Baking Social and Environmental Values into Corporate DNA

The flexible purpose corporation could make companies more responsible.

By Susan H. Mac Cormac

As the oil flowed for months unchecked into the Gulf from the Deep Horizon rig, the world focused on the environmental and social harm corporations can inflict. Did BP cut corners in terms of safety and labor standards in order to promote shareholder value? 

In the wake of the BP oil spill, pundits and populists alike raised their voices to accuse large corporations of being motivated solely by the pursuit of profits at the expense of social values. However, the legal requirements that govern corporate behavior (what I refer to as the “corporate form”) often motivate corporations to focus on impact on short-term share price as opposed to impact on the natural environment and communities in which they operate. While the “business judgment rule” does afford considerable flexibility, I believe more incentives (and protection) are needed to encourage good behavior.

Thus, the Flexible Purpose Corporation was born. Currently a bill before the California State Assembly (S.B. 201), this new type of legal entity was created by a talented group of corporate lawyers in California. Specifically the form would allow corporations to pursue “special purposes,” such as sustainability or social goals, which are negotiated by and agreed to between the board and its shareholders, together with traditional financial goals. 

The Flexible Purpose Corporation shifts the fiduciary duties of boards and management, essentially creating a new safe harbor (in addition to the business judgment rule) to encourage and ultimately require the pursuit of agreed upon special purposes alongside financial goals. If, for example, management wanted to install solar panels at a facility, they could factor in the sustainability benefit, as well as the financial cost-benefit in their decision-making process.

The Flexible Purpose Corporation creates accountability because shareholders would be able to enforce adherence to the designated special purpose, in much the same way they are able to enforce financial goals today. Through metrics and mandatory reporting, this new corporate form promises a level of corporate transparency not currently available. The increased level of transparency and accountability promises to bring socially responsible investing out of its niche market into the mainstream, making funding more accessible for companies with environmental and social priorities.

It is important to note this new form not only enables the incorporation and operation of other new entities (like B Corps and Benefit Corporations from other states) but also works well with robust standards that have been (and are being) developed by folks like UL Environmental.

If enacted the Flexible Purpose Corporation would not replace existing corporate forms. It would simply provide another option for both new companies and existing corporations that wish to embed social and environmental values more deeply into their DNA. The new form has been specifically designed to accommodate large and small companies, including private and publicly-listed companies. 

If BP was incorporated as a Flexible Purpose Corporation, would the oil spill have happened? I honestly believe it would have been much less likely. But more importantly, its shareholders would have had a clear path to enforce accountability for the environmental and social impact. 

About Susan H. Mac Cormac

Susan Mac Cormac is a partner in the Corporate Group of Morrison & Foerster’s San Francisco office. She serves as co-chair of the firm’s 550-lawyer Business Department and the Cleantech Group.

Talkback Readers: What’s your take on the Flexible Purpose Corporation? Would companies act more responsibly with it? Share your thoughts on Talkback!

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