Delaware Public Benefit Corporations Through the Lens of Executive Compensation

Hanna Basra

 

I. The Delaware Public Benefit Corporation’s Recent Amendment

Public Benefit Corporations (PBC) are a type of for-profit corporation under Delaware law “intended to produce a public benefit. . . and to operate in a responsible and sustainable manner.”[1] This type of corporation differs from a traditional for-profit corporation, which has historically focused on profit and maximizing shareholder value.[2] The PBC statute codifies “stakeholderism” into a type of corporation.

Although introduced in 2013, PBC’s were previously a rarely adopted corporate structure. In July 2020, Delaware amended its code to make PBC’s more available to corporations and attractive to directors. Now, a smaller percentage of stockholders is required to approve becoming a PBC and the board of directors has reduced legal risk.[3] 

Delaware’s code outlines a balancing test: PBCs must balance the interests of (1) stockholders, (2) those materially affected by the corporation’s conduct, and (3) public benefits identified in the company’s certificate of incorporation.[4] A PBC is a unique type of corporation because, unlike traditional corporate forms, it requires the corporation not prioritize stockholders’ interests above the interests of those affected by the corporation’s conduct and public benefits.

II. Public Benefit Corporation Enforcement

In one 2020 study, 71% of US consumers said they want corporations to prioritize their stakeholders – which include employees, customers, the community, the environment, and others – to the same degree as shareholder returns.[5] This approach can be referred to as “stakeholderism.” PBC’s sound favorable: the corporation continues to operate for a profit, and all involved parties also benefit.

Prior to the PBC Amendment, there was just one PBC, Laureate Education. Since the Amendment, there are approximately a dozen new PBC’s. However, given the recency of the amendment and increasing adoption, literature on PBC’s is largely limited to theories, with few empirical studies. [6] Some authors consider whether PBC’s will be used for favorable marketing or whether they will truly result in an adoption of stakeholderism that alters the U.S. market’s profit-maximization norm.[7] Others come out against stakeholderism, arguing it’s not possible because of conflicting interests or would actually be harmful to all parties.[8]

While Delaware’s PBC balancing test may lead PBC’s to act upon a higher social responsibility standard, it’s unknown how judges will draw the line. Until there’s case law to clarify the statute, PBC’s could benefit from the favorable perception of being a PBC while continuing to prioritize the shareholder. This is akin to “green-washing”, which is when companies “make people believe that your company is doing more to protect the environment than it really is.”[9]  It could be called social-responsibility-washing. There is a disparity between (1) marketing a corporation as socially responsible (and benefiting from the marketing) and (2) making decisions and investing resources in socially responsible actions and outcomes.

How the three prongs of the PBC balancing test will interact with the Business Judgment Rule will also be pivotal. Previously, even if corporations had outlined admirable social responsibility goals in their purpose (typically included in a corporation’s articles of incorporation), the Business-Judgment Rule prevented courts from second-guessing a corporation’s decision as long as those decisions were taken with due care and in good faith.[10] While the balanced interests requirement in the PBC statute provides a stricter standard than the Business Judgment Rule, the enforcement of the Business Judgment Rule through court decisions has yet to be clarified as it relates to PBC’s.

An aspect that could shed light on whether PBC’s are social-responsibility-washing or acting in alignment with all their stakeholders is executive compensation. “The adoption of CSR [corporate social responsibility] contracting [in executive compensation contracts] leads to (a) an increase in long-term orientation; (b) an increase in firm value; (c) an increase in social and environmental initiatives; (d) a reduction in emissions; and (e) an increase in green innovations.”[11] CSR contracting leads to benefits for other stakeholders. Looking to PBC’s executive compensation to determine whether or not CSR contracting has been adopted would help the answer the question – do PBC’s benefit stakeholders? Next, I look to the composition of PBC CEOs’ compensation.

