Substance over Symbolism: Do We Need Benefit Corporation Laws?

In a recent article published in the Minnesota Law Review (Headnotes), I argue that benefit corporation laws, while increasingly popular as mechanisms to integrate societal and environmental objectives into business operations, are largely unnecessary and potentially counterproductive within the existing legal framework. Corporate America is increasingly embracing environmental, social, and governance (ESG) objectives alongside profit-making. This trend has sparked the adoption of benefit corporation legislation across numerous states, creating a new corporate form that explicitly allows directors to pursue public benefits alongside profits. However, my analysis reveals that such legislation not only duplicates existing legal flexibility but may also yield negative unintended consequences.

The Myth of Shareholder Primacy

A common justification for benefit corporation laws is that traditional corporate law requires directors to prioritize shareholder wealth maximization. This is a misconception. Cases often cited to support this view, such as Dodge v. Ford and Revlon, do not establish an invariable legal requirement to maximize shareholder wealth. The business judgment rule typically protects directors' decisions to consider non-shareholder interests, as long as there is a rational connection to long-term shareholder value.

Moreover, thirty-two states have adopted constituency statutes explicitly allowing directors to consider various stakeholders' interests. This demonstrates that conventional corporate law already provides ample flexibility for pursuing social objectives without needing specialized legislation.

Illusory Protections

Benefit corporation statutes suffer from vague language and weak enforcement mechanisms. The requirement to generate a ‘material positive impact on society and the environment’ lacks clear definition or metrics. The sole enforcement mechanism—benefit enforcement proceedings—is limited to shareholders who face inherent conflicts of interest. The mandated benefit reports lack rigorous standards or penalties for misrepresentation.

Delaware's public benefit corporation statute particularly demonstrates these shortcomings, not requiring benefit reports to be made public or assessed against third-party standards. This suggests these laws create a state-sponsored "benefit" designation without meaningful accountability.

Unintended Consequences

Perhaps most concerning, benefit corporation laws may reinforce the false notion that traditional corporations cannot prioritize social benefits. This could chill corporate social responsibility efforts across the broader business landscape. The statutes also create legal uncertainty that may increase director liability while weakening shareholder rights.

The Push Behind the Laws

The drive for benefit corporation legislation appears more political than practical. States adopt these laws to appear progressive while requiring minimal governmental investment. B Lab, the primary advocate for these laws, raises questions about potential conflicts between its nonprofit mission and profit-oriented activities through various marketing partnerships.

Conclusion

Rather than adopting flawed benefit corporation legislation, states should focus on clarifying the substantial flexibility that already exists under traditional corporate law. The combination of conventional corporate forms and private certification systems like B Corp provides sufficient tools for businesses seeking to pursue profits with purpose. Creating a new corporate form may simply add confusion while failing to enhance accountability or social impact.

Cheng-chi “Kirin” Chang (張正麒) is the Associate Director & Research Fellow of the AI and the Future of Work Program at Emory University School of Law.

The full paper is available here.