Committing To Doing Good and Doing Well: Fiduciary Duty in Benefit Corporations

AbstractCan someone running a business do good while doing well? Can they benefit society and the environment while still making money? Supporters of social enterprises believe the answer is yes, as these companies aim at making money for shareholders, while also pursuing other social benefits. Since 2010, states have begun to enact statutes creating the "benefit corporation" as a new legal form, one designed to fit social enterprises. Benefit corporations proclaim to the world that they will pursue both social good and profits, and those who run them have a fiduciary duty to consider a broad range of social interests as they make their decisions, rather than a duty to focus solely on increasing shareholder value. Does this novel fiduciary duty effectively commit these businesses to doing good? How will courts actually apply this duty in practice? Will this new duty accomplish its goals without unduly high costs?This article is among the first to analyze in detail the fiduciary duty provisions in several versions of these new benefit corporation statutes. It compares duties in benefit corporations to duties in traditional corporations in the leading categories of fiduciary duty cases. It argues that there is likely to be a modest "flattening" in the risk of liability for directors and officers of benefit corporations. That is, as compared to the level of risk in ordinary corporations, the risk of being held personally liable will be greater for decisions where that risk is smaller in ordinary corporations, while the risk of liability will be smaller for decisions where that risk is greatest in ordinary corporations.The article then asks whether the statutes strike the proper balance in holding directors and officers accountable. The statutes could be too strong if they scare off investors and managers. They could be too weak if they allow managers to proclaim their virtue while ignoring their duties with no fear of legal sanctions. Neither possibility can be dismissed, but this paper argues that the statutes have got it just right. They create enough risk of liability that managers must pay attention to their legal duties, allowing courts to help shape norms of appropriate behavior, while not imposing such high risk that this promising new business form becomes unattractive.IntroductionCan someone running a business do good while doing well? Can they benefit society and their environment while still making money? Much of the time the answer is clearly yes. Since even before Adam Smith,1 we have known that under the right conditions, individuals seeking their own profit may be driven, as if by an invisible hand, to help society as a whole. But the conditions are not always right, and sometimes businesses which focus only on maximizing profits for their owners will seriously harm other persons or the environment.2To help make the dilemma more concrete, consider a hypothetical ice cream company named Jen & Berry's which has developed a loyal following in part because its products are seen as environmentally friendly. However, the containers the company uses are nonbiodegradable and significantly harmful to the environment. More environmentally-friendly containers are available, but at greater cost. Jen & Berry's customers have shown no concern about these containers, so switching to the less harmful product would significantly increase costs with no benefit in higher revenues. How should managers of a business faced with such a choice proceed?Past answers have split between two extremes, embodied in two legal forms of business associations.3 For-profit corporations focus on what their name suggests, making a profit, whereas non-profit corporations focus on doing some defined social good. But recently, some entrepreneurs and investors have become interested in developing businesses that have dual goals of making a profit for their investors while also pursuing social goods, sometimes narrowly and sometimes broadly defined. …