Fiduciary Duty, Benefits Corporations and Patagonia

A key challenge to a for-profit centered approach to social innovation is the fiduciary obligation of a public company’s executives.  In the articles of incorporation, a company’s executives are bound to act in the financial interest of its shareholders.  Thus a corporate social responsibility policy can expose a firm to litigation should its shareholders come to believe that such a policy significantly shrinks the bottom line.  I’m not aware of may such lawsuits having actually occurred, but the possibility certainly looms large as an incentive for executives to place a low priority on CSR.  The argument that public corporation’s shouldn’t invest in CSR is compelling.  As a public company, they are stewards of the public’s money.  The public has a right to expect that the firms will maximize their financial return in accordance with the law.  

In 2012, the state of California became the 7^th state to create the category of “benefit corporations.”  B Corps broaden executives’ fiduciary duty to include the “consideration of workers, community and the environment.”  The new designation shields executives from the personal and corporate risk of pursuing socially impactful policies.  LA Times on California Benefits Corporations

The most prominent company to take advantage of the B Corp designation is Patagonia.  In additional to leading the apparel industry towards defining environmental sustainability benchmarks for production, Patagonia currently donates 1% of its revenue to grass-roots environmental advocacy groups.  Presently, the company is wholly owned by its charismatic founder Yvon Chouinard.  Since he is the sole shareholder, he is free to pursue any kind of policies.  (In other examples of potential bottom-line threatening policies Patagonia currently operates as a debt-free company, has run marketing campaigns encouraging its customers to buy less of its product and provides day-care services to its employees.)  As Chouinard progresses further into his seventies, a succession plan could potentially threaten his environmental, pro-worker and simply quirky business policies.  B Corp status embeds the legitimacy of his values and policies into the most basic framework of the company.  WSJ on Patagonia and Chouinard

In the context of the legal cannon, B Corps are newborn babies.  To my knowledge, the implications of the law have yet to be defined through litigation and case law.  Despite the platitudes of both political parties, judges do in fact shape the law – it’s their job.  I will be interested to see how the B Corp status holds up through the interpretive process of the judiciary.

At least two articles here that take a skeptical look at B Corps.

Wake Fores Law Review Article on Benefit Corporations 

Harvard Law Blog Post on B Corps