Good counsel

Socially-driven entrepreneurs are partnering with a new breed of corporate lawyer with interests that go beyond bunce for shareholders. Nina Boeger writes.

UK company law makes two things clear. First, shareholders are not the legal owners of the company, even if they are sometimes still referred to as such. In fact, they own the legal claim to a transferable commodity called the share. Secondly, the principle of shareholder primacy, even if it is enshrined in the law, does not, itself, legally mandate that directors prioritise shareholders’ short-term wealth maximisation at all cost. Insofar as they can make a plausible business case for doing so, directors are, in law at least, entitled to use their business judgment to look after the interests of all stakeholders – including employees, consumers, creditors, communities and the environment – while generating value for shareholders.

The point is, directors’ concerns are often focused narrowly on the shareholders’ financial interests nowadays. It is in the practice of corporate governance that we see the guiding principle of shareholder wealth maximisation and prioritisation of the shareholders’ short-term financial interests above all else. Meanwhile, chief executives and managers are suitably incentivised to pursue that principle.

Directors are, in law at least, entitled to use their business judgment to look after the interests of all stakeholders – including employees, consumers, creditors, communities and the environment – while generating value for shareholders.

Led by the rules of financial capitalism, the directors’ concern is to maximise quarterly returns to increase share prices. And the policy context operates broadly to assist them in this, making these commitments systemic. Yet this corporate governance system is ill-suited to address the global externalities it generates. They include widespread labour exploitation and environmental crises as well as outright fraud committed by chief executives who seem to think nothing of stripping public companies of their assets and employees of their pensions and livelihood, to line their own pockets and those of financial investors.

But some companies – often smaller private businesses, but some large and public companies – are incorporating as social enterprises or businesses with a dual mission that includes commitment to do social good as well as make profit.

Directors’ concerns are often focused narrowly on the shareholders’ financial
interests nowadays.

In the US, the legal format of the Benefit Corporation is now widely available to do just that and, perhaps more importantly still, interest from social impact investors in these legal forms appears to be growing. In the UK, it is the Community Interest Company (CIC) form, introduced in 2005, that makes available a specific legal format for a dual mission company. Just like the Benefit Corporation, the CIC commits the company to a social purpose, but unlike the former, it also places limitations on what profits directors may extract, and how much of their profit they may distribute by way of dividend.

In fact, incorporating a mission-led business does not necessarily depend on the CIC format or any other tailored legal form. As we have seen, UK company law in principle allows directors some wiggle room to exercise their fiduciary duties in what they may consider more humane, wholistic and sustainable ways than the excusive pursuit of shareholder value maximisation. Traditional companies can “bake” their social purpose, and their commitments to stakeholders, into their constitutional documents by setting themselves up as a for-profit company with social purpose without adopting any specially designated legal format. And they can structure their share ownership more sustainably, for example, by giving voting shares to employees or involving foundations, as is wide practice in Denmark and Germany. Other governance features, including board membership, reporting, accounting and due diligence, can also be constitutionally adjusted to generate greater accountability towards stakeholders. Nowadays, companies wishing to set up in this way may also seek a certification as a B Corporation – an international label awarded to those companies that satisfy a social impact test.

Choosing a generic company format into which social commitments are incorporated as part of the company’s constitution, may seem a fairly straightforward option. It might be attractive perhaps to those who consider themselves activist entrepreneurs with a wish to turn the current into a more humane, fair and sustainable corporate world. However, there are some real limitations.

Some companies are incorporating as social enterprises or businesses with a dual
mission that includes commitment to do social good as well as make profit.

For one, unlike in the case of a CIC or a Benefit Corporation, the company’s constitutional documents can be changed. A social mission, once baked in, is not there forever (neither is B Corp certification which has to be renewed). So as companies grow and expand or as they become takeover targets, the chance of mission-drift towards a more financialised corporate culture grows.

Secondly, as the wheels of financial capitalism continue to turn, making dual mission companies financially viable and sustainable is a challenge. One of the risks here is that, in terms of attracting investment, these companies may fall between two chairs. Social impact investors will want to trust that the company delivers the social good it is committed to (but will be aware of the mission-drift risk). At the same time, there is the risk that over-committing to a social purpose could lower profit so far that it makes the company uncompetitive and, in extreme cases, fail.

Also, there is a third limitation, perhaps less obvious than the other two. Developing corporate governance structures to create social-mission companies requires expert corporate lawyers. But commercial, company and transactional legal specialists with sufficient expertise to advise entrepreneurs minded to setting up a social mission-driven business are difficult to find.

Corporate lawyers are not known as a particularly radical breed and, after decades of crafting company legal structures in the context of shareholder value maximisation, social mission is not something that enters their field of legal expertise easily. They are private lawyers, commercially intentioned and usually, by necessity, doctrinal.

​So as companies grow and expand or as they become takeover targets, the chance of mission-drift towards a more financialised corporate culture grows.

However, a new breed of private company lawyer is currently growing in number. In the US, authors like Jannelle Orsi or Rick Alexander highlight examples of transactional lawyers concerned with social corporate mission and, more widely, the development of a sustainable economy through enterprise. In Europe too, increasingly, organisations such as the European Social Enterprise Law Association bring together company lawyers with expertise in designing legal structures for social enterprises and mission-led businesses.

Some are young practitioners, aligning their career choices and options with those of social mission driven entrepreneurs. Others have been in the corporate legal profession for a long time and have come to realise that business as usual is not as rewarding as creative design of alternative corporate structures. These are fledgling movements, but as the strength of these professional networks grows and their exchange of expertise in setting up social-mission driven companies bears fruit, they are gaining momentum. In time they could become powerful reminders for other corporate lawyers, that there is a force to the law, including company law, that can be used progressively in the interest of social change.

Nina Boeger is a UK solicitor and Germany lawyer. She works as a Senior Lecturer in Law and Director of the Centre for Law and Enterprise at the University of Bristol Law School.

nina.boeger@bristol.ac.uk

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