1 Looking Back to Move Forward

For those of us who, like Paul Valery, believe that, despite ourselves, nous entrons dans l’avenir à reculons, looking at the trends and prospective of a field of law (or even a simple legal phenomenon) means looking at its origins. In other words, we can only attempt to divine the future by contemplating and considering (in the etymological sense) the past and the present. This may be a short-sighted way of proceeding, but we see no alternative.

This chapter does not aim to discuss the legislative and non-legislative history of benefit corporations, B-Corps, società benefit, sociedades de beneficio e interés colectivo or sociétés à mission,Footnote 1 whatever their national name and shades might be,Footnote 2 as each section of this book analytically sets them out already, and as the history of the various forms of benefit corporations is, in itself, still rather short.Footnote 3

On the other hand, we deem it useful to frame the recent and lively progression of the “benefit corporation phenomenon”Footnote 4 (as we prefer to refer to it as a mere “phenomenon,” given its different shades in different legal systems) within the broader context of the generally renewed awareness on corporate purpose (or purpose of the company),Footnote 5 shareholder welfare, shareholder theory, enlightened shareholder value,Footnote 6 on corporate (or business) social responsibility,Footnote 7 on the raison d'être, or on the interest of the company (or corporate interest), just to recall some of the most widely used slogans. Such timeless problems (related to those “watchwords” or “formulas”) have recently returned to the heart of the debate, as we can observe even at a simple glance to the international literature.Footnote 8 Although they have never completely popped out of practitioners’, and especially corporate law theorists’, heads, previously, the debate related to them seemed somewhat dormant (or, at least, less lively).

Proceeding with a rough and reductive synthesis, we can state that, since the end of the last century the issues that used to be tackled (and to a large extent resolved) thanks to the classic instruments of law (state sovereignty; imperative norms of state law; possibly international treaties to be translated into internal norms; etc.) have turned out to be of such magnitude that they no longer seem likely to be settled alike. The global and planetary echo of both technology and economy, the affirmation of “super-capitalism,” the emergence of global entrepreneurial entities (not simply multinationals), whose turnover exceeds the gross domestic product of most states, break the assumption on which the effective sovereignty of the 19th century state was based: the co-extension of politics, economics, and law. States lost the position gained (perhaps also thanks to Hegel), and other organizations are now bursting onto the stage of the world’s destinies: corporations, whose ability to plan and dictate the rules of the game seems destined to make them become a great political player.Footnote 9

Today, there is no longer one corporate social responsibility only, no longer a unique purpose to be pursued, and the Friedman doctrine—for which business social responsibility is just that of using the company’s resources and engaging in activities designed to increase its profits while respecting the rules of the gameFootnote 10—is no longer applicable. This occurs not because of its lack of intrinsic logical soundness, but for the simple reason that the (existing) rules of the game imposed on corporations and their directors cannot ensure the protection of the fundamental values and interests of whole society by themselves. Hence, in this situation, it seemed natural to restore corporate responsibility to pursue general, common, collective interests and values. In other words: if God does not exist, man should nevertheless live veluti si Deus daretur, as if God existed.

Thus, companies—especially large ones—are not only the instruments for carrying out business activities in the exclusive interest of those who participate in them and of the company itself, but also the guardians of common, general, and even public interest. This should bring the task of identifying, selecting, and weighing up all these interests back to the companies that are free to the most suitable way to concretely pursue them. Large shareholding companies can no longer be considered only as the main characters in the economic stage, but also as the leads of the political stage (with a series of inevitable consequences in terms of the democratic deficit of the decisions that do not fall within the scope of the present study).

Hence, directors now have conspicuous (and indeed substantially disproportionate) discretionary powers; to the extent that some scholars (correctly, in our opinion) stressed how promoting the centrality of corporate social responsibility, reinforcing sustainability policies and making ESG (environmental, social, and governance) issues as overriding now represent a key concern for large companies’ managers and directors. It is obvious that this also leads to a (not entirely unjustified) skepticism about the possibility of solving the dilemmas above by entirely relying on such figures.Footnote 11

2 Techniques and Possible Reasons for an Explicit Recognition of Benefit Corporations

The aforementioned context resulted in the creation of benefit corporations, i.e., companies expressly characterized by the aim of pursuing a twofold order of interests, that also need to be properly balanced: on the one hand, the traditional profit-making shareholder interests and, on the other hand, the stakeholders’ interests (e.g., that of employees, clients, suppliers, members of the local community in which the firm operates, but also public administration and society as a whole). Consequently, managers and directors of benefit corporations need to, above all, strike a balance between such interests.

