The Rise of Stakeholder Capitalism

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Since at least the 1970s and the publication of Milton Friedman's "shareholder primacy" doctrine, throughout the hostile takeover business culture of the 1980s, and during the more recent linking of executive compensation to company profits or share price, many businesses and aspects of US competition law supported the view that the primary—if not sole—obligation of a business was to generate shareholder value or profit.1

However, in recent years, consumers, investors, the general public and others have inspired a movement to demand more of corporations than just profit maximization. This movement is shifting corporate focus from "shareholder primacy" to stakeholder capitalism and "doing good while doing well."

The shift is evident not only with individual companies, but also with collective efforts in the business community.

In August 2019, the Business Roundtable issued the new Principles of Corporate Governance, which it calls a "modern standard for corporate responsibility."2 These principles moved away from a shareholder-primacy model, which focused solely on financial and operational costs and benefits, towards a broader stakeholder-driven model that includes a focus on environmental and social risks and opportunities. In January 2020, the annual World Economic Forum convened in Davos under the theme of "Stakeholders for a Cohesive and Sustainable World" seeking to renew "the concept of stakeholder capitalism to overcome income inequality, societal division and the climate crisis."3 Based on its Manifesto 2020, the program focused on "achieving maximum impact on the Forum's platform for public-private cooperation across six core areas of activity: Ecology, Economy, Society, Industry, Technology and Geopolitics.4

Recently, consumers, investors, the general public and others have inspired a movement to demand more of corporations than just profits

3,900+
Certified B corporations worldwide
Source: B Lab

Factors driving a growing movement

Businesses committed to public and expanded stakeholder benefits include ones chartered as "benefit corporations," "public benefit corporations," "low-profit/limited liability companies" (L3Cs), and "community interest corporations," as well as ones certified as "B corporations" and other stakeholder-capitalism or mission-aligned companies committed to achieving ESG aims or a specified social benefit. For clarity, this report refers to all of these and similar companies as "benefit corporations." For more detail, see "New legal structures for the increasing number of benefit corporations."

Several recent trends are driving this broader stakeholder-capitalism movement, including:

  • Conscious consumerism – Increasingly, customers seek to purchase products that are healthier, more environmentally sustainable, ethically made and able to benefit the community or a social purpose. Consumers want to support companies whose social, ethical and philosophical values align with their own.5 Businesses, in turn, have responded to this "vote with your wallet" approach by changing their marketing and other practices to appeal to consumers attentive to the societal impacts of their shopping and consumption choices6
  • Socially responsible investing (SRI) and ESG investing – This conscientious market approach refers to investments that seek to achieve not only positive financial returns but also a long-term beneficial impact on societal, environmental and business performance.7 The number of companies and funds that prioritize certain ESG factors—such as divesting from petroleum assets, increasing the number of women in leadership positions, etc. —has increased exponentially in recent years
  • Charity brands – A growing number of brands are attracting customers by incorporating some sort of philanthropy or donation into their business model. This is commonly achieved by making an in-kind or financial donation directly correlated with each purchase8
  • Corporate sustainability initiatives – More and more companies are promoting sustainability goals in their supply chains, including labor and environmental standards, even without necessarily binding themselves to a particular model. For example, Louis Dreyfus Company's sustainability initiative seeks to voluntarily achieve certain goals loosely aligned with the UN Sustainable Development Goals9
  • Business and human rights initiatives – A growing number of national laws have implemented human rights standards and reporting requirements for businesses, influenced by the UN Guiding Principles on business and human rights.10 In addition, in recent years, corporate benchmarking initiatives—public rankings that measure and compare human rights and recognized ESG issues —have grown.11

Today, several countries and many US states have legal structures that allow businesses to establish themselves as benefit corporations. See Figures 1 and 2.

Several countries and many US states have legal structures that allow businesses to establish themselves as benefit corporations

New legal structures for the increasing number of benefit corporations

The movement to broaden stakeholder capitalism has resulted in, or at least coincided with, the creation of new corporate legal structures, including through charter and other certification mechanisms that effectively create legal obligations for companies in US states and other countries. Examples include:

Benefit corporations (as legally registered)

New companies can incorporate as a "benefit corporation" in many US states and several other countries that have passed legislation creating this business form.12 Notably, the corporate law in some countries does not need to add a new business form to permit companies to consider social benefits on equal footing with profit, because their corporate law already permits such flexibility. Examples of prominent benefit corporations and/or companies with benefit corporation certification include Patagonia and Athleta clothing brands, Kickstarter, Illy Coffee, and Unilever subsidiaries Ben and Jerry's (ice cream) and Seventh Generation (cleaning products).

In addition, an existing company can elect to become a benefit corporation by amending its governing documents, which typically requires a two-thirds super-majority vote of all shareholders. The procedure for filing amendments in most US states is similar to that for any other corporate structure, with the addition of a statement declaring the company is a benefit corporation. Some states also require benefit corporations to name the specific public benefit they plan to pursue and to comply with certain reporting requirements.

