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.
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Since at least the 1970s and the publication of Milton Friedman's "shareholder primacy" doctrine, throughout the hostile takeover business culture of the 1980s, and during the more recent linking of executive compensation to company profits or share price, many businesses and aspects of US competition law supported the view that the primary—if not sole—obligation of a business was to generate shareholder value or profit.1
However, in recent years, consumers, investors, the general public and others have inspired a movement to demand more of corporations than just profit maximization. This movement is shifting corporate focus from "shareholder primacy" to stakeholder capitalism and "doing good while doing well."
The shift is evident not only with individual companies, but also with collective efforts in the business community.
In August 2019, the Business Roundtable issued the new Principles of Corporate Governance, which it calls a "modern standard for corporate responsibility."2 These principles moved away from a shareholder-primacy model, which focused solely on financial and operational costs and benefits, towards a broader stakeholder-driven model that includes a focus on environmental and social risks and opportunities. In January 2020, the annual World Economic Forum convened in Davos under the theme of "Stakeholders for a Cohesive and Sustainable World" seeking to renew "the concept of stakeholder capitalism to overcome income inequality, societal division and the climate crisis."3 Based on its Manifesto 2020, the program focused on "achieving maximum impact on the Forum's platform for public-private cooperation across six core areas of activity: Ecology, Economy, Society, Industry, Technology and Geopolitics.4
Recently, consumers, investors, the general public and others have inspired a movement to demand more of corporations than just profits
3,900+
Certified B corporations worldwide
Source: B Lab
Businesses committed to public and expanded stakeholder benefits include ones chartered as "benefit corporations," "public benefit corporations," "low-profit/limited liability companies" (L3Cs), and "community interest corporations," as well as ones certified as "B corporations" and other stakeholder-capitalism or mission-aligned companies committed to achieving ESG aims or a specified social benefit. For clarity, this report refers to all of these and similar companies as "benefit corporations." For more detail, see "New legal structures for the increasing number of benefit corporations."
Several recent trends are driving this broader stakeholder-capitalism movement, including:
Today, several countries and many US states have legal structures that allow businesses to establish themselves as benefit corporations. See Figures 1 and 2.
Several countries and many US states have legal structures that allow businesses to establish themselves as benefit corporations
The movement to broaden stakeholder capitalism has resulted in, or at least coincided with, the creation of new corporate legal structures, including through charter and other certification mechanisms that effectively create legal obligations for companies in US states and other countries. Examples include:
Benefit corporations (as legally registered)
New companies can incorporate as a "benefit corporation" in many US states and several other countries that have passed legislation creating this business form.12 Notably, the corporate law in some countries does not need to add a new business form to permit companies to consider social benefits on equal footing with profit, because their corporate law already permits such flexibility. Examples of prominent benefit corporations and/or companies with benefit corporation certification include Patagonia and Athleta clothing brands, Kickstarter, Illy Coffee, and Unilever subsidiaries Ben and Jerry's (ice cream) and Seventh Generation (cleaning products).
In addition, an existing company can elect to become a benefit corporation by amending its governing documents, which typically requires a two-thirds super-majority vote of all shareholders. The procedure for filing amendments in most US states is similar to that for any other corporate structure, with the addition of a statement declaring the company is a benefit corporation. Some states also require benefit corporations to name the specific public benefit they plan to pursue and to comply with certain reporting requirements.
Benefit corporations are treated like all other corporations for tax purposes, but benefit corporation status provides legal protections to balance financial and non-financial interests when making decisions—even in a sale scenario or as a publicly traded company. For example, directors may be required to consider other public benefits in addition to profits. Shareholders could then be prevented from using stock value declines as evidence for a lawsuit against the company. Transparency provisions in many of the statutes require benefit corporations to publish an annual report demonstrating their social and environmental performance using an independent third-party standard.