There are two ways of achieving a recognition of the status of benefit corporations in the regulation:

  1. (i)

    on the one hand, the identification of an ad hoc model, namely, of an autonomous type of company, alongside those already existing in the respective legal systems;

  2. (ii)

    on the other hand, the possibility of qualifying any type of company in that system as a benefit corporation whenever it plans to pursue the abovementioned double purpose as a necessary one. In this case, the status of benefit corporations would not represent an (autonomous) ad hoc model, but a qualification to which all companies can aspire, provided they fulfil certain legal requirements.Footnote 12

Still, in our view, the most important question is whether amending the regulation on this topic is necessary (or appropriate) and, if so, which is the most suitable direction.

Obviously, the reasons for a regulatory intervention are almost endless. For instance, a more favorable tax treatment—although we do not think this should happen, given that the choice of adopting the benefit corporation status should be taken regardless of its possible economic convenience—or any other incentive could be granted to benefit corporations to ultimately encourage the pursuit of common interest purposes.Footnote 13

At the same time, from a logical point of view, another question comes first: is it actually necessary to provide benefit corporations with an ad hoc model to be able to lead both managers and directors to pursue such dual purpose (i.e., balancing shareholders’ and third parties’ interest)? This is a national-specificFootnote 14 matter of law, and it is strictly connected to the notion of corporation that applies in any given system from time to time: for example, whenever this notion is causally neutral, there would obviously be no doubt of expressly providing for the category of benefit corporations; but, even where this notion is not entirely neutral from a causal (or, better, teleological) point of view, corporate case-law admits that directors enjoy sufficiently broad discretionary powers, such as to allow the consideration of a series of interests in the definition of strategic corporate objectives to be pursued in the interest of shareholders. Such ineliminable discretion is, in our opinion, linked to the fact that there is no monolithic and predetermined concept of corporate interest, and that the formulas for defining the social interest must necessarily be concretely adapted. So, the problems related to the definition of such interests lead to countless ways in which, at the discretion of directors, both order of interests can be pursued by the companies.

Therefore, even in those legal systems where the notion of company is not causally neutral and where there is no list of interests that directors have to consider when determining the company’s interest, the reason traditionally put forward to justify an intervention in the field of benefit corporations seems disingenuous: to make what would otherwise have been precluded to companies possible and, therefore, to allow directors to pursue common benefit purposes in conjunction with the economic activity that constitutes their corporate purpose. In addition, we defined it as disingenuous because, even in those legal systems, directors had the power to consider “other” interests to a certain extent before the eventual introduction of benefit corporations.Footnote 15

From a strictly logical point of view, the opposite is true, if anything. As the corrosion critique states explicitly providing for benefit corporations in a legal system can provide an argumentative basis for claiming that altruistic activities (which prior to the introduction of benefit corporations could be undoubtedly carried out by corporations, albeit as a tool in the pursuit of the main corporate purpose) are not (from that moment on) exercisable by benefit corporations.Footnote 16 Providing for benefit corporations in the legal system would, then, not allow them to do what (non-benefit) corporations previously could not (and did not) do, but preclude all the companies other than the benefit corporations from continuing to do what they actually did (or could have done) in the past. In short, it might be a tool to reduce the scope of discretion of non-benefit corporations’ directors.Footnote 17

The latter interpretation is appealing from a purely logical standpoint; however, it comes up against numerous obstacles that the law presents in those legal systems which provide for benefit corporations.Footnote 18 Above all, this reading fails to overcome the fact that pursuing interests other than those of the shareholders may lead, in any case, to an inevitable “incidental by-product of the business judgment rule.”Footnote 19

So far, discussions on the matter resulted in some major points that deserve to be recalled.

In legal systems that do not expressly provide for benefit corporations, nothing prevents directors from performing individual “altruistic” activities, if such activities are instrumental to the pursuit of the corporate purpose.Footnote 20 In the legal systems which, on the other hand, provide for benefit corporations, directors of non-benefit corporations are not precluded from carrying out altruistic activities, always provided that such activities are instrumental to the pursuit of the corporate purpose. In both cases, choices are backed by the business judgment rule.

