Patagonia Tests New Sustainable Legal Status

http://www.bloomberg.com/news/2012-01-04/patagonia-road-tests-new-sustainability-legal-status.html

by wtvanhest • 15 years ago

86 30 15 years ago

_delirium• 15 years ago

Although it's interesting to formalize it, it's never really been the case that directors of normal companies are legally required to maximize profits above all else; they're generally given extremely large leeway to run the company as they see fit, as long as they're up-front with investors about what they're doing and why, and aren't engaged in shady things like trying to benefit insider shareholders at the expense of external shareholders. More: http://news.ycombinator.com/item?id=3227980

This probably will still help, though, because many directors of normal corporations believe they have stronger profit-maximizing duties than courts have actually ruled that they do, and they're in any case worried about even unsuccessful shareholder lawsuits.

onemoreact• 15 years ago

This is actually why companies can 'over compensate' people without getting into trouble. Paying Union workers, Day traders, or Executives above market rate does not open a company up to investor lawsuits unless it's far beyond any reasonable standard. But, they have slightly less leeway when dealing with suppliers.

wtvanhest2• 15 years ago

To me the most important thing this does is force the conversation with management and allow everyone to get on the same page. Even in companies where they are not registered this way.

Treynor, one of the great finance minds of our time argues in one of his writings that management at a large firm can be more responsible for balancing the interests of all stakeholders rather than simply maximizing profits.

I believe that idea should be discussed more rather than simply accepting the idea that profit should always come first.

sunahsuh• 15 years ago

This Forbes blog post provides some context regarding the culture of publicly traded companies, earnings guidance and "maximizing shareholder value": http://www.forbes.com/sites/stevedenning/2011/11/28/maximizi...

This is prevailing practice for publicly traded companies -- I feel like these Benefit and Flexible Purpose Corps are more about allowing companies to be publicly traded without having to play this game through setting social expectations than through real structural differences. (To be taken with a grain of salt as I'm not a lawyer or a financial professional, just someone that's been an individual investor.)

ryana• 15 years ago

>> I feel like these Benefit and Flexible Purpose Corps are more about allowing companies to be publicly traded without having to play this game through setting social expectations than through real structural differences.

As someone who works at what was, until Patagonia, probably the largest B-Corp around, I'll comment on this.

Yes the idea is that with these legal designations and social/environmental charters written in to the company by-laws it will allow for, someday, a B-Corp to go public and not have to change the way it operates. The oft-cited example of "what went wrong and why we need this" is Ben & Jerry's.

When Ben & Jerry's was bought by Unilever in 2000 the new ownership shut down a handful of their social programs and stopped sourcing products from local farmers, among other changes. Other companies were concerned about that happening to them in the future, and thus B-Labs.

jonstjohn• 15 years ago

As a long-time admirer of Patagonia and other companies that incorporate sustainability and social responsibility into their businesses, it is great to see this happening. If nothing else, it draws attention to alternative business goals and provides some degree of legal protection to certain public companies.

damoncali3• 15 years ago

Can someone explain why this is necessary or why a corporation would want to be put under what I assume (it's tough to tell from the article) additional legal risk of "benefiting humanity?". Could you not now be sued for "not being green enough" or worse, not being "good" enough, where "good" is defined by the shareholders? I don't get it - regular corporations currently have a lot of flexibility. What does this new form accomplish?

cyrus_3• 15 years ago

There is indeed additional legal risk -- shareholders (but not other stakeholders) can sue for not taking actions that "benefit humanity" as measured by a required independent audit.

However, this is balanced by the legal protection offered to the company when it does do something that does not strictly increase its profits.

It comes down to your values though -- if you believe that the most important thing is to make money while leaving yourself open to the smallest cross-section of legal liability, that's exactly what a standard corporation is for. If you believe that your purpose is to build a better world, and you need an organization with cashflow to do it, you had fewer options in the past. Now you have two more, at least in California.

smsm422• 15 years ago

So if such corporation would be public and it would oppose, say, SOPA and I believed SOPA creates great public benefit and owned shares of such corporation, I could sue it for not promoting the public benefit and actually force the company to come out and support SOPA? How that makes any sense? And how the courts would even decide such case - no legal definition of public benefit exists or even possible?

If you wanted to make profits and to build a better world, what prevented you from setting a regular company and a charity and have the former donate to the latter? A lot of people donate millions of dollars this way.

