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In July last year, US insurance company Lemonade completed one of 2020’s strongest IPOs, seeing its share price gain 139% on its first day of trading. As a certified B-Corp, Lemonade has a legal obligation to consider the fortunes of all stakeholders: shareholders, workers, community, customers and the environment.
In December, Airbnb had its IPO – again a fairly good one. The holiday rental giant has a stakeholder committee of the board, has written stakeholder principles and has a stakeholder charter; but it also has multiple share classes, including one (owned by the founders) with 20 votes per share, compared to the common stock’s one vote per share. So who’s really the most important stakeholder at Airbnb?
There are 3,745 B-Corps across 74 countries, but – of the 480 companies that floated in the US in 2020 – just two of them were B-Corps. In addition to Lemonade, egg company Vital Farms went public at the end of July 2020.
But out of 480 IPOs, two isn’t a lot.
As well as the two IPOs, three existing companies converted to B-Corps. Amalgamated Bank converted to B-Corp status around the middle of last year, with the support of major shareholders such as BlackRock and Vanguard, and the blessing of proxy advisors. And in the latest conversion, the second (not the first, despite what its PR claims) public company to convert to a B-Corp is life sciences tech company Veeva Systems, with 99% of shareholders supporting the move.
If BlackRock thinks it’s such a good idea for Amalgamated and Veeva (it’s a big shareholder there too) to become B-Corps, then why isn’t it converting itself? Instead of signing on to the seemingly meaningless Statement on the Purpose of a Corporation from the US Business Roundtable?
‘Instead of making nice statements for the BRT, why not just become a B-Corp? A nicely worded note will not resolve the issue. It’s fluff’ – Elissa Habbart
Well, what is a B-Corp? A B-Corp (or, more properly, a ‘public benefit corporation’), is defined under Delaware law, for example, as “a positive effect (or reduction of negative effects) on 1 or more categories of persons, entities, communities or interests (other than stockholders in their capacities as stockholders) including, but not limited to, the effects of an artistic, charitable, cultural, economic, educational, environmental, literary, medial, religious, scientific or technological nature.”
B-Corps typically obtain certification from B Lab, a non-profit headquartered in the US, as corporations that meet social sustainability and environmental performance standards and agree to be accountable and transparent with respect to such goals.
I spoke to Ellisa Habbart of The Delaware Counsel Group (DCG), which is a member of the Council of the Section of Corporation Law of the Delaware State Bar Association. Among other activities, the Council analyses issues related to corporate law to determine what amendments to Delaware General Corporation Law should be recommended to the Delaware General Assembly. Delaware is the state where the vast majority of US corporations are incorporated, so it is essential that its corporate statutes are ‘state of the art’.
Speaking in her personal capacity, Habbart is somewhat scathing about the BRT’s Statement on the Purpose of a Corporation.
“When the BRT came out with their statement, I laughed,” she says. “Public benefit corporations have been authorised under Delaware law for years now. Instead of making nice statements for the BRT, why not just become a B-Corp? A nicely worded note will not resolve the issue. It’s fluff.”
Habbart notes that she worked for corporate clients, most of whom did not sign on to the BRT statement or to similar statements. “There are companies that have been running impact investment funds for more than 20 years,” she says, “so they are probably more of a stakeholder company than companies that did sign on”.
“These companies have been a bit low key about their impact funds. But do you respect people that make a charitable donation and make a big stink about it?” she asks. “I prefer to trust the people who do the right thing because it is the right thing to do and not for the accolades.”
Habbart further questions the sincerity of those signing on to the BRT statement, describing them as “purporting to address issues” without making any fundamental changes. “In my opinion, the BRT signatories are just trying to make the market comfortable that they believe in the importance of constituencies and issues other than just profit without having to go through the process and agree to specific goals.”
This was a conclusion reached by a number of shareholders who, last year, filed resolutions calling on signatories to the Statement on the Purpose of a Corporation to describe what they were changing in order to become stakeholder companies. When I tell Habbart that most, if not all, the recipients of such resolutions – including giants like BlackRock – had responded that they’d been doing it for a while, and that signing up to the Statement was just a way to make a public statement on it, she laughs again.
“I just want people to play honest,” she says. “Don’t just sign up to nice words – either sign on and make a commitment, or don’t. There are still people who want to invest strictly for profit; just be honest. Whether or not it is practical to run a company for all sorts of constituencies is not the issue, but if you are saying that is what you are doing, you had better do it.”
‘Directors’ hands are not tied as much the traditional ideology would have you believe in a Delaware C-Corp’ – Robert Eccles
But Delaware law is understood by many to have an especially forceful emphasis on shareholder primacy, which some shareholder advocates and their legal representatives say could make it legally difficult to move to a wider stakeholder model.
Habbart is dismissive of this argument. She says that there is another argument among the legal community, that Delaware law has always had room for companies to consider other stakeholders, despite the focus on shareholder value – or indeed because of it – as not doing so would hurt the company in the long term.
In a separate conversation, corporate governance professor and senior advisor at Boston Consulting Group, Robert Eccles, pointed out that "Delaware C-Corp [regular corporation] directors ‘may’ take account of other stakeholders within the framing of shareholder value creation. What this means is that directors’ hands are not tied as much the traditional ideology would have you believe in a Delaware C-Corp. In a public benefit corporation (PBC), on the other hand, directors ‘shall’ take account of other stakeholders, and they must publish a statement of purpose. In a PBC there’s a positive duty to stakeholders, just as there is with shareholders."
But Habbart says Delaware law needs to keep up with global trends. “We do not live in a bubble – the rest of the world is taking these issues very seriously. If you are a B-Corp you are held accountable with respect to goals other than profit; anything less is just wishy washy. Regardless of the legal position one takes, the practical reality is that the money wants to see people doing certain things and corporations will need to behave the way the markets are demanding.”
She notes that, until recently, one of the obstacles to a corporation converting to a B-Corp was appraisal rights. “Under the old rules for B-Corps, shareholders who didn’t agree with a proposal that would result in an existing corporation becoming a B-Corp could be very costly to that corporation.”
Before August last year, if a stockholder did not wish to approve a merger with a B-Corp that would result in the combined company having B-Corp status, or if a stockholder did not want to vote in favour of the conversion of a corporation to B-Corp status, it was possible that such a stockholder would have to be paid the fair value of his or her shares in lieu of remaining a stockholder – a potentially massive cost to the company. But the Delaware legislature has now amended the relevant state statute to eliminate such ‘appraisal rights’.
“My hope,” concludes Habbart, “is that by removing a major obstacle to becoming a B-Corp, more companies that wish to make an accountable commitment to certain constituencies and issues will do so.”