By Walter Spak and Jessica Lynd
*Gregory Spak, Jay Campbell and Allison Kepkay contributed to the creation of this report.
Increasingly, companies worldwide are expanding the focus of their business models beyond maximizing shareholder profits to include other stakeholder values, such as:
This movement has implications for companies, shareholders, workers and the public at large.
The impact of this movement on the international trading system and the ability of existing trade laws and agreements to account for it has not received much attention yet. But it should.
The agreements and laws that regulate international trade largely presume that companies operate only to make a profit. For example, US trade remedy laws focus on practices such as "dumping": selling at prices below production cost and a reasonable profit. Imports can be considered to 'injure" a domestic industry if that industry’s profit margins are sagging. Companies that receive inducements to achieve economic or social goals could be penalized for receiving "subsidies." Key terms like "dumping," "injury," and "subsidy" all presume a free market orientation in which companies act with the primary focus of achieving and maintaining profits.
Our current notions of fair/unfair competition and fair/unfair trade derive from the power of the free market. According to free market theory, every company should have its chance to compete in a marketplace governed by rules, including the need to sell above the cost of production and to avoid "dumping" into foreign markets, unfair government subsidization and other activities that thwart competition.
But what happens when "benefit corporations" commit themselves to taking on additional costs in order to comply with enhanced environmental or labor standards? Should they be disadvantaged or conversely required to compete with imports that do not assume these additional costs? Should governments push companies to achieve broader societal goals? If so, then we may need to re-think the current agreements, laws and regulations that define fair and unfair trade.
Under current trade rules, US importers could be at risk of paying higher duties and other trade remedies, due to differences in how foreign benefit corporations produce goods and conduct their businesses—or could potentially leverage an ESG business model to eliminate or reduce trade remedies against them. Similarly, US benefit corporations could be forced to compete against foreign corporations exporting to the US that do not abide by stakeholder-capitalism values.
Until trade laws in the US or at the World Trade Organization (WTO) adapt to account for the unique role that benefit corporations play in international competition, those businesses should be mindful of how their socially conscious business model could be bolstered or hampered by existing trade laws.
This report examines challenges and opportunities that may arise as companies pursuing societal benefit motives engage in international trade. We provide an overview of what board members, general counsel and other leaders of benefit corporations should consider when addressing allegations or pursuing their own petitions in US trade disputes in order to maintain competitiveness while pursuing ESG objectives, as well as suggestions for how the trade laws could change to accommodate the rise in stakeholder capitalism.
Amid a growing movement towards corporations that "do good while doing well," many countries and US states are creating legal structures that allow businesses to establish themselves as different types of benefit corporations and stakeholder-capitalism companies.
Stakeholder-capitalism businesses and benefit corporations need to pay special attention to certain key considerations in US international trade remedy cases, to ensure that their unique missions are not overlooked or considered "unfair" trading practices.
The CEO and founder of the Shareholder Commons—a nonprofit focused on structures for a sustainable, just economy— discusses with us how systemic changes can help companies create value, while prioritizing the long-term health of capital markets and shareholder profits.
The Director of Stakeholder Governance and Policy for B Lab—a nonprofit that certifies companies as B Corporations—discusses with us the benefits added when a company’s operations and business model include its entire social and environmental performance.
As businesses increasingly adapt to a new stakeholder-capitalism approach and seek to add value through benefit corporation registration and similar certifications, they should craft trade law arguments that support their approach and protect their vulnerabilities.
Frederick Alexander, Chief Executive Officer and founder of the Shareholder Commons—a nonprofit organization focused on issues and structures for a sustainable, just economy— discusses how systemic changes can help companies create value, while prioritizing the long-term health of capital markets and shareholder profits.
Q: What value does the Shareholder Commons provide to companies competing in international trade?
Alexander: The Shareholder Commons uses a market-wide and systems-first approach to our thinking and activism. We believe in harnessing the power of universal owners—large institutional investors with diversified portfolios and financial interests in the well-being of the entire economy—to change market systems so that all companies create value and maximize profits through sustainable, humane practices.
For any company pursuing sustainability and public benefits, this type of systems-first approach would prevent other businesses from being able to externalize costs (causing individuals, communities and even competitors to bear the impact of their environmental pollution, lack of worker benefits and/or similar practices that harm others). Instead, all would be forced to compete based on the levels of sustainable value that they add, including to the economy, environment and society overall. An individual company can try to set up guardrails for itself, but it is much easier when many companies do it. That's something diversified shareholders can help create.
