What if Doing Well Means Getting Sued?

Dr. Peter Cappelli of Pennsylvania University’s Wharton School recently finished a study that suggests Indian firms succeed because they often have a strong social mission.  Doing well financially is possible, Cappelli and his team of researchers assert, because they are “doing good.”  Indeed, a cursory look at large Indian corporations offers commendable mission statements:  Tata Group’s value and purpose include a goal to “improve the quality of life of the communities” in which it serves.  Reliance Industries Inc. equates growth with care for good health, safety, the environment, and people.  Many Indian conglomerates list an impressive range of projects that improve the lives of Indians and citizens abroad.  Cappelli concludes, therefore, that American business leaders should serve all of a company’s stakeholders, not just its shareholders.

Unfortunately, US law is in the way of any company striving to do good.

Take the case of Ben & Jerry’s.  Once a small local operation, the ice cream company eventually went public to raise cash for the expansion of its operations.  While making “Peace Pops” and taking progressive political stands, Ben & Jerry’s raised awareness of sustainability issues by using only hormone-free milk and sustainably sourced ingredients.  Co-founders Ben Cohen and Jerry Greenfield insisted that 7.5% of its profits would go to local community projects.  For years, the firm was wildly successful, spurning offers to sell, believing that staying independent was the best way to maintain Ben & Jerry’s social mission.

In 2000, the European conglomerate Unilever offered to by Ben & Jerry’s for a sum far exceeding the firm’s stock price.  Loyal customers and activists cried foul, but the truth was that Cohen and Greenfield had no choice:  under US securities law, shareholders could have sued the company had Ben & Jerry’s turned down Unilever’s offer.  Attorneys advised Ben & Jerry’s that it did not have adequate insurance to cover legal fees, and that the directors on its board could be held personally responsible for any litigation costs.  Rather than risk the destruction of an iconic company and brand, its board voted to accept Unilever’s offer.  Unilever still supports Ben & Jerry’s activism, but Cohen and Greenfield are no longer involved with the firm’s day-to-day operations.

Cohen and Greenfield planted the seed for younger entrepreneurs to embrace social change, but there are limits.  US business law at the federal and state levels recognize only for-profit or non-profit organizations–nothing in-between.  A company may have a noble mission of donating 10% of its profits to charity, or using only sustainably-harvested resources, but as a company grows and its ownership becomes more diluted, or even becomes publicly-owned, shareholders have the power to sue if a company does not maximize its profits.  Maximum shareholder value will always be favored in the court of law over environmental stewardship or charitable giving.

This may change.  Led by Todd Johnson, a partner at Jones Day’s Palo Alto office, a group of seven lawyers is working to change California law to allow for an “H-Corp,” a hybrid for-profit/non-profit entity that will shield a company’s management and board of directors from any such litigation.  Several other states have legislation pending, and Vermont is close to passing a similar law.

Many American corporations, including Johnson & Johnson and Google, already engage in social change and environmental causes.  However, changes in the law should encourage these companys’ leaders, stakeholders, and employees to do even more for their communities, without risking any interference from shareholders who only want to triple their bottom line instead of accepting a triple bottom line.

Based in Fresno, California, Leon Kaye is a business writer and strategic communications specialist. He has also been featured in The Guardian, Sustainable Brands and CleanTechnica. When he has time, he shares his thoughts on his own site, GreenGoPost.com. Contact him at leon@greengopost.com. You can also reach out via Twitter (@LeonKaye) and Instagram (GreenGoPost). He is currently living and working in Abu Dhabi, United Arab Emirates.