

Patagonia Tests New Sustainable Legal Status - wtvanhest
http://www.bloomberg.com/news/2012-01-04/patagonia-road-tests-new-sustainability-legal-status.html

======
_delirium
Although it's interesting to formalize it, it's never really been the case
that directors of normal companies are legally required to maximize profits
above all else; they're generally given extremely large leeway to run the
company as they see fit, as long as they're up-front with investors about what
they're doing and why, and aren't engaged in shady things like trying to
benefit insider shareholders at the expense of external shareholders. More:
<http://news.ycombinator.com/item?id=3227980>

This probably will still help, though, because many directors of normal
corporations _believe_ they have stronger profit-maximizing duties than courts
have actually ruled that they do, and they're in any case worried about even
unsuccessful shareholder lawsuits.

~~~
sunahsuh
This Forbes blog post provides some context regarding the culture of publicly
traded companies, earnings guidance and "maximizing shareholder value":
[http://www.forbes.com/sites/stevedenning/2011/11/28/maximizi...](http://www.forbes.com/sites/stevedenning/2011/11/28/maximizing-
shareholder-value-the-dumbest-idea-in-the-world/)

This is prevailing practice for publicly traded companies -- I feel like these
Benefit and Flexible Purpose Corps are more about allowing companies to be
publicly traded without having to play this game through setting social
expectations than through real structural differences. (To be taken with a
grain of salt as I'm not a lawyer or a financial professional, just someone
that's been an individual investor.)

~~~
ryana
>> I feel like these Benefit and Flexible Purpose Corps are more about
allowing companies to be publicly traded without having to play this game
through setting social expectations than through real structural differences.

As someone who works at what was, until Patagonia, probably the largest B-Corp
around, I'll comment on this.

Yes the idea is that with these legal designations and social/environmental
charters written in to the company by-laws it will allow for, someday, a
B-Corp to go public and not have to change the way it operates. The oft-cited
example of "what went wrong and why we need this" is Ben & Jerry's.

When Ben & Jerry's was bought by Unilever in 2000 the new ownership shut down
a handful of their social programs and stopped sourcing products from local
farmers, among other changes. Other companies were concerned about that
happening to them in the future, and thus B-Labs.

------
xanados
There are actually several arguments against these so-called "stakeholder
society" initiatives that most people don't consider at the outset. For
example:

1\. These concepts generally come with weaker governance for company managers,
allowing them greater latitude to act inefficiently in general. By contrast
with maximizing shareholder value, managers can undertake almost any program
under some pretense or justification, ranging from excessive empire building,
to justifying sweetheart deals with friends at greater cost citing
"environmental" concerns. This doesn't matter for Patagonia because it's
family-owned, but this would be a huge problem with making this a widespread
practice in the Fortune 500.

2\. Widespread use represents a de facto tax on businesses through less
efficient operations, but without the control of the political process to
direct it. Even if you aren't in favor of governmental interference, it is
generally better for organizations that are going to have charitable aims to
be directly accountable, whether via the democratic process or the donation
process.

3\. Returns to shareholders, in light of the returns that go to other
stakeholders, are reduced, thus potentially reducing the amount of financing
available from capital providers.

So it doesn't really matter if Patagonia does this, but doing it on an
economy-wide scale would potentially be a big mistake.

~~~
lkrubner
These remarks really need to be compared to the situation in Germany. A large
degree of stakeholder democracy is enforced by law. In Germany, any company
with more than 50 employees must allow workers some representation on issues
of hiring and firing, and any company with over 300 employees must provide
funds so that at least one worker can work full-time on workers concerns.
Representation on the Board, by workers, is common. And the result seems to be
a highly efficient system.

Compare that to the American experience, in which fraud and abuse has been
widespread: Enron, Worldcom, the S&L Bailouts, CountryWide, Wachovia, etc.

As programmers, we know that bad code can be written in any language, and
clearly fraud can be committed under any legal system. Still, we also know
that each language tends to encourage certain habits, while discouraging
certain other habits. Obviously one can find examples of fraud in Germany and
efficient operations in the USA. However, it is striking how few scandals
ripple through the German business community, and how very competitive German
manufacturing firms are.

Given the comparison of Germany to the USA, I'd be cautious about dismissing
systems of stakeholder democracy.