III. Do PBC Executive Compensation Structures Indicate Balanced Interests?

Vital Farms is a PBC whose stated mission is to bring ethical food to the table.[12] In Vital Farms’ 10-K, the corporation’s annual statement filed with the U.S. Securities and Exchange Commission (SEC), Vital Farms outlines it’s “ethical decision-making model” as involving five stakeholders: farmers and suppliers, customers and consumers, crew members, community and environment, and stockholders.[13] According to the 14-A, the corporation’s proxy statement filed with the SEC, Vital Farms compensates it’s CEO and CFO through a base salary, stock options, 401K contributions, and a Non-Equity Incentive Plan. The Non-Equity Incentive Plan is based on the executive’s target bonus, as a percentage of their base salary and the percentage attainment of Vital Farms’ corporate goals established by the Board in its sole discretion and communicated to each officer. The second prong of Delaware’s PBC balancing requirement is the interests of those materially affected by the corporation’s conduct, which certainly includes the stakeholders Vital Farm’s has listed, but the compensation structure is not expressly tied to those stakeholders. It is possible the stakeholders are included in Vital Farms’ corporate goals, but those goals are not defined in their 10-K,14-A, or Articles of Incorporation, so it’s unknown whether or not they align with any CSR metrics. They are at the discretion of the Board.

Lemonade is a PBC on a mission to “transform insurance. . . into a social good.”[14] Lemonade’s executive compensation consists of a base salary, stock options, and other compensation. Other compensation consists of a variety of items unrelated to CSR including but not limited to: contributions to pension plans, severance funds, disability funds, education funds and 401(k) matching; unused vacation days; car allowances; and work from home allowances. In 2020, the CEO received stock options that vest over four years but become exercisable only if the stock price equals or exceeds four pre-determined amounts.[15] Whatever hasn’t become exercisable after four years is forfeited. Not only does this structure not motivate based on CSR, but strongly connects CEO compensation to achieving specified stock prices.

IV. Conclusion

While the PBC structure is a statutory means of holding corporations accountable to stakeholders other than stockholders, it remains to be seen what metrics and aspects the courts will look to in applying the PBC balancing test – and how far the courts will step into corporate decisions to enforce a balanced stakeholder approach.  The executive compensation structures at Vital Farms and Lemonade do not connect to each PBC’s social responsibility purposes. Although this article only looks at two recent PBC’s executive compensation structures, the sample is not indicative of stakeholderism-motivated decision making. In order for PBC’s to act for the benefit of non-stockholders, courts will need to articulate how PBC’s will be measured against their duty to balance the interests of stockholders, stakeholders, and the public benefits articulated in their articles of incorporation.

 

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[1] 8 DE Code § 362 (2020).

[2] Tess Alonge, B Corps Give Traditional Business a Run for Their Money, Northeastern University (April 18, 2018), https://www.northeastern.edu/sei/2018/04/b-corps-give-traditional-businesses-a-run-for-their-money/

[3] Michael R. Littenberg, Emily J. Oldshue & Brittany N. Pifer, Delaware Public Benefit Corporations—Recent Developments, Harvard Law School Forum on Corporate Governance (August 31, 2020), https://corpgov.law.harvard.edu/2020/08/31/delaware-public-benefit-corporations-recent-developments/

[4] 8 DE Code § 362 (2020).

[5] Michael Theis, 71% of U.S. Consumers Want ‘Socially Responsible’ Companies, The Chronicle of Philanthropy (March 12, 2020), https://www.philanthropy.com/article/71-of-u-s-consumers-want-socially-responsible-companies/

[6] Michael B. Dorff, James Hicks, & Steven Davidoff Solomon, The Future of Fancy? An Empirical Study of Public Benefit Corporations, Harv. Bus. Rev., 2021, at 113, 125.

[7] Id.; Ellen Kennedy, What Are Public Benefit Corporations (PBCs)?, Kiplinger (October 15, 2021).

[8] Martin Petrin, Is Stakeholderism Bad for Stakeholders?, The CLS Blue Sky Blog (May 21, 2020).

[9] Greenwash, Cambridge Dictionary, https://dictionary.cambridge.org/us/dictionary/english/greenwash (last visited Nov. 8, 2021).

[10] The Delaware Way: Deference to the Business Judgment of Directors Who Act Loyally and Carefully, Delaware Corporate Law,https://corplaw.delaware.gov/delaware-way-business-judgment/ (last visited Nov. 8, 2021).

[11] Caroline Flammer, Bryan Hong, & Dylan Minor, Corporate governance and the rise of integrating corporate social responsibility criteria in executive compensation: Effectiveness and implications for firm outcomes, 40 Strat. Mgmt. J. 1097, 1097 (2019).

[12] Vital Farms, https://vitalfarms.com/ (last visited Nov. 8, 2021).

[13] Vital Farms, Inc., Registration Statement (Form S-1) (November 10, 2020).

[14] Lemonade, https://www.lemonade.com/giveback (last visited Nov. 8, 2021).

[15] Lemonade, Inc., Proxy Statement (Form 14A) (June 9, 2021).