Can the new “benefit corporation” charters give companies a conscience?
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In 1776, Adam Smith wrote, “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.” He was summing up the key insight of capitalism: Allowing economic actors to pursue selfish goals also benefits society as a whole. In the intervening centuries, that insight has helped unleash humanity’s productive capacity like never before.
But an epigram does not a perfect economic system make. The consequences that follow when economic actors—especially massive global corporations—pursue narrow self-interest are written all over contemporary history: the financial meltdown, the BP oil spill, the working conditions in overseas factories. The village butcher, brewer, and baker still had to look you in the eye every Sunday on the way to church. The drivers of global capitalism do not.
To rein in the excesses of capitalism without losing the dynamism that makes it hum, a variety of thinkers have begun looking for ways to re-imagine the corporation itself, restructuring it to encourage businesses to pursue not only profit, but also positive social impact. One of those innovations will hit Massachusetts Saturday, when companies here will be able to register as a new entity called a “benefit corporation.”
The idea of a benefit corporation is to weave some social responsibility into the DNA of the company itself through its charter. In the standard structure for a large corporation, called a “C corporation,” the CEO has a legal duty to maximize return for shareholders. If a CEO of a traditional corporation suddenly decides to use the company’s money to sponsor a charitable cause, or pay factory workers higher wages, or cut down on pollution because she thinks it’s the right thing to do, she could expose herself to a lawsuit from shareholders if it cuts into profits. A benefit corporation, on the other hand, is required by law to create “a material, positive impact on society and the environment,” and—while still making a profit—to consider the effects of its actions on its customers, its employees, society, and the environment.
First proposed in 2008 by a Philadelphia nonprofit called B Lab, the benefit corporation is still in its infancy as an idea. Maryland became the first state to allow benefit corporations, in April 2010, and since then 11 other states have authorized the new corporate structure, with efforts to do so underway in 14 more. B Lab estimates that there are 170 registered benefit corporations so far, and that about 10 Massachusetts businesses will adopt the structure on Dec. 1. In January, outdoor clothing company Patagonia registered as a benefit corporation in California, becoming the most prominent business to do so thus far.
Benefit corporations mark a novel approach to rewriting the contract between free enterprise and society; they have already gained wide support among the progressive business community and social entrepreneurs, as well as state legislators from both parties. But as they spread across the United States, they also raise important questions about the right balance between profit and responsibility. How far can you dilute the profit motive without hurting a business’s chances to grow and thrive? And, if there really is broad agreement that the profit motive sometimes needs to be reined in for the greater good, is a voluntary, opt-in effort really the best tool to accomplish it?
In some ways , the idea of a socially driven company doesn’t re-envision the corporation so much as nudge it back toward its original raison d’être. The first modern corporations were products of 17th-century colonialism, entities like the Dutch East India Company and the Jamestown Corporation. The corporate structure allowed groups of investors to pool their risks and rewards, and they enjoyed legal recognition and protection by monarchs precisely because their success was expected to feed back into the society that chartered them.
This innovative structure proved an immense success. The rise of corporations was in large part responsible for fostering the entrepreneurialism and institutional stability that fueled the industrial revolution. Today, corporations continue to sustain an epoch of unprecedented economic growth.
But to many critics, the scale and reach of today’s multinationals has thrown off the balance of power between companies and society. The world’s largest corporations are now powers unto themselves, rivaling in size and sophistication many of the sovereign nations in which they operate. Today, if you rank annual corporate revenues alongside national gross domestic products, only about half of the world’s 100 largest economic entities are nations—the rest are private corporations. Exxon-Mobil’s annual revenue exceeds Austria’s GDP; four years after the financial meltdown, several of America’s financial institutions remain “too big to fail,” enjoying implicit government insurance while pushing back against government rules. The US business lobby continues to block meaningful climate regulation, and in this area and others, the long-term consequences of unlimited corporate political contributions remain unclear.Continued...