The introduction to the book describes the history of B Lab and the Benefit Corporation Model Act. It also tells the story of how B Lab persuaded the Delaware legislature to pass its own version, creating public benefit corporations and securing critical credibility for hybrid forms of business organizations. Finally, the introduction poses some important questions that companies using these new forms (and courts interpreting the new statutes) must grapple with and explains the central theme of the book: BCs and PBCs are poor enforcement tools for a company's social purpose, but they are excellent reinforcement tools.
Chapter 1 outlines the purpose of corporations, taking the reader through the history of shareholder primacy, its policy justifications, and the ill effects that prioritizing shareholder welfare have arguably produced. The chapter argues that although there is little legal bite to the law requiring boards to maximize corporate profits for the benefit of shareholders, the rule has had a significant impact on managerial culture. The chapter concludes by pointing out some of the cultural forces now undermining the shareholder primacy rule.
Chapter 2 provides a primer on corporate governance law in the United States. The chapter explains that boards of directors are entrusted with most of the legal power to make corporate decisions, though often day-to-day decisions are delegated to a team of senior managers. The chapter then explains the concept of the fiduciary duties of care, loyalty, and good faith, as well as the Unocal and Revlon duties that apply in the hostile takeover context. These duties are usually enforced through a derivative suit, a lawsuit by a shareholder on behalf of the corporation. The chapter explains the particular requirements of derivative suits and the policy rationale for these requirements.
Chapter 3 sets forth the major differences between BCs and PBCs on the one hand and traditional corporations on the other. The chapter breaks out its discussion of BCs from its separate discussion of PBCs. For each of these forms, the chapter explores the legal purpose of these entities, specific public benefits, the duty to balance profit against purpose, the availability and requirements of lawsuits to enforce these entities' social purpose, the social purpose disclosure rules that apply, the possibility of appointing a benefit director or officer, and the mechanics of a traditional corporation converting into a BC or PBC.
BCs must pursue the general public benefit and are permitted to adopt a specific public benefit to pursue as well. PBCs must adopt a specific public benefit and must also consider the impact of their actions on all those materially affected by them. Chapter 4 explores what these legal requirements mean and how Delaware PBCs are pursuing them in practice. The chapter also examines the policy justifications for these rules' permissiveness and discusses the arguments for drafting tighter requirements.
Chapter 5 probes the weaknesses in the BC and PBC statutory mechanisms designed to ensure these entities pursue a social purpose while also earning a profit. The primary statutory enforcement mechanisms are lawsuits to enforce boards' duty to pursue a social purpose and mandatory periodic disclosure of companies' self-evaluation of their success in doing so. After concluding that neither mechanism is likely to be effective, creating a significant risk that BCs and PBCs will engage in purpose washing, the chapter examines private ordering mechanisms that might provide more robust assurances that BCs and PBCs will pursue their social purposes. These include third-party certification, nonprofit governance, mandatory trade-off rules, and benefit directors and officers. The chapter concludes by analyzing whether companies registered in states without a BC or PBC enabling statute might create a similar result by adding provisions to their corporate charters.
Chapter 6 presents the advantages and disadvantages of BCs and PBCs for entrepreneurs. There is a risk that these forms will pursue purpose at the expense of profit. Also, BCs and PBCS are more complex to govern, pose some liability risk, impose greater disclosure obligations, and come with the uncertainty inherent in a new form of legal organization. Converting to a BC or PBC may also pose challenges. On the other hand, these new forms may enhance a company's ability to attract customers, attract and retain employees, attract investors, and defend against hostile takeovers. Also, the new forms empower entrepreneurs to express their values through their choice of business organization. The chapter concludes by examining whether social entrepreneurs might prefer a nonprofit corporation over a BC or PBC.
While Chapter 6 explored whether social entrepreneurs should adopt these new forms, Chapter 7 examines BCs' and PBCs' desirability to investors. The chapter begins with a taxonomy of different types of investors based on their goals and strategies, then goes on to analyze reasons why each type of investor might (or might not) be interested in investing in a business organized as a BC or PBC. The chapter then describes an empirical study of venture capital investment in Delaware PBCs that demonstrates that venture capital companies have invested billions of dollars in PBCs, though perhaps at smaller amounts at each investment round than is typical when investing in traditional corporations. The chapter concludes by briefly introducing the existence of publicly traded PBCs, a topic mostly reserved for Chapter 9.
One of the critiques of BCs and PBCs is that the mandate to balance the pursuit of profit against the provision of social good is too complex for boards to manage. This chapter takes on that challenge by examining a number of possible balancing strategies boards might adopt. After considering the complexity critique, the chapter argues that any balancing strategy should be transparent, credible, and measurable. The chapter then proposes and explains three strategies that might meet these goals: minimum thresholds, trade-off ratios, and maximizing subject to constraints.
Chapter 9 describes a relatively new entry to the social enterprise scene, the publicly traded PBC. While Laureate Education became the first publicly traded PBC in 2017, few others followed until 2020. As of this writing, there are over a dozen publicly traded PBCs, plus a few PBCs that are wholly owned subsidiaries of publicly traded corporations. This chapter provides a brief primer on the federal securities laws, then explores how those laws may have an impact on these companies. The primary focus of the discussion is to explore whether a PBC's public status may help prevent it from purpose washing. The chapter examines the disclosure of a few publicly traded PBCs to gain a sense of how rigorously these companies are fulfilling their disclosure obligations related to their social purposes.
The conclusion briefly summarizes the book's major themes, asking whether BC and PBCs are a reasonable form for entrepreneurs and investors to adopt and whether they will produce companies that behave in a way that is materially different from traditional corporations. It argues that the answer to the first question is a resounding yes, but the answer to the second question is more ambiguous.