economies
• The management-employee loyalty partnership can be dissolved without either party considering the other a traitor.
Let there be light for employees and management
Senator Mark Desaulnier
Senator Mark Desaulnier authored the bill that allows public employees to spike their pensions so that the employees can receive pension payments that are greater than their salaries.
74% of the $850,000 collected by Senator Desaulnier came from the lobbying capital of California -Sacramento. Sacramento is not in Senator Desaulnier's district.
Remember California Senator Mark Desaulnier!
The Corporate Flexibility Act
The Corporate Flexibility Act of 2011 seems to miss a greater point about sustainability. The history of sustainability has progressed from “soft” business concerns (people, planet) to “hard” (profit). Yet this Triple-Bottom-Line, and legislation like SB 201 that seem to support it - still miss a fundamental aspect of sustainability.
The Triple-Bottom-Line use an accounting metaphor implying an allocation to three seemingly distinct spheres of interest. The original bottom-line of profit must make room for two new bottom-lines – people and planet. The implicit message of 3BL is that profit will be diminished. 3BL lacks an understanding that people, planet and profit are all interconnected and interdependent. All three are part of a system whose optimization can not be achieved through separate accounting for each. Rather than seeing people, planet and profits as three bottom lines, a systems perspective sees the planet as the model for the how the system works, with people providing the input into the system and profit as an essential outcome of the system. Indeed sustainability is really about understanding and managing the interconnections and interdependencies of system components as they work in service of the system aim.
Using a triple-bottom-line accounting metaphor for sustainability creates a very non-systems perspective which includes the very ideas that have contributed to the problem: "manage what you measure", zero-sum, and and win-lose. From a systems perspective investors can be shown that pursuing a sustainability strategy is not about atonement and accommodation but about alignment to unstoppable economic, technological, environmental, and social trends trends in the 21st century - and that alignment will lead to competitive advantage and long-term profitability.