It looks like it's one of those feel-good laws that everybody pats themselves on the backs about how they promoted public benefit and nobody even thinks about how it would work or what would be the consequences...

cyrus_3• 15 years ago

The popular hospitality exchange Couchsurfing recently incorporated as a B corporation as well (they were a non-profit before.)

http://www.couchsurfing.org/about.html

torontos• 15 years ago

They raised ~$8million from Benchmark and Omidyar. It's pretty interesting that Benchmark Capital invested in a corporation that "is dedicated to creating public benefit." Not at all surprising to get it from Omidyar, of course.

http://techcrunch.com/2011/08/24/couchsurfing-raises-7-6-m-w...

Will be interesting to see how they monetize

gerggerg• 15 years ago

"Under current law, shareholders can sue corporate boards for not maximizing profits"

Wow, I never new that. Granted I know very little of the legal implications of incorporating, but still. I wasn't expecting it to be so plain. Corporations have a legal obligation to not care about anything but money. Explains a lot.

damoncali3• 15 years ago

It's not that simple. Boards have certain duties to act on behalf of the corporations, and not their own personal interests. Since concepts like "the good of humanity" are so vague, and can be interpreted in mutually exclusive ways, the theory is that those decisions should be made by shareholders with their own money, not with the company's.

Take a "sweat shop", for example. There is one view that they are exploitative and that low wages overseas should not be tolerated. There is another view that those wages generate income in areas of the world where it is greatly needed. How is a board of directors to decide which view to take? Which shareholders should they listen to?

So boards have been defined as the people who watch the business for the good of the business. And they're given great leeway in doing so. (You can't sue them for making bad business decions, for example - only fraudulent or grossly negligent ones).

Bundling charity with business is an interesting idea, but I'm not sure it's better than separating them, or if there isn't an inherent contradiction in the two when you apply it to large public companies.

After all, profits can always be used to better humanity without the conflicts I've described after they've been given to the shareholders.

I'm a little skeptical that it will change much, but we'll see. It will be interesting to watch.

yew• 15 years ago

> I'm a little skeptical that it will change much, but we'll see. It will be interesting to watch.

Likewise, on both counts.

Though I think it's important to remember, even if this enterprise fails the state of California is a big enough experimental setting to provide all sorts of interesting (and possibly even useful) new data.

ghaff• 15 years ago

It would probably be more accurate to say maximize shareholder value but, that aside, you're reading a bit too much into that statement.

It is, in fact true, that the board of a company incorporated as a for-profit has a fiduciary duty to shareholders which does, yes, translate into trying to make money for them. And there have been (rare) cases that this has come up an issue. It factored into a lawsuit Ebay brought against Craigslist at one point. If Apple's Board of Directors suddenly decides that they're going to donate all of Apple's profits to the Save the Whales Foundation, they would doubtless be sued. (I'm assuming for purposes of argument the BoD would even have the legal authority to do so.)

That said, boards are not required to maximize short-term profit. They can make modest philanthropic contributions. They can do things for their local communities. They can pay their employees well and give them lots of time off. And so forth.

The argument, in the context of fiduciary responsibilities, would be that all these things can contribute to the long-term value of the firm.

If, however, you honestly don't care much about making money and want to give most of your profits back to the local community of whatever, you really shouldn't be incorporating as a for profit.

xanados2• 15 years ago

There are actually several arguments against these so-called "stakeholder society" initiatives that most people don't consider at the outset. For example:

1. These concepts generally come with weaker governance for company managers, allowing them greater latitude to act inefficiently in general. By contrast with maximizing shareholder value, managers can undertake almost any program under some pretense or justification, ranging from excessive empire building, to justifying sweetheart deals with friends at greater cost citing "environmental" concerns. This doesn't matter for Patagonia because it's family-owned, but this would be a huge problem with making this a widespread practice in the Fortune 500.

2. Widespread use represents a de facto tax on businesses through less efficient operations, but without the control of the political process to direct it. Even if you aren't in favor of governmental interference, it is generally better for organizations that are going to have charitable aims to be directly accountable, whether via the democratic process or the donation process.

3. Returns to shareholders, in light of the returns that go to other stakeholders, are reduced, thus potentially reducing the amount of financing available from capital providers.

So it doesn't really matter if Patagonia does this, but doing it on an economy-wide scale would potentially be a big mistake.

lkrubner• 15 years ago

These remarks really need to be compared to the situation in Germany. A large degree of stakeholder democracy is enforced by law. In Germany, any company with more than 50 employees must allow workers some representation on issues of hiring and firing, and any company with over 300 employees must provide funds so that at least one worker can work full-time on workers concerns. Representation on the Board, by workers, is common. And the result seems to be a highly efficient system.

