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Corporate governance for stakeholders

My journey to the practice of law has not been linear. My sensitivity to injustice and inequality, on the other hand, has been a constant driver. I’ve always been in search of a solution, which led me to seek a deeper understanding of the systematic ways inequality has been ingrained into the fabric of society, which led me to law school. If you had told me when I was eighteen that eventually I would come to the realization that a piece of the solution was dependent on reforming corporate governance, I would have scoffed indignantly at the idea that corporations could be anything but evil money-making machines.

I’m not sure when the switch flipped, but sometime during law school I began to see how corporations could be leveraged as a solution if we recast the role they play in society. As my colleague, Lenore Palladino, writes in her recent blog post on corporate governance, “Why Workers on Corporate Boards Just Makes Sense,” corporations are run “according to a neoliberal model of shareholder primacy,” but that doesn’t mean they have to continue to be run that way or that it even makes sense. Corporations can and should be run differently. The corporate form and its many variations can be used to create economically viable businesses that benefit workers and communities, that are good stewards of the environment, and that demand capital in service of stakeholders.

Giving workers a voice in their companies, if not an ownership stake, has a role to play in breaking the extractive cycle corporate American has been in for much of modern history. Positioning workers so that they have a say makes sense from a practical point of view too. Without workers corporations don’t create value for anyone. Workers are the face of a business, they deal with customers and understand the day-in and day-out operations in a way the C Suite cannot. Placing workers on corporate boards also creates more accountability for companies that claim to consider all stakeholders in decision making. As Lenore points out in her article, giving employees board representation puts stakeholders on the board, creating a board that inherently governs for its stakeholders and not just shareholders. Often self-interest is viewed negatively, but when you consider creating a board where a variety of self-interests are represented, it can be leveraged to accomplish measured and equitable outcomes that benefit society as a whole.

Leaving a Legacy: Creating a Social Enterprise that Outlives Its Founder

More and more, entrepreneurs and investors want more than just a buck:  they want to create a business with a social mission, then preserve that entity’s mission through time. This blog post briefly discusses three ways to keep a business entity on purpose long after the founders have left.

The first way is to borrow a page from much of the rest of the world and use “golden shares.” A golden share is a share with special voting powers greater than the other shares. To illustrate that power:  threatened with a takeover or acquisition that jeopardize the entity’s mission, one golden share could veto the transaction.

While we recognize that golden shares are hardly used in the U.S., we see potential. Our research indicates that the broad, powerful Delaware corporate law (the “gold standard” for U.S. corporations) has the flexibility and breadth to allow golden shares. Case law suggests that golden shares are permissible if they were created for an equity holder at the outset of the transaction.

 

second way to leave a legacy is through a Public Benefit Corporation. The very act of creating a public benefit corporation creates a high level of protection for the entity’s social mission; to delete or amend an entity’s public benefit statement or purpose would require approval of two-thirds of the outstanding stock of the corporation entitled to vote.

 

 

 

A third vehicle for preserving a company’s social mission is through a “perpetual purpose trust.” The Hershey Company, for example, has historically supported kids in financial need. Hershey does this through a purpose trust worth about $12 billion. The mechanism of the Trust’s control is fairly straightforward:  “The Trust owns about 8 percent of the chocolate company’s shares, but because of a dual class stock arrangement it controls about 81 percent of the votes.” This voting power allowed Hershey to reject a $23 billion takeover bid from rival candy maker, Mondelez.

Preservation of an entity’s long-term social agenda is a good thing. Jason Wiener|p.c. has partnered with other thought leaders on this topic (see, for example, Armin Steuernagel and his white paper on steward ownership). Our work-group plans to publish resources for the purpose-driven enterprise; sign up for our email alerts and we’ll let you know when it is available.