Loosening Shareholder Primacy’s Grip on Environmental, Social, Governance (“ESG”) Factors: Benefit Corporations Offer Increased Latitude in Decision-Making for ESG-Motivated Directors
By Matthew Quandt
ABSTRACT
The longstanding view that corporations exist for the sole purpose of delivering profits to their shareholders has come under increased scrutiny in recent years. Critics of shareholder primacy have elevated considerations of environmental, social, and governance factors (ESG), and lauded companies that engage in strong corporate social responsibility initiatives. Legislators have responded to this recent shift of opinion by creating the “public benefit corporation” (PBC) entity form in both Delaware and 34 other states. This “hybrid” organizational form permits directors to consider multiple constituencies in their decision-making and pursue two corporate purposes simultaneously: the traditional pecuniary motive of returning profit to shareholders, as well as additional “public benefits” of their specification, which may be nonpecuniary.
This Note focuses on Delaware’s PBC statute and seeks to disprove the theory that directors who choose that entity form and consider nonpecuniary corporate purposes and constituencies expose their companies to increased risk of liability. Although many traditional corporations have hesitated to convert to the PBC entity form, the characteristics of the PBC form that cause their skepticism actually serve to their benefit. PBCs provide directors increased latitude to consider and promote environmental, social, and governance goals in corporate decision-making, both in ordinary-course-of-business decisions as well as decisions related to change of control transactions. Doing business as a PBC also poses no legal risks materially different than those inherent to traditional corporations. For these reasons, directors of traditional corporations with ESG motivations should more seriously consider the PBC entity form.