New corporate form lets companies pursue sustainability with less chance of backlash
In January, the California legislature created a new kind of company: the Flexible Purpose Corporation. This is the latest effort to create a corporation targeting social purposes alongside shareholder value. The traditional corporate form does not prevent companies from pursuing social goals; the corporate "business judgment rule" allows boards and managers to weigh environmental and social factors when considering shareholder interests. In practice, however, those factors are often put on the back burner due to concerns about short-term results and shareholder lawsuits.
"Most of the incentives run counter to looking ahead to the long term or doing anything that could jeopardize today's bottom line," says Morrison & Foerster partner Susan Mac Cormac, who co-chaired the group that formulated the new legislation. Typically, too much emphasis on social issues that does not translate into improved financial performance is seen as risky—and avoided.
FPCs are required to identify social and/or environmental purposes in their charters, pursue them, and report annually on progress. "The premise is that management agrees with shareholders on one or more social purposes. They have a fiduciary duty to them," she explains. As a result, directors and management are largely protected from liability when they make these decisions.
Existing corporations can merge into or convert into an FPC with approval of at least two-thirds of shareholders. "It takes time for corporations to change, but we may not have a lot of time left to meet our social and environment challenges," says Mac Cormac. "The hope is that this will help speed things up.
New Forms for New Challenges
Business is playing a growing role in addressing issues like the environment, social problems, and resource usage. Some companies have "bent" the traditional corporate form to include sustainability as a goal. But that approach often has limited success, and it can create legal risks for management and board members. Thus, over the past decade, new types of corporate forms have emerged aimed at balancing the traditional focus on profits and shareholders with the new mandates for social and environmental action.
Rethinking Responsibilities
Over several decades, corporate responsibility has moved from theories and manifestos to government policies, global conferences, and a plethora of efforts by corporations focused on embedding it into business. "There has been a clear trend in corporate governance toward increased attention to the environmental and social impacts of business operations and toward bringing sustainability into the business mainstream," says Mac Cormac. For companies, practicality is key. The new Flexible Purpose Corporation lets companies pursue social goals while receiving protection from liability and availing themselves of mainstream capital.
- 1962: Silent Spring
Rachel Carson's book on toxic chemicals and the environment brings environmental issues to mainstream audiences. - 1970: First Earth Day
Nationwide teach-ins and demonstrations help build momentum for environmental legislation in U.S. - 1972: Limits to Growth
Controversial Club of Rome report foresees resource depletion and extensive pollution. - 1973: Energy Crisis
Arab oil embargo drives up price of oil, underscoring developed world's dependence on finite resources. - 1980s: Climate Change
Debate about long-term effects of greenhouse gases begins, prompted by EPA/National Academy of Sciences report; becomes main stream political and business issue in 1990s. - 1980s: Constituency Statutes
U.S. states begin passing laws that allow corporate officials to consider the interests of a variety of stakeholders, not just shareholders, in carrying out duties. - 1992: Earth Summit
The Rio Declaration on Environment and Development outlines 27 key principles for sustainable development. - 1997: Global Reporting Initiative
Nonprofit organization provides businesses with globally applicable sustainability reporting framework. - 1999: Dow Jones Sustainability Indexes
Tool helps investors identify companies that follow principles of sustainable development. - 2000: U.N. Global Compact
U.N. initiative launched to encourage businesses worldwide to adopt sustainable and socially responsible policies and report on their efforts. - 2003: Carbon Emissions Trading
Europeadopts the first emission-trading law, setting a market value for carbon dioxide. - 2005: Kyoto Protocol
First agreed to in 1997, greenhouse gas reduction protocols take full legal effect. - 2005: CEOs Weigh In
Chief executives of GE and Wal-mart deliver high-profile speeches supporting green business and sustainability. - 2008: G8 Cuts Emissions
The group of industrialized nations agrees to cut greenhouse gas emissions in half by 2050. - 2010: Benefit Corporations
First U.S. state passes law creating a corporate form designed to benefit society and shareholders. - 2010: ISO 26000 Standard
Voluntary corporate responsibility standard established for areas such as the environment, community involvement, and development. - 2011: Sustainability ROI
Harvard Business School paper reports that the stock of companies with a sustainability focus outperformed those without such a focus. - 2011: Flexible Purpose Corporation
First U.S. state passes law creating a corporate form that that supports the convergence of business profitability and sustainability.
Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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