Dear Larry (PART II of II),
As promised in my first letter to you (Part I of II), which defined the “Age of ESG” (i.e. the age in which finance attempts to reshape itself to account for sustainability-related risk), I write this second letter to introduce you to the legal corporate form best suited to facilitate lasting, meaningful corporate action in the Age of ESG — Delaware public benefit corporations (“PBCs”).
First, what are PBCs?
Importantly, unlike the more well-known and popularized “B-Corp,” a PBC is a unique creature of statute that mandates directors balance profit and purpose alongside the interests of non-stockholder stakeholders.
In other words, the statutory language codifying and supporting the existence of PBCs mandates that directors of PBCs move away from regime of shareholder primacy and instead consider all stakeholders when making their decisions.
For example, while traditional corporations that are incorporated under Delaware law (call them “C-Corps”) can become B-Corps simply by meeting the environmental and social performance standards of B-Labs (a non-profit in the sustainable investing space), the only thing that happens when such traditional C-Corps become B-Corps is that they obtain a stamp/marking from B-Labs certifying that they are meeting B-Labs’ purportedly righteous standards. At the end of the day, however, such B-Corp certified C-Corps are still only subject to traditional Delaware corporate law and that is a huge issue because — under traditional Delaware corporate law — any consideration of non-stockholder stakeholders must be subordinated to considerations related to maximizing stockholder value.
–See Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173, 176 (Del. 1986) (stating that the concern for the impact on constituencies other than stockholders is proper only if there is some rationally related benefit accruing to the stockholders).
–See Allen v. El Paso Pipeline GP Co., L.L.C., 2014 WL 2819005, at *8 (Del. Ch. June 20, 2014) (“directors may promote the interests of other corporate constituencies . . . [but] stockholders’ best interest must always, within legal limits, be the end”).
–Leo E. Strine, Jr., The Social Responsibility of Boards of Directors and Stockholders in Change of Control Transactions: Is There Any “There” There?, 75 S. CAL. L. REV. 1169, 1170 (2002) (“The predominant academic answer is that corporations exist primarily to generate stockholder wealth, and that the interests of other constituencies are incidental and subordinate to that primary concern.” (citing Dodge v. Ford Motor Co., 170 N.W. 668, 684 (Mich. 1919))).
It’s like, “Great, you’ve become a B-Corp, but we all know that your company is still, at the end of the day, beholden to the regime of stockholder primacy. When push comes to shove, you’ve got to subordinate the interests of non-stockholder stakeholders when you’re making decisions.”
And Larry, doesn’t that conflict with what you, the Chief Executive Officer of BlackRock, Inc. (the largest money-management firm in the world), just laid out in your recent annual letter to CEOs?
In that letter, didn’t you say: “a company cannot achieve long-term profits without embracing purpose and considering the needs of a broad range of stakeholders”?
And in that letter didn’t you threaten that if the data disclosed by companies does not cover how they serve their full set of stakeholders (e.g. by publishing disclosures in line with (i) the industry-specific Sustainability Accounting Standards Board (“SASB”) guidelines, and (2) the Task Force on Climate-related Financial Disclosures (“TCFD”) recommendations), then BlackRock,Inc. will conclude companies are not adequately managing risk and will therefore hold their board members accountable by voting against them?
If the answer to those questions is yes, then shouldn’t we be worried about relying upon traditional C-Corps to facilitate meaningful corporate action in the Age of ESG?
That said, you might be wondering how PBCs — as opposed to traditional C-Corps — might facilitate meaningful corporate action in the Age of ESG.
As I previously explained in my first letter to you (Part I of II), in the Age of ESG, meaningful corporate action will require at least two things for most companies: (1) that their directors have the ability to take the sorts of actions and make the sorts of decisions that genuinely boost ESG scores, without, for example, worrying about violating fiduciary duties in the process; and (2) that they respond to investor demand by producing useful ESG related disclosures.
Let’s start with the first point.
As codified, a PBC is a for-profit corporation that is “intended to produce a public benefit …[and] operate in a responsible and sustainable manner.”