Given such premise, we can try to delve into the real meaning of provisions requiring us to understand the difference between benefit and non-benefit corporations (precisely in those legal systems that provide benefit corporations with an ad hoc model). This is a matter that depends on the single national regulations; but, at least de jure condendo, it makes sense to resolve it as follows:

  • in non-benefit corporations, the pursuit of altruistic purposes should be instrumental to the pursuit of the profit-making (or selfish) shareholders’ purpose;Footnote 21

  • in benefit corporations, the pursuit of altruistic purposes should be raised to the same level as the selfish aim (namely, the traditional one for profit-making corporations), with the consequence that the former would not be the aim for the pursuit of the latter, but the corporation has to be managed trying to balance both.

Obviously, from a practical point of view, this conceptual contrast would lose much of its clarity. However, the two points above still make sense looking at the duty to carry out altruistic activities: while non-benefit corporations (which could well perform such activities) would not be strictly obliged to implement such policies, benefit corporations would.Footnote 22

3 Corporations Between Doing Well and Doing Good: The State-of-the-Art of the International Debate

Given the renewed interest in the corporate purpose recalled at the beginning of this chapter,Footnote 23 an extensive debate developed on the usefulness of benefit corporations in the relations between shareholders and stakeholders at the international level. In other words, the question addressed was whether benefit corporations could be the right tool to achieve the social and environmental sustainability of business activities and, thus, follow up on the instances of corporate social responsibility, allow socially responsible investing, facilitate the creation of shared value, and strengthen the competitiveness of the company, while meeting the needs and the challenge of the communities in which it operates.Footnote 24

As far as the possible reasons for the success of the benefit corporation in general are concerned, Dorff’s analysis is particularly accurate.Footnote 25 He identifies eight orders of reasons for having recourse to a public benefit corporation. Some of them are of a more practical order,Footnote 26 while others appear to be ideal;Footnote 27 but, in the author’s perspective, those are compatible and cumulative grounds that make benefit corporations a revolutionary tool, capable of overturning the principle of shareholder wealth maximization. Other scholars also recognize the coexistence, among these reasons for success, of practical reasons (particularly their ability to more effectively fight hostile operations undertaken by entities whose motivations of profit maximization threaten these companies) and of an ideal order (in terms of philanthropic endeavors).Footnote 28 They emphasize the need for a rigorous mission accountability of benefit corporations, given their intrinsic nature,Footnote 29 and, at times, places benefit corporations in a grey sector.Footnote 30

On the contrary, those who support skeptic (or, at least, puzzled) positions highlight two main issues:Footnote 31 the degree of bindability and relevance of concepts as shareholder primacy, shareholder wealth maximization and market value maximization; the fear that this translates into the adoption of vacuous corporate greenwashing policies.

As for the former, some authors stress the need to preserve the spirit of capitalism in the pursuit of business activities,Footnote 32 other authors—especially in the light of the steps being taken at European level on the subjectFootnote 33—now believe that the company should be considered in the social context in which it operates, and some other authors, while contemplating the possibility (but not the need) to look at further and broader interests, believe that benefit companies are not a decisive tool,Footnote 34 since the same results can be achieved by reconsidering traditional business practices and, specifically, by implementing policies to eventually maximize profits which are also oriented towards the creation of value and not just profits.Footnote 35

On the second problematic issue, certain scholars point to the lack of effective accountability and oversight systems in the current regulatory framework,Footnote 36 while others explicitly fear problems of greenwashing.Footnote 37 Consequently, the current provisions would not sufficiently protect shareholders, customers, or other stakeholders. Other academic exponents are more favorably disposed towards benefit corporationsFootnote 38 and hope for the adoption of guidelines on the subject aimed at clarifying, on the one hand, the real meaning of fiduciary duties in the hands of directors and managers and, on the other hand, the stages of verification and certification, to avoid the possibility of the adoption of the benefit corporation status turns to a form of corporate greenwashing.