~~~
xanados
The system in Germany is different in that it names a particular set of
stakeholders, namely workers, and gives them a formal place in governance
controls. To my knowledge, German managers do not have to take into account
the objectives of suppliers, the local economy, or society at large in their
decision making. While it's similar, it actually addresses the first point I
made, as compared with the California law under discussion.

German companies have much more concentrated share ownership, which gives them
an advantage for corporate governance that perhaps makes scandals less likely.
Also, they are a product of the German culture which is very different from
American culture.

------
jonstjohn
As a long-time admirer of Patagonia and other companies that incorporate
sustainability and social responsibility into their businesses, it is great to
see this happening. If nothing else, it draws attention to alternative
business goals and provides some degree of legal protection to certain public
companies.

------
gerggerg
_"Under current law, shareholders can sue corporate boards for not maximizing
profits"_

Wow, I never new that. Granted I know very little of the legal implications of
incorporating, but still. I wasn't expecting it to be so plain. Corporations
have a legal obligation to not care about anything but money. Explains a lot.

~~~
damoncali
It's not that simple. Boards have certain duties to act on behalf of the
corporations, and not their own personal interests. Since concepts like "the
good of humanity" are so vague, and can be interpreted in mutually exclusive
ways, the theory is that those decisions should be made by shareholders with
their own money, not with the company's.

Take a "sweat shop", for example. There is one view that they are exploitative
and that low wages overseas should not be tolerated. There is another view
that those wages generate income in areas of the world where it is greatly
needed. How is a board of directors to decide which view to take? Which
shareholders should they listen to?

So boards have been defined as the people who watch the business for the good
of the business. And they're given great leeway in doing so. (You can't sue
them for making bad business decions, for example - only fraudulent or grossly
negligent ones).

Bundling charity with business is an interesting idea, but I'm not sure it's
better than separating them, or if there isn't an inherent contradiction in
the two when you apply it to large public companies.

After all, profits can always be used to better humanity without the conflicts
I've described _after they've been given to the shareholders_.

I'm a little skeptical that it will change much, but we'll see. It will be
interesting to watch.

~~~
yew
> I'm a little skeptical that it will change much, but we'll see. It will be
> interesting to watch.

Likewise, on both counts.

Though I think it's important to remember, even if this enterprise fails the
state of California is a big enough experimental setting to provide all sorts
of interesting (and possibly even useful) new data.

------
cyrus_
The popular hospitality exchange Couchsurfing recently incorporated as a B
corporation as well (they were a non-profit before.)

<http://www.couchsurfing.org/about.html>

~~~
torontos
They raised ~$8million from Benchmark and Omidyar. It's pretty interesting
that Benchmark Capital invested in a corporation that "is dedicated to
creating public benefit." Not at all surprising to get it from Omidyar, of
course.

[http://techcrunch.com/2011/08/24/couchsurfing-
raises-7-6-m-w...](http://techcrunch.com/2011/08/24/couchsurfing-
raises-7-6-m-will-users-cry-sell-out/)

Will be interesting to see how they monetize

------
BrandonCWhite
I worked on getting the first Benefit Corporation legislation passed in the
United States. Specifically, Maryland was the first state to pass this type of
corporation and a company I co-founded was the first company to change from a
Delaware C Corp status to a Benefit Corporation. You can check my affiliation
out here: [http://brandoncwhite.com/blog/a-new-type-of-company-a-
benefi...](http://brandoncwhite.com/blog/a-new-type-of-company-a-benefit-
corporation/)

There are still a lot of questions and issues around this type of corporation
as has been pointed out. There certainly is a void that will ultimately get
filled through case law at some point in the future. Having said that, I think
it's a step in the right direction for companies that want to add some level
of protection around their "Triple Bottom Line" philosophy. Ben and Jerry said
that has this sort of corporation existed they would not have sold Ben and
Jerry's. But, it does not mean that it's a fit for all companies. The start-up
that I am working on now is not a benefit corporation and we probably will not
become one. Not because we do not want to take into account the aspects of a
triple bottom line, but rather because at this point it's not something at the
core of what we are doing.

Overall, I think it's at least a good option for those that would like to
focus on a triple bottom line. How exactly the law is interpreted will be
interesting to see how it plays out.

------
damoncali
Can someone explain why this is necessary or why a corporation would want to
be put under what I assume (it's tough to tell from the article) additional
legal risk of "benefiting humanity?". Could you not now be sued for "not being
green enough" or worse, not being "good" enough, where "good" is defined by
the shareholders? I don't get it - regular corporations currently have a lot
of flexibility. What does this new form accomplish?

