Decades after the manifestation of the Friedman Doctrine, corporate America is experiencing an advent of mission-driven, for-profit businesses.
In a recent post on benefit corporations, I examined the notion of companies seeking to create value for all stakeholders, expanding their fiduciary duty to engender positive social and/or environmental impact. To date, over 1,000 companies have incorporated as “benefit corporations” and have effectively embedded sustainable principles into their DNA.
Benefit corporations exist as a hybrid structure serving two masters: shareholders and society. Not surprisingly, “B Corps” resemble non-profits, a business structure which locks in its social purpose in perpetuity. Many non-profits successfully pursue social missions through capitalism. In fact, the term “non-profit” is a misnomer, as these entities can, and often do, earn profits. Non-profits enjoy the luxury of not paying taxes, albeit having no shareholders forces these businesses to raise capital through philanthropy, rather than floating shares. Philanthropists expect no material return form their investment. At the extreme, one might conclude that B Corps are a means for such companies to raise capital from investors and subsequently use those funds for social purpose rather than to maximize shareholder return.
Due to pursuit of social mission first, a B Corp will presumably fall short of maximizing shareholder value. If so, B Corps will trade at a discount to intrinsic value, evolving in a similar manner to different voting classes of shares. Share classes with fewer or no voting rights have historically traded at a discount to voting shares. This discount is largely determined by a perception that the shareholders who own voting shares may not choose to maximize the value of the non-voting shares. Similarly, the perception that B Corp management is not forced to maximize shareholder value will lead to a discounted share price.
Ten years prior to the arrival of benefit corporations, Unilever acquired Ben & Jerry’s through a hostile takeover. Ben & Jerry’s, long operating with consideration of all stakeholders, has been practicing sustainable business since its founding in 1978. On the assumption that Ben and Jerry’s would have incorporated as a benefit corporation had the option existed, it is very possible the fate of Ben & Jerry’s would be different today. Assuming a dueling effect of reduced takeover premiums as hostile takeovers of B Corps become unlikely, it is reasonable to anticipate an even further depression of B Corp stock prices. In either case, shareholders’ lose.
Can Benefit Corps fulfill both missions without conflict between two masters? The market rewards certainty. The B Corp structure attempts to reduce uncertainty by clarifying missions. But in reality, B Corps introduce vast ambiguity around corporate governance. At what opportunity cost are Benefit Corps pursuing social mission?