Ultimately, it is undeniable that benefit corporations had a profound impact on the general debate on corporate purpose, contributing to the maintenance of a shareholder-value oriented view of social interest by non-benefit corporations. The awareness of the importance of the “benefit issue” and the official recognition of the special institution by several parties has led some authors to believe that, at a closer inspection, a solution is already be available to us.Footnote 39 So, if the reflection on the very general themes of the role of companies in the pursuit of common and general interests has led to the creation of a special case (that of the benefit corporation), it is now the benefit corporation itself that influences the outcome of this general debate.

4 The Problems of the Introduction of an Ad Hoc Regulation for Benefit Corporation

The previous paragraphs highlighted that the reasons for expressly recognizing the category of benefit corporations are probably not decisive. An express provision about the benefit corporations’ status does not seem to have generated significant results in terms of legal certainty, nor does to increase corporate sustainability as a whole. Indeed, the provision of the legal status of benefit corporations inevitably poses additional problems.

On the one hand, the transition of existing companies to the benefit corporation model (i.e., achieving the relevant qualification durante societate) affects the functioning of the company. First, it must be approved by majority vote; second, it must protect dissenting shareholders with specific forms of withdrawal or exit.

On the other hand, as we have seen, the express provision of a benefit corporation model fails in reducing the scope of discretion of the non-benefit corporations’ directors (and, generally, this is positiveFootnote 40). However, there is more, as it does not seem proper to reduce that of benefit corporations’ directors either. In short, an express provision for benefit corporations in the regulation does not even seem to decrease the related agency costs in such latter cases for various reasons. On the one hand, company’s bylaws could express the scope of the common beneficial interest to be pursued, as well as the ways in which (and the limits within which) it should be targeted. On the other hand, nonetheless—and beyond the fact that this normally almost never happens, and, at present, there would be no merit check on this pointFootnote 41—two factors cannot but increase directors’ discretion in the performance of their duties.

  1. (i)

    Directors are necessarily entrusted with the additional function of balancing the pursuit of this common-benefit purpose with that of traditional profit-making purpose, and this adjustment inevitably generates an additional room for choice.

  2. (ii)

    On the flipside, any provision in the company’s bylaws allowing to pursue a (hypothetically well-defined) common beneficial interest entails the recognition of a (further) area of discretion for directors.Footnote 42 In other words, the traditional business judgment rule is accompanied, in the context of benefit corporations, by a so-called benefit judgment rule.Footnote 43 The result is that benefit corporation’ directors can enjoy a wider (double) discretion; with the further consequence that they are less responsible for their choices towards shareholders than non-benefit corporation’ directors are.Footnote 44

5 The Challenges of the Regulatory Framework

Going back to history, it is acknowledged that benefit corporations are the product of the so-called fourth sector and, in this sense, they represent the result of discussions concerning corporate social responsibility, sustainability, stakeholder primacy, etc.Footnote 45 They can be seen precisely as an attempt to overcome the most patently ambiguous aspects of the fourth sector.

Indeed, when it comes to corporate social responsibility, it has not yet been fully (and perhaps deliberately) clarified whether such responsibility is a legal responsibility or a merely ethical one.Footnote 46 Given that liability assumes a rule of conduct, one should in fact first establish what kind of rule underlies corporate social responsibility. If it were only an ethical rule, social responsibility would not be relevant; if, on the other hand, it were a rule of law, then we would be in the field of the legal responsibilities of directors and other corporate bodies, and it would be a matter of understanding how the social aims underlying corporate social responsibility can be reconciled with the profit-oriented aims that characterize corporations.

While there is no doubt that the pursuit of common benefit interests becomes the subject of a legal obligation in benefit corporations; it is less clear how corporate and social purposes are reconciled in practice and whether there is a real directors’ liability for the failure to pursue wider interests.

Once again, there is no specific rule of law that helps us to solve the matter. Still, stakeholders do not enjoy any direct action against benefit corporations’ directors, as non-managers and non-directors do not have any legitimacy to protect altruistic purposes.Footnote 47

Therefore, the development of a more precise regulation of the functions, powers and responsibilities of directors is the area in which the most significant progress can be made. Innovations in the regulation, as well as in the case law and, to a not negligible extent, in the practices of drafting corporate bylaws seem to be able to contribute to this result.