Benefit corporations are treated like all other corporations for tax purposes, but benefit corporation status provides legal protections to balance financial and non-financial interests when making decisions—even in a sale scenario or as a publicly traded company. For example, directors may be required to consider other public benefits in addition to profits. Shareholders could then be prevented from using stock value declines as evidence for a lawsuit against the company. Transparency provisions in many of the statutes require benefit corporations to publish an annual report demonstrating their social and environmental performance using an independent third-party standard.

Low-profit limited liability company (L3C)

An L3C generally is a hybrid of a traditional limited liability company (a private organization whose owners actively participate in management but face no personal liability for the organization's obligations) and a non-profit business (a business that operates to benefit the general public without shareholders or any profit motive). With this blend, an L3C is a private company that earns profits while conducting its business to advance a certain cause or better social welfare. L3Cs are intended to help socially responsible businesses attract money from both foundations and private investors.13

Certified B corporations (non-profit certification)

A "certified B corporation," is a traditionally registered business that undergoes rigorous certification standards by a non-profit organization called the B Lab. To maintain this certification, the business must seek to balance purpose and profit, and must consider the impact of its business decisions on all stakeholders, including workers, customers, suppliers, community, the environment, etc. Many companies seek certification in order to build trust and value for their business.14 Currently, more than 3,900 certified B corporations exist in 150 industries throughout 74 countries.15

Stakeholder capitalism businesses can face unique challenges and opportunities in US antidumping duty and countervailing duty cases

The Biden-Harris administration and stakeholder-capitalism businesses

The Biden-Harris administration is poised to act in this area, and civil society is urging it to do so. A coalition of 50 impact-oriented organizations, including the non-profit group B Lab, has proposed the creation of a White House Initiative on Inclusive Economic Growth to coordinate federal policies around stakeholder capitalism that would also support the administration's efforts to address three key crises: the COVID-19 economic fallout, a widening racial wealth gap and climate change.16 During his presidential campaign, President Biden seemed to embrace stakeholder capitalism, saying it "isn't a new or radical notion; these are basic values and principles that helped build this nation."17 Since taking office, President Biden has added to his staff professionals already engaged with stakeholder capitalism ideas in the competition law sector. For example, Federal Trade Commission Chair Lina Khan previously critiqued the antitrust laws, arguing that factors such as workers' wages can also indicate anti-competitive behavior—thus promoting a stakeholder-capitalism concept.18

The administration can begin promoting stakeholder capitalism and benefit corporations through the US Department of Commerce (the DOC). As discussed below, the DOC could enforce the trade remedies laws in ways that incentivize and support benefit corporations and stakeholder capitalism businesses.

Ultimately, however, trade remedies laws conform to WTO agreements, which were written with conventional business models in mind and were intended to be applied uniformly across all member countries.

If individual WTO member countries seek to incentivize benefit corporations on their own, without amending the WTO agreements, the results might be less than ideal. It is not difficult to imagine that an individual WTO member country might incentivize and protect benefit corporations only when they are part of the country's domestic industry, but ignore or exploit benefit corporations when they are part of a foreign industry in a dispute.

1 Friedman"s article "A Friedman Doctrine: The Social Responsibility of Business is to Increase Its Profits," was published September 13, 1970 in The New York Time. However, others have argued that Friedman‘s article was not a singular launching pad for shareholder capitalism. See https://corpgov.law.harvard.edu/2020/04/16/stop-blaming-milton-friedman.
2 https://www.businessroundtable.org/business-roundtable-redefines-the-purpose-of-a-corporation-to-promote-an-economy-that-serves-all-americans.
3 https://www.weforum.org/press/2020/01/stakeholder-capitalism-a-manifesto-for-a-cohesive-and-sustainable-world.
4 Id.
5 See https://bthechange.com/marketing-myths-the-truth-behind-social-purpose-brand-campaigns-8f84dec6741d.
6 See https://www.nytimes.com/2019/10/01/smarter-living/sustainabile-shopping-conscious-consumer.html.
7 See https://www.investor.gov/introduction-investing/investing-basics/glossary/environmental-social-and-governance-esg-investing
8 See https://www.businessinsider.com/companies-that-give-back.
9 See https://www.ldc.com/sustainability/our-approach.
10 See UN Guiding Principles on Business and Human Rights.
11 See our recent reporting on this issue.
12 A list of states with benefit corporation legislation. Further information on benefit corporations in other countries here.
13 See https://nonprofithub.org/starting-a-nonprofit/jargon-free-guide-l3c.
14 See https://bcorporation.net
15 Id.
16 See An Urgent Call to Biden-Harris Administration: Create White House Initiative on Inclusive Economic Growth.
17 https://www.fastcompany.com/90586468/ceos-if-you-really-believe-in-stakeholder-capitalism-now-is-your-chance-to-make-it-real.
18 See https://www.theatlantic.com/magazine/archive/2018/07/lina-khan-antitrust/561743/.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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