Q: How would you respond to those who argue that the social and ecological boundaries you advocate for businesses should occur through government regulations?
Alexander: Shareholder stewardship can be an important complement to regulation. No legal regime so far has been able to cause companies to change their practices and bear the full amounts of the environmental and social costs that they typically externalize to others. Moreover, acting only through legal regulations creates a "race to the bottom" among jurisdictions, where certain jurisdictions try to lift or loosen regulations in order to attract investment. Similarly, regulations alone can set up a direct conflict between abiding by the regulations and maximizing profits. This leads to lobbying against regulations in order to increase financial returns or following the letter of a law, but not its spirit.
In a systems-wide approach, investors recognize that the externalized costs of an individual company can impact their other investments, particularly when they hold diversified portfolios. We envision that shareholders can implement guardrails on portfolio companies to limit the negative sum externalities that a business can impose on others and then enforce these guardrails through votes against directors.
Q: Can an existing company change its legal form to become a benefit corporation?
Alexander: Yes. In jurisdictions where benefit corporation legislation exists, companies can become benefit corporations relatively easily, usually through a charter amendment. For example, the entity is often known as a "public benefit corporation" (or PBC) in Delaware.
In some jurisdictions like Delaware, the company must specify one or more public benefits that it will provide. In other jurisdictions, this specification is optional, but the company must still consider the interests of all stakeholders. The public benefit that a benefit corporation adopts can be almost anything: providing nutritious meals to children; a media company sharing accurate information with its news consumers; or some other purpose that corresponds to the company's business. We usually advise companies to state a meaningful, but not too narrow, benefit—so that they do not have to go back to shareholders frequently for approvals to modify the purpose.
Q: How do benefit corporation directors balance profit with their shareholder values?
Alexander: If directors find that a company's profit-seeking efforts conflict with shareholder values and/or the company's public benefit, then they should assess whether these profits are coming from negative value (such as by paying workers less). As a rule of thumb, a company's profits should come from adding value.
At the end of the day, benefit corporation status does not change the power dynamic between owners/shareholders and company managers. To that end, if managers focus on promoting shareholder interests, and if those shareholders are diversified across investments, then directors may find significant alignment between shareholder interests and the interests of other stakeholders. For example, a bank that is a benefit corporation might decide to lower its returns by using some of its capital to provide loans to assist marginalized communities where the return on investment is less than it would otherwise be, because it believes that its diversified shareholders will benefit from the improvements to the economy due to increasing opportunities and addressing historical injustices.
Q: What value do consumers receive from benefit corporations?
Alexander: Although value to consumers is often seen as low-cost goods and services, those lower prices often come with externalities that affect consumers and their communities, such as plastic deposited into oceans or inequalities extended through low-paying jobs. We think the goal for consumers should not be low prices, so much as accurate prices that are not artificially lowered through externalized costs or artificially raised through anticompetitive behavior. At that point, companies truly compete on visible full prices, without hidden costs or costs imposed on society and the environment.
Q: How can the Biden-Harris administration support benefit corporations?
Alexander: The most immediate step the administration could take is to pursue "dual materiality" at the US Securities and Exchange Commission (SEC). Currently, the US corporate disclosure regime is "outside in" (it asks companies to disclose how external events and conditions may affect the company and its earnings.) A critical complement to this would be an additional "inside out" disclosure that asks how the company's business practices affect society and the environment. The Shareholder Commons recently submitted comments to the SEC in this regard. The European Union is developing a similar proposal.
In addition, the administration could take regulatory action (which would not need congressional approval) by clarifying that fiduciary duties under ERISA and under the Investment Advisors Act allow, or even require, that trustees guide companies in their portfolios to prioritize the health of social and environmental systems that diversified investors rely on.
A more far-reaching goal would be to mandate benefit corporation status for all companies over a certain size. Senator Elizabeth Warren previously proposed something similar in the Accountable Capitalism Act.
Finally, the administration should also consider "safe harbors" for investors to discuss social benefits across competing businesses without fearing an antitrust or Securities Act claim. The ESG Disclosure Simplification Act of 2021 (H. R. 1187) recently passed in the US House of Representatives included language proposing a study on these issues.
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This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.
© 2021 White & Case LLP
