How Corporate Lawyers Can Change the Future of Green Business

How Corporate Lawyers Can Change the Future of Green Business

A panel of three CEOs from Cornell and a lawyer headlined a recent gathering at the Commonwealth Club of California (this is not the start of a joke). There I heard something I have never heard before, professionally or otherwise, “As you can tell, I have a passion for corporate forms.” 

That's not a reference to bureaucracy but to the legal structure of corporations. What does it have to do with afforestation in the Amazon, wages in Indonesia, or the state of the planet our grandchildren will inherit?

A lot, actually.

While the rest of us obsessed over Copenhagen, climategate, or clawing out of the recession, a group of 10 corporate lawyers, including law professors from Stanford and UC Berkeley, worked pro bono last year to draft a little-known, 280-page bill for the California legislature.

Senate Bill 1463, introduced by State Senator Mark DeSaulnier of Contra Costa County, would enable companies to file as “flexible purpose corporations” and prioritize society or the environment alongside shareholder value.

As Suz MacCormac, the panel's moderator and one of the lawyers leading the charge for SB 1463 said, “It means that a company can emphasize things other than shareholder value, any time, and not get sued.”

With a flexible purpose corporation, or FPC, a company can justify actions that go beyond enhancing financial shareholder value, and promote activities with positive effects on employees, customers, suppliers, the community and society, or the environment.

Wow. I would normally rate an in-depth panel on corporate forms as engaging as a TMZ retrospective about the Kardashians, but this could fundamentally alter the future of green business.

The panelists -- Autodesk CEO Carl Bass, New Leaf Paper's President and Co-Founder Jeff Mendelsohn, and RSF Social Finance President and CEO Don Shaffer -- all mentioned how the existing corporate form was limiting. For example, nonprofits cannot gain access to capital markets, and for-profits can't necessarily do good when they want.

If you are thinking that a flexible purpose corporation sounds a bit, well, out there, consider one of the world’s most powerful corporations, Google.  While registered as a standard corporation, Google has nonetheless established a credo of “Don’t Be Evil.” The company’s Founders’ Letter in 2004 (the year it went public) states:

Don't be evil. We believe strongly that in the long term, we will be better served -- as shareholders and in all other ways -- by a company that does good things for the world even if we forgo some short term gains. This is an important aspect of our culture and is broadly shared within the company.

Then consider Unilever, a stalwart of corporate leaderboards for over a century. On an analysts' call a few weeks ago, CEO Paul Polman said,

“Unilever has been around for 100-plus years. We want to be around for several hundred more years. So if you buy into this long-term value-creation model, which is equitable, which is shared, which is sustainable, then come and invest with us. If you don’t buy into this, I respect you as a human being, but don’t put your money in our company.”

A company with an annual revenue greater than the GDPs of Kenya and Bolivia, combined, is basically telling the market that if it can’t be a flexible purpose corporation, then their investors better be flexible.

These companies are not alone. B Corporation has registered 350 corporations that meet “comprehensive and transparent social and environmental performance standards,” and this year Maryland and Vermont became the first states in the country to establish “for benefit corporations.” 

There has also been an increase in collaboration between businesses and nonprofits, in what the Harvard Business Review recently deemed “Hybrid Value Chains.”

An FPC takes this concept to a new level. The FPC working group conferred with the Securities Exchange Commission, the New York Stock Exchange and the Nasdaq to insure FPCs are recognized by all three. This recognition provides unparalleled legitimacy.

Secondly, in a classically Californian manner, FPC development is open platform. The working group stressed transparency over protocol, meaning that anyone can develop the standards for an FPC. B Lab, UL Environment, and the Global Impact Investing Rating System (GIIRS) were mentioned in the panel as examples of standards developers whose input would be welcome.

Thirdly, this bill is not just for upstarts, as existing companies can “convert” to being flexible purpose corporations. Companies that currently profit from sustainability are the most likely candidates for conversion to FPCs.

It's doubtful that customers will encourage firms to make the switch, and shareholders aren't expected to be a major force in pushing for conversions either. Autodesk CEO Bass pointed out, “Ninety percent of my shareholders are institutional investors, and 99 percent of them want to make money in a short time period.”

But employees are likely to play an important role. Ask new graduates which they'd prefer to work for -- a standard company or a flexible purpose corporation that puts environmental stewardship on par with fiduciary duty -- and they'd pick the latter. If behavior patterns on workplace issues hold true, the new employees will nudge coworkers toward the same view and as talent becomes increasingly critical in a creative economy, companies will be forced to respond.

Many of the members of the audience attending the panel on FPCs  were excited at the prospect of a new form of corporation, but skeptical, like me, that the bill would clear the California legislature.

Bass noted, however, that the bill has elements that appeal to lawmakers of various stripes. Progressives will love the expected societal benefits and fiscal conservatives will welcome the prospect of private enterprise solving social challenges, instead of making Big Government bigger.

Corporations have been around since the 1600s -- not long by nature’s standards. In this short span they have been deified, vilified, modeled and mocked. Recent books such as "The Corporation" by Joel Bakan and "Eminent Corporations" by Andrew Simms and David Boyle have been less than flattering.

But that narrative can change. Like anything in nature, corporations will evolve and adapt to new circumstances. The strength of a market, like the resilience of an ecosystem, improves with increased diversity. If SB1463 passes, there could be hope for us yet. And we will have lawyers to thank for it.

Image CC licensed by Flickr user eBeam.