An Amalfi lemon is pictured at the 'Costieragrumi De Riso' traditional lemon growing company, on a ... [+]
It was a big day in Wall Street today. Lemonade (LMND) rang the NYSE bell and was able to raise about $319 million with an initial public offering. Lemonade is a technology-driven renters and homeowners insurance startup, and the second public benefit corporation to file for an IPO.
A public benefit corporation (PBC) is a new type of company—think a hybrid of corporate forms—allowing companies to have a public benefit purpose (as articulated in its charter) in addition to the traditional profit model.
In the United States, legislators in thirty-five states across the country (and the District of Columbia) have enacted some form of innovative social enterprise legislation, passing 45 bills, mirroring current social movements.
Even Delaware, a state considered “pro-management,” because of its court decisions and statutes, adopted such a form in 2013–the Public Benefit Corporation (PBC).
Unfortunately, many companies perhaps will find it hard to adopt this form because of inadequate guidance in Delaware and other states about how managers and directors can balance a company’s profit purpose with its public benefit purpose.
There is also uncertainty in the event of litigation over breach of fiduciary duties.
Are PBCs, like Lemonade, the new route for an IPO? Maybe they should be.
In my article, The Law of Social Entrepreneurship - Creating Shared Value through the Lens of Sandra Day O’Connor’s iCivics, I note that social entrepreneurs are dealing with legal uncertainty and capital formation difficulties. They have to persuade their potential investors and other audiences that they are indeed credible and are leading a social enterprise as they claim, which result in inefficiencies in raising capital. There are additional challenges associated with structuring, launching, funding, and counseling social enterprises—all topics covered in my article.
Luckily, there are groups that are working on developing agreed-upon metrics for assessment, there will always be difficulty associated with measuring value creation and intangible assets of public benefit corporations. These is a fair debate about whether these firms can simply be measured by monetary performance or traditional profit creation. They should be evaluated based on their impact on the public, the communities that they serve, the services that they offer and the various products that they create.
However, with the current political climate in this country—as a result of the COVID-19 pandemic, which sparked social distancing, economic crisis, mass layoffs, furloughs, inequality and civil unrest—corporations are pressured by institutional investors and other market participants to incorporate in their charters a deep obligation to act for the benefit of society at large.
I just wrote a new piece on this topic. Feel free to check it out: Times They Are a-Changin': When Tech Employees Revolt!
Corporate responses to the pandemic have profound effects on employee rights, their role in the corporations that they serve and overall economic activity in the United States.
In the last few decades corporate governance scholarship neglected the role of employees- “human capital,” and mainly focused on the relationship between directors, managers and shareholders.
There are calls from the public for a revolution in corporate law in the United States, mirroring the current social movements, to resist short-termism and achieve long-term value. Tech employees joined these calls and are revolting by organizing, striking and publicly speaking out against their employers. Tech employees demand that their employers redefine corporate purpose and pursue long-term value while using a stakeholder lens. These developments contribute to a “paradigm shift” in thinking about talent management and corporate culture.
In 2020, companies finally realized that “shareholder primacy” is not a good business strategy for attracting, engaging and retaining their workforce.
My article addresses the old but ongoing debate in corporate governance theory, from the current dominant shareholder-centric corporate governance to collaborative (stakeholder-centric) corporate governance, and the new corporate personhood theory. It answers the question of whether our corporate law allows directors to take stakeholder interests into account.
It offers a pragmatic solution to an age-old debate: Should our corporate governance theory be extended to include the protection of directors (or officers) if they take employee interests into account in decision-making?
Perhaps if public companies decide to take stakeholder interests into account, then they should formally change their charters—certificates of incorporation—and moreover and more importantly, they should be required to disclose additional information and file periodically with the relevant state and federal authorities, akin to Public Benefit Corporations (PBCs).
They should be required to disclose to their shareholders and the public, information on their various efforts to promote their public-benefit mission and purpose, and the results of such efforts. Different states have different reporting requirements for PBCs, which these companies can easily follow.
There is new legislation recently passed by the House in Delaware, and, if signed into law, will make it easier for a traditional corporation to convert to a PBC.
The U.S. investment community also desires to understand the management of human capital. Transparency with regards to human capital management is incredibly important for business and society. So much so that our regulators, the U.S. Securities and Exchange Commission (SEC), are now tasked with proposing, drafting and enforcing new disclosure rules.
The SEC should move to a prescriptive approach (a specific line-item requirement) and require public companies to disclose information on talent management.
Such intervention in the market will alleviate the problem of lack of mandatory reporting and access to information, which also contributes to the systemic problem of lack of diversity amongst the largest employers in our nation.