Low-profit limited liability company (L3C)
An L3C generally is a hybrid of a traditional limited liability company (a private organization whose owners actively participate in management but face no personal liability for the organization's obligations) and a non-profit business (a business that operates to benefit the general public without shareholders or any profit motive). With this blend, an L3C is a private company that earns profits while conducting its business to advance a certain cause or better social welfare. L3Cs are intended to help socially responsible businesses attract money from both foundations and private investors.13
Certified B corporations (non-profit certification)
A "certified B corporation," is a traditionally registered business that undergoes rigorous certification standards by a non-profit organization called the B Lab. To maintain this certification, the business must seek to balance purpose and profit, and must consider the impact of its business decisions on all stakeholders, including workers, customers, suppliers, community, the environment, etc. Many companies seek certification in order to build trust and value for their business.14 Currently, more than 3,900 certified B corporations exist in 150 industries throughout 74 countries.15
Stakeholder capitalism businesses can face unique challenges and opportunities in US antidumping duty and countervailing duty cases
The Biden-Harris administration is poised to act in this area, and civil society is urging it to do so. A coalition of 50 impact-oriented organizations, including the non-profit group B Lab, has proposed the creation of a White House Initiative on Inclusive Economic Growth to coordinate federal policies around stakeholder capitalism that would also support the administration's efforts to address three key crises: the COVID-19 economic fallout, a widening racial wealth gap and climate change.16 During his presidential campaign, President Biden seemed to embrace stakeholder capitalism, saying it "isn't a new or radical notion; these are basic values and principles that helped build this nation."17 Since taking office, President Biden has added to his staff professionals already engaged with stakeholder capitalism ideas in the competition law sector. For example, Federal Trade Commission Chair Lina Khan previously critiqued the antitrust laws, arguing that factors such as workers' wages can also indicate anti-competitive behavior—thus promoting a stakeholder-capitalism concept.18
The administration can begin promoting stakeholder capitalism and benefit corporations through the US Department of Commerce (the DOC). As discussed below, the DOC could enforce the trade remedies laws in ways that incentivize and support benefit corporations and stakeholder capitalism businesses.
Ultimately, however, trade remedies laws conform to WTO agreements, which were written with conventional business models in mind and were intended to be applied uniformly across all member countries.
If individual WTO member countries seek to incentivize benefit corporations on their own, without amending the WTO agreements, the results might be less than ideal. It is not difficult to imagine that an individual WTO member country might incentivize and protect benefit corporations only when they are part of the country's domestic industry, but ignore or exploit benefit corporations when they are part of a foreign industry in a dispute.
1 Friedman"s article "A Friedman Doctrine: The Social Responsibility of Business is to Increase Its Profits," was published September 13, 1970 in The New York Time. However, others have argued that Friedman‘s article was not a singular launching pad for shareholder capitalism. See https://corpgov.law.harvard.edu/2020/04/16/stop-blaming-milton-friedman.
2 https://www.businessroundtable.org/business-roundtable-redefines-the-purpose-of-a-corporation-to-promote-an-economy-that-serves-all-americans.
3 https://www.weforum.org/press/2020/01/stakeholder-capitalism-a-manifesto-for-a-cohesive-and-sustainable-world.
4 Id.
5 See https://bthechange.com/marketing-myths-the-truth-behind-social-purpose-brand-campaigns-8f84dec6741d.
6 See https://www.nytimes.com/2019/10/01/smarter-living/sustainabile-shopping-conscious-consumer.html.
7 See https://www.investor.gov/introduction-investing/investing-basics/glossary/environmental-social-and-governance-esg-investing
8 See https://www.businessinsider.com/companies-that-give-back.
9 See https://www.ldc.com/sustainability/our-approach.
10 See UN Guiding Principles on Business and Human Rights.
11 See our recent reporting on this issue.
12 A list of states with benefit corporation legislation. Further information on benefit corporations in other countries here.
13 See https://nonprofithub.org/starting-a-nonprofit/jargon-free-guide-l3c.
14 See https://bcorporation.net
15 Id.
16 See An Urgent Call to Biden-Harris Administration: Create White House Initiative on Inclusive Economic Growth.
17 https://www.fastcompany.com/90586468/ceos-if-you-really-believe-in-stakeholder-capitalism-now-is-your-chance-to-make-it-real.
18 See https://www.theatlantic.com/magazine/archive/2018/07/lina-khan-antitrust/561743/.
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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
View full image: Countries with benefit corporation legal structures (PDF)
View full image: US jurisdictions with benefit corporation legal structures (PDF)
