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What if Doing Well Means Getting Sued?

Leon Kaye | Tuesday March 16th, 2010 | 12 Comments
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.


▼▼▼      12 Comments     ▼▼▼

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  • jeandrap

    And of course there is B Corp that has made legislative strides as well.

  • Parson1

    It'd be great if California could lead the way to legislative change. I wonder if we have the same legal constraints in Canada (and Quebec)?

  • Guest

    What about the L3C (or is it LC3) hybrid corporation structure model? Would that allow for a similar shield against shareholder litigation?

  • http://www.facebook.com/marciebarnes Marcie Barnes
  • http://blog.babyganics.com/ Evan

    Taking away a shareholder's power to have a say in management might have undesirable effects. Either the shareholder pulls out his share and ditches the company, or he just goes ahead with whatever the whole company wants- with his opinions heard but not necessarily acted upon. I do hope California is able to handle this well and set things straight.

  • Guest

    What about the L3C (or is it LC3) hybrid corporation structure model? Would that allow for a similar shield against shareholder litigation?

  • http://www.facebook.com/marciebarnes Marcie Barnes
  • http://blog.babyganics.com/ Evan

    Taking away a shareholder's power to have a say in management might have undesirable effects. Either the shareholder pulls out his share and ditches the company, or he just goes ahead with whatever the whole company wants- with his opinions heard but not necessarily acted upon. I do hope California is able to handle this well and set things straight.

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  • http://www.zecozi.com Sophie Tran

    Perhaps, I’ve been missing out on some news… but I haven’t heard anything about HCorps (only BCorps) so far. What’s the diff between H & BCorps (if any)? They sound alike to me…. Would appreciate any responses. Thanks.

    -Sophie Tran
    stran@zecozi.com
    http://www.zecozi.com
    http://www.twitter.com/sophie_tran

    • http://greengopost.com/se-europe-balkans/ Leon Kaye

      Hi Sophie–the HCorp in California would be a registered company that acts as a hybrid between a profit-seeking company and an NGO–I’m making it more simple than it sounds. BCorps go through a registration process with a 3rd party like the organization linked above. It looks like the HCorp didn’t go anywhere in CA–as far as I know Maryland is the only state that created a registration process for Bcorps, the way companies do so that are LLCs, S corps, etc. Both operate the same–the main difference is that an “Hcorp” has its structure clearly stated in its charter, so shareholders can’t sue the company for not maximizing profits, not selling to the highest bidder (as what happened to Ben & Jerry’s), etc.

      The reason why an Hcorp (or Bcorp as in MD) is important is because so many problems associated with private companies (not having a social mission, etc.), is that the issues are structural. Even if a company wants to suddenly donate a percentage of profits to charity, dedicate itself to only buying fair trade ingredients, there’s always a way for large shareholders to sue cause by law, companies have to maximize profits.

      I’m not an attorney, and it’s difficult to explain, but I hope this makes sense.

      LK

      • Sophie Tran

        Thank you for your response, Leon.

        Yes, yes. I remember learning about businesses having a “legal obligation” to “maximize sharholders’ profits” (and I think even make it a priority/sole purpose of a corporation!) When I learned about this, I was utterly and honestly confused. How can this be ETHICAL?

        How can a company be good, be responsible, value the community that its livelihood depends on… if its legal obligation is to pursue whatever is in the best interest of shareholders? Businesses (big or small) affect the community as businesses are an entity in a physical ecosystem (hence, shops, banks, bakeries, hair salons…. those all require land, resources, materials, energy, etc…) The people who work for those businesses commute to work. They use fuel. BIG corporations, manufacturers, factories, etc. etc… use MASSIVE resources… oil, fuel, cut forests for wood to make desks, paper, etc… and many other examples are evidence that businesses affect the community… at least environmentally.

        Socially, conscious consumerism leads to a healthier community. Businesses help drive economies (so I do think businesses have an obligation to make profits, to keep provide livelihoods for employees, to promote innovation/technology that will improve lives overall)…

        Sorry, I’m rambling but yes… B Corps are necessary and makes sense to me, given the fact that shareholders can sue corporations that do not choose what the best profit-maxing options.

        However, how can the general public understand what BCorps are without getting so technical? Usually, people get “turned off” when they hear “big, fancy words…” I think.

        I go to school for architecture so I understand LEED. But try explaining LEED to a non-arch student. It’s a bit difficult.

        • http://greengopost.com/se-europe-balkans/ Leon Kaye

          Sophie–ethics and the law do not necessarily go together. Your points are well taken–but the truth is that Hcorps or Bcorps need to be part of US and state business laws & codes for them to succeed on a wider scale. These laws were written at a different time.

          And it is hard to explain these to folks on the street . . .which is why . . . the other side often wins cause they have the $$$ to control the tone…

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