The Delaware General Corporation Law does this in several ways:
–See Delaware General Corporation Law; Subchapter XV; §362(a) (stating that a PBC must specify its public purpose in its certificate of incorporation (e.g. “The purpose of the Company is to engage in any lawful act or activity for which corporations may be organized under the Delaware General Corporation Law, as the same exists or as may hereafter be amended from time to time. The specific public benefit of the Company is to promote the advancement of environmental stewardship by developing more sustainable high performance materials and by democratizing materials and tools for innovative product development for the betterment of local communities.”))
–See Delaware General Corporation Law; Subchapter XV; §365(a) (stating that Directors must balance three interests: (1) shareholders’ pecuniary interests; (2) the best interests of those materially affected by the corporation’s conduct; and (3) the specific public benefit identified in its certificate of incorporation (we can call this the “Balancing Requirement”)).
–See Delaware General Corporation Law; Subchapter XV; §365(b) (stating that a director is protected by the Business Judgment Rule and his or her fiduciary duties are satisfied when he or she makes any decision implicating the Balancing Requirement so long as “such director’s decision is both informed and disinterested and not such that no person of ordinary sound judgment would approve.”)
Hence, unlike traditional C-Corps, PBCs allow directors to focus on creating societal benefit, notwithstanding some cost to generating financial value for stockholders.
In other words, PBCs — unlike traditional C-Corps— provide directors with the air cover they need (from a legal perspective) to make decisions that genuinely boost ESG scores (e.g. deciding to procure more expensive renewable energy to run a company’s operations despite the increased pecuniary cost to stockholders because, on balance, the benefits associated with a less polluted environment and which accrue to a company’s other stakeholders, such as the community materially affected by the company’s conduct, outweigh such pecuniary costs).
And the cherry on top?
The Delaware General Corporation Law also addresses the second point related to meaningful corporate action in the Age of ESG (i.e. responding to investor demand by producing useful ESG related disclosures).
–See Delaware General Corporation Law; Subchapter XV; §366(b) (stating that a PBC must provide shareholders with a self-assessment of public purpose (at least every two years), which includes: (1) the objectives the board has established to promote the best interests of stakeholders and the public benefit outlined in the certificate of incorporation; (2) the standards the board uses to measure its progress; (3) the factual information based on those standards; and (4) an assessment with respect to meeting such objectives).
So, if, Larry, you’re genuinely concerned about reshaping finance to account for sustainability-related risk, then why not, when companies fail to publish robust sustainability-related disclosures, use your substantial voting power to (in addition to holding board members accountable by voting against them) vote to convert such traditional C-Corps into PBCs?
I’m not sure you know this, but very recently, in a dramatic turn of events, the corporate section of the Delaware bar announced and approved proposed 2020 amendments to the Delaware General Corporate Law, which would make it much easier for traditional C-Corps to become PBCs. Of course, before these proposed 2020 amendments become effective, the Delaware legislature and governor still need to adopt them, but that normally happens without controversy. So, it seems like it’s a done deal.
More specifically, the proposed 2020 amendments will delete two impediments that currently exist when a traditional C-Corp converts (by merger or charter amendment) to a PBC: (1) the 2/3 high vote of stockholders and (2) appraisal rights, which are currently triggered whenever a private company converts to a PBC and in some circumstances when a public company converts to a PBC by way of a merger. The amendments would lower the statutorily required vote to convert to or from a PBC to a majority and eliminate appraisal rights.
This is a key development that is likely to have a material positive impact on companies’ willingness (and your ability to influence companies) to convert PBCs.
Larry, this is a remarkable opportunity, which I sincerely hope that BlackRock, Inc. and the other large money-management firms take full advantage of.
As I hope this letter made clear, Delaware Public Benefit Corporations offer the best way for companies and directors to take meaningful corporate action in the Age of ESG; and the good news is that the path to becoming a Delaware Public Benefit Corporation will soon be made that much easier.
Kind regards,
Drew
