Evan Gabor

In August 2018, Senator Elizabeth Warren introduced the Accountable Capitalism Act, which would require “[a]ny entity organized as a corporation, body corporate, or limited liability company” with over $1 billion in revenue to obtain a charter from the newly established Office of United States Corporations. In order to comply with the charter, the corporation must have a stated “purpose of creating a general public benefit,” which must be identified in both the charter of the United States corporation and in the incorporation documents filed in the company’s state of incorporation.

One question this bill presents is whether the federal government should legislate in an area, corporate registration, that is typically left to the states. Another question is whether corporations, given the constraints of state law, would be able to comply with this legislation without consent from shareholders. For example, although in Delaware, corporations may be permitted to “change, substitute, enlarge or diminish the nature of its business or its corporate powers and purposes,” Del. Code Ann. tit. 8, § 242(a)(2) (2018), without a vote of shareholders, § 242(b)(1), in order to become a public benefits corporation as defined under Delaware law the corporation must obtain approval from 2/3 of the outstanding stock, § 363(a). An issue to be further analyzed is whether a corporation incorporated “for the general public benefit,” would necessarily fall within the meaning of a public benefits corporation under Delaware law, and therefore require shareholder approval. While these are interesting questions that should be addressed, given the fact that the proposed bill is unlikely to pass, this post will not analyze them specifically.

However, even if the bill does not pass, the proposal could lead to changes in the relationship between corporations and investors, namely, a replacement of “shareholder primacy by stakeholder primacy.” In her op-ed in support of the bill, Senator Warren asked, “[w]hat are the obligations of corporate citizenship,” and, in a rebuke of Milton Friedman’s theory that the corporation’s single obligation is to maximize shareholder returns, responded that corporations have “obligations to their employees, customers and the community.” Assuming, as Senator Warren argues, that corporations should account for these stakeholders, the question becomes whether those duties ought to be enshrined in law, or whether there are other market forces that can push corporations to respond to them while still aiming to maximize profit.

Milton Friedman argued that corporate directors should not make decisions in pursuit of a “socially responsible” goal beyond what is required by law because this spends shareholder’s money for a general social interest rather than serving the shareholder’s direct interest. This is still the general consensus for how corporations ought to act. However, how corporations can maximize profits may be beginning to change.

Recently, more companies have become B-Corporations to “don[] the persona of a responsible citizen, while continuously preforming practices to maximize profits.” One salient example of a firm taking on such a persona is Danone. Danone’s Chairman and CEO, Emmanuel Faber, has stated that people are walking away from brands that have consumed for years, presumably substituting for those with a more socially responsible focus. Faber has said that his company’s purpose is not “to create shareholder value,” but instead to “get healthy food in as many mouths as possible.” In pursuit of this goal, around 30% of Danone’s subsidiaries are B-Corporation certified. Having a social focus, at least for firms in consumer industries, could create a broader consumer base, and therefore, should be pursued to maximize profits. Additionally, ensuring that a corporation enhances some general public benefit could reduce the company’s cost of capital. In 2017, Danone completed a $2 billion syndicated credit deal that directly tied “the margins payable to the banks over the entire duration of the facility” to third-party-verified environmental, social, and governance (ESG) performance. Going forward, if these trends continue, companies ought to be socially accountable in order to maximize profits so that they do not damage their corporation’s reputation and so that they can gain access to capital at lower rates.

While a goal of profit maximization may pull corporations to account for the general public interest, investors may also push corporations to do so. Since 2016, sustainable, responsible, and impact investing (SRI) has increased 38%. Now, SRI assets account for over one-quarter of total assets under professional management in the United States. Additionally, institutional investors such as Blackrock have intimated that CEOs risk losing their support “if [the companies] fail to demonstrate that they create value for society.” In his 2018 Annual Letter to CEOs, BlackRock’s CEO, Larry Fink, presented his view that BlackRock, even when acting as a passive investor, would push corporations to articulate and pursue, a long-term strategy that  serves all stakeholders and to “demonstrate the leadership and clarity that will drive not only [BlackRock’s clients’] own investment returns, but also the prosperity and security of their fellow citizens.” These trends in investment behavior imply that long-term, sustainable goals focused on all stakeholders may be necessary to attract investors.

As Senator Warren suggests, it may be time for corporations to account for all stakeholders, not just shareholders. In a market where consumers are attracted to responsible corporations, optimal financing is contingent on ESG performance, and investors—especially the largest institutional investors—push companies create social value, it is possible that corporations must respond to the obligations of other stakeholders in order to maximize profits as current corporate governance requires. This may be an optimistic outlook on the market’s ability to pressure corporations to “do good,” but it may also be a viable way to move forward without disturbing the current status of state driven corporate law.