From this perspective, regulating benefit corporations without concurrently fine-tuning some key aspects of their rules seems to be the major shortcoming of this vast reform effort. The weakness that is generally evident in the benefit corporation phenomenon is, indeed, a lack of rules. What deserves to be first discussed and governed today is not just the possibility of pursuing non-profit interests through organizational forms with their own legal personality and full economic self-sufficiency (a possibility which it is very unlikely to be questioned), but rather the consequences of this choice. Until now, in fact, answers given to this latter point still appear to be inadequate in various legal systems.

What seems urgent, therefore, is to start providing less vague answers to questions that do not arise at a factual level, but at a regulatory level. In short, it is a matter of understanding whether and how the liability of benefit corporations’ managers and directors is affected by such purpose, who has the right to take legal action to ascertain and compensate any failures (related to the pursuit of non-profit interests) of said directors, and to what extent directors enjoy an increased discretion related to both profit-making and altruistic purposes.

In our opinion, this is an unavoidable step to be taken, and it could make it possible to set a specific regulatory framework for benefit corporations, without getting to the point of hypothesizing, as it is already being done (albeit very questionably), new means for applying an allegedly sustainable corporate governance in a completely indiscriminate manner.

And, in this sense, the Model Business Corporation Act reform already seems like it was going in that direction, as the introduction of a new Chapter 17Footnote 48—which aims to serve as a reference for those states that have not yet adopted ad hoc regulations on benefit corporations, as well as for those that have statutes based on versions previously proposed by the Model B-Lab or individual state regulationsFootnote 49—was discussed in Fall 2019.

6 Preliminary and Tentative Conclusions

The perspectives of benefit corporations (i.e., corporations whose bylaws requires the pursuit of a dual purpose, on the one hand, for profit and, on the other hand, for altruistic purposes,Footnote 50 regardless of any legislative qualification in this regard) appear interesting, and it is easy to foresee that these corporate genres will continue to enjoy a certain success as promotional tools for their respective economic activities. This success is likely to increase in the years to come as choosing them means (and will mean) enjoying an undeniable reputational value in the eyes of the public and of the whole market. This attitude favors the spread and the success of benefit corporations, and it depends on the general awareness of consumers and public investors to the main issues that typically underlie the altruistic activities carried out by benefit corporations (e.g., sustainable growth; fight against climate change or pollution; protection of common goods such as air, water, etc.; fight against poverty and social inequalities, etc.).

Obviously, a closer inspection of economic return’s prospects from the use of the benefit corporation in terms of propaganda, promotion, marketing is impossible here (and in any case would presuppose business skills that are beyond the reach and scope of the authors). However, it should be noted that the adoption of the benefit corporation model is, in practice, still rather rare among large companies, especially when listed.Footnote 51 In this sense, the success of benefit corporations seems, at least up to now, essentially reserved for the segment of small or medium-sized companies or, again, for subsidiaries belonging to larger groups.Footnote 52 In the latter hypothesis, benefit corporations stand as an entity of the group specifically dedicated to perform purposes to the benefit of the whole community, somehow replacing the presence of a foundation or a charity within the corporate group. Of course, this does not exclude a more extensive use of B-Corps, simply certified companies whose diffusion will reasonably increase in the years to come.Footnote 53

Ultimately, as far as trends are concerned, our impression is that, besides cases in which benefit corporations contribute—in practice due to the evocative power and reputational potential of the formula—to creating shareholder wealth, it is difficult to imagine it being used to a quantitatively significant extent. However, it should be pointed out that some have recently proposed, even authoritatively, to have recourse to Public Benefit CorporationsFootnote 54 as a default model for every public company with revenues in excess of one billion dollars.Footnote 55 Now, regardless of the clamor that such an extreme (and at the same time substantially unfeasible) proposal would cause, due to its numerous potential shortcomings,Footnote 56 it is clear that generalized regulatory interventions of this kind would, if ever adopted, end up substantially modifying the fate of the benefit corporation model.

Nevertheless, some problems remain as to the role, powers, and duties of directors and as to the safeguarding of the public’s trust with respect to the pursuit of broader objectives. On the one hand, benefit corporations’ directors appear, in line with the trend, to be endowed with such a wide discretionary power as to increase agency costs beyond tolerable limits. On the other hand, the legal instruments to make the pursuit of common benefit purposes effective are still far too weak. In this sense, an ad hoc intervention in the regulation should first take on the task of reducing ambiguity, especially taking the opportunity to frame the role of benefit corporations’ directors in the most detailed and suitable manner.