Is this a veiled attempt to allow an entrepreneur to maintain control, possibly even from the grave, with respect to a company's social DNA-especially in a hostile situation? After all, stakeholders like employees do not have the right to sit on the Board (as they do in Germany) or to sue. Nor does that right apply to all shareholders---only to those who own-gulp!-more than 5% of the company's shares.
According to Simon, the answer is no because a company's shareholders or a new owner can "opt out" of being a Benefit Corp. at any time. "The idea is trust but verify," he says. "If you have requirements and obligations but there's no enforcement mechanism, it could easily come to pass, especially if there is new leadership or circumstances arise, that suddenly these things aren't addressed anymore. This is a way to make sure that if a company opts into being a Benefit Corp., they are going to live by it.
"Obligations mean nothing unless there's a means by which you can hold people accountable," he says.
Translation: The Benefit Corp. broadens the fiduciary duty of directors by increasing their potential liability in the sense that they are accountable for a company's social and environmental commitments as well as financial performance.
The logic behind broadening the protections for directors when exercising their fiduciary duty in the Flexible Corp. is the exact opposite-the carrot as opposed to the stick. Here, the idea is to encourage directors to engage in socially beneficial decision-making including, potentially, at the expense of maximizing profits by helping them to avoid litigation. "Boards of directors, especially in public companies, are incredibly risk-averse," Johnson explains. "As a practical matter, directors always become consumed with the concern that if they don't maximize profits, they are going to get sued."
"[Both types of new corporations] change fiduciary duty," he adds. "But in the [sense of reducing risk for directors], we are doing a better job of protecting that change."
Of course, the different approach reflects a different raison d'etre for the Flexible Corp., which is to help social entrepreneurs access capital-both from mainstream profit-driven capital markets and mission-constricted foundations. Nonprofits, if they are wealthy and can afford expensive lawyers, have been creating hybrid structures by establishing for-profit subsidiaries. But since it's best for the for-profit in this structure to be mission-driven so that the parent non-profit does not risk the loss of its tax-exempt status, they are often structured as LLCs, a corporate form that institutional investors in the mainstream capital markets generally avoid.
As part of California's general corporation code, the Flexible Corp. is designed to resolve that dilemma by allowing the hybrid social enterprise to simplify its structure and thereby eliminate the attendant hybrid conflicts by converting to for-profit status while satisfying the requirements of institutional shareholders for a standardized corporate entity. "The Special Purpose is designed to put shareholders and potential shareholders on notice that the corporation will pursue interests that may or may not align with profit maximization," Johnson says. "The idea is to make all kinds of social innovation a whole lot easier by unleashing the capital that will allow it to happen."
When activists or even corporate intra-preneurs want to change a "system," they look for a strategic lever, something like a tiller on a sailboat. The idea is this: You move the tiller just a tad, and you can shift the direction of the entire boat. In this metaphor, of course, the tiller represents fiduciary duty and the boat represents our entire economic system-or, in this case, the behavior of two new classes of companies.
To put it another way: the importance of redefining fiduciary responsibility cannot be overemphasized-or belittled.