Compare that to the American experience, in which fraud and abuse has been widespread: Enron, Worldcom, the S&L Bailouts, CountryWide, Wachovia, etc.

As programmers, we know that bad code can be written in any language, and clearly fraud can be committed under any legal system. Still, we also know that each language tends to encourage certain habits, while discouraging certain other habits. Obviously one can find examples of fraud in Germany and efficient operations in the USA. However, it is striking how few scandals ripple through the German business community, and how very competitive German manufacturing firms are.

Given the comparison of Germany to the USA, I'd be cautious about dismissing systems of stakeholder democracy.

xanados2• 15 years ago

The system in Germany is different in that it names a particular set of stakeholders, namely workers, and gives them a formal place in governance controls. To my knowledge, German managers do not have to take into account the objectives of suppliers, the local economy, or society at large in their decision making. While it's similar, it actually addresses the first point I made, as compared with the California law under discussion.

German companies have much more concentrated share ownership, which gives them an advantage for corporate governance that perhaps makes scandals less likely. Also, they are a product of the German culture which is very different from American culture.

smackfu• 15 years ago

Given that most mortgage fraud was done at the employee level (for instance, encouraging people to lie on applications), I'm not sure how giving the employees a greater voice would have an impact at all.

kijin2• 15 years ago

> it is generally better for organizations that are going to have charitable aims to be directly accountable, whether via the democratic process or the donation process.

Aren't these "benefit corporations" also ultimately accountable to shareholders who invested money in them? Although social benefits are more difficult to measure than profits and dividends, that doesn't change the fact that whoever pays the bills will have an incentive to ensure that the corporation does what they think it should do. In fact, shareholders might be in a better position to hold managers accountable than donors to a non-profit are.

damoncali3• 15 years ago

shareholders might be in a better position to hold managers accountable

But to whom? You can't assume shareholders agree on what this means, so you're introducing a layer of politics into the board elections. I'm not sure that's a good thing.

You could say the same about buisnes management- shareholders will disagree on strategy. But the current solution to that is the "business judgement rule" that says boards have wide-ranging protections so long as they're acting in good faith. You'd have to assume the same sort of thing would be adopted for charitable decisions - the "charity judgement rule", if you will.

And now you have a board with wide freedoms on business decisions and on non-business decisions. In other words, you have a board who can do pretty much anything they want outside of outright fraud. That is not exactly inspiring corporate governance for would-be investors or would-be do-gooders.

leot• 15 years ago

While I am, at least at this point, a big fan of B-corps, the issues of efficiency are real. Organizations will sometimes use their B-corp or not-for-profit status as an excuse to provide poor value to their customers or for overall bad management.

Case-in-point: REI. Though they're a co-operative, they don't behave at all like one. They don't have a straightforward product pricing policy (co-operatives shouldn't have "sales"). They don't hold free and fair elections to their board of directors (candidates for election must be approved by those currently in charge). They altogether fail to serve as an example of how a co-operative should behave (this is obvious when you compare them, and their prices, to their Canadian counterpart MEC).

JumpCrisscross3• 15 years ago

It is ironic that we castigate Chinese SOEs for having a dual purpose of profit maximasiation and seeking the "general welfare of society" (worded differently in China or Russia) and then commend it here. The structures are, at least in writing, shockingly similar.

The problem is that generating shareholder value is objective and empirically validate-able. Having these other systems increased the complexity of the system - bad - while giving it a dual qualitative raison d'être.

Present structure of a for-profit corporation paired with a non-profit foundation is less ambiguous.

BrandonCWhite• 15 years ago

I worked on getting the first Benefit Corporation legislation passed in the United States. Specifically, Maryland was the first state to pass this type of corporation and a company I co-founded was the first company to change from a Delaware C Corp status to a Benefit Corporation. You can check my affiliation out here: http://brandoncwhite.com/blog/a-new-type-of-company-a-benefi...

There are still a lot of questions and issues around this type of corporation as has been pointed out. There certainly is a void that will ultimately get filled through case law at some point in the future. Having said that, I think it's a step in the right direction for companies that want to add some level of protection around their "Triple Bottom Line" philosophy. Ben and Jerry said that has this sort of corporation existed they would not have sold Ben and Jerry's. But, it does not mean that it's a fit for all companies. The start-up that I am working on now is not a benefit corporation and we probably will not become one. Not because we do not want to take into account the aspects of a triple bottom line, but rather because at this point it's not something at the core of what we are doing.

Overall, I think it's at least a good option for those that would like to focus on a triple bottom line. How exactly the law is interpreted will be interesting to see how it plays out.

Patagonia Tests New Sustainable Legal Status

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