~~~
cyrus_
There is indeed additional legal risk -- shareholders (but not other
stakeholders) can sue for not taking actions that "benefit humanity" as
measured by a required independent audit.

However, this is balanced by the legal protection offered to the company when
it does do something that does not strictly increase its profits.

It comes down to your values though -- if you believe that the most important
thing is to make money while leaving yourself open to the smallest cross-
section of legal liability, that's exactly what a standard corporation is for.
If you believe that your purpose is to build a better world, and you need an
organization with cashflow to do it, you had fewer options in the past. Now
you have two more, at least in California.

~~~
smsm42
So if such corporation would be public and it would oppose, say, SOPA and I
believed SOPA creates great public benefit and owned shares of such
corporation, I could sue it for not promoting the public benefit and actually
force the company to come out and support SOPA? How that makes any sense? And
how the courts would even decide such case - no legal definition of public
benefit exists or even possible?

If you wanted to make profits and to build a better world, what prevented you
from setting a regular company and a charity and have the former donate to the
latter? A lot of people donate millions of dollars this way.

It looks like it's one of those feel-good laws that everybody pats themselves
on the backs about how they promoted public benefit and nobody even thinks
about how it would work or what would be the consequences...

~~~
cyrus_
The nonprofit that is behind the B corporation initiative has this to say
about legal liability:

 _Will the B Corp legal framework create additional liability for our Board of
Directors and officers?_

 _It is the opinion of our attorneys that adopting the B Corp legal framework
to expand the definition of the ‘best interests’ of the corporation should
reduce the liability for Directors and Officers by creating legal protection
(called ‘safe harbor’) for them to take into consideration the interests of
multiple stakeholders when making decisions, particularly when considering
financing and liquidity scenarios. Adopting the B Corp legal framework will,
however, give shareholders additional rights to hold Directors and Officers
accountable for taking into consideration these same interests when making
decisions ‐‐ and that of course is the whole point._

From the FAQ for investors and directors:
[http://www.bcorporation.net/resources/bcorp/documents/FAQs%2...](http://www.bcorporation.net/resources/bcorp/documents/FAQs%20-%20Investors%20and%20Directors4.pdf).

In your particular scenario involving SOPA/PIPA, the company's executives can
straightforwardly claim that they acted in good faith to promote the interests
of the broader business sector that they are a part of, and thus they would
not be liable for their actions.

~~~
smsm42
The thing here is that if they can claim good faith and it is a protection for
them, then the whole setup is meaningless - they could always claim "we
thought it's a good idea" even if shareholders think it's a terrible one.
Public good is a matter of opinion, and anybody can claim any opinion.

If, however, this provision is not toothless and useless, then I don't see how
it can not create additional potential liability. Of course, it can play both
ways - i.e. the management can both claim public good as defense for
controversial actions and be attacked on public good grounds for them. It's
just an additional complication, compounded by absence of any clarity on the
question of what the said good is.

It is telling that your document does not give a clear answer to the question
of additional liability, basically saying "we're reducing liability, no, wait,
we're increasing it and it's a good thing!".

------
JumpCrisscross
It is ironic that we castigate Chinese SOEs for having a dual purpose of
profit maximasiation and seeking the "general welfare of society" (worded
differently in China or Russia) and then commend it here. The structures are,
at least in writing, shockingly similar.

The problem is that generating shareholder value is objective and empirically
validate-able. Having these other systems increased the complexity of the
system - bad - while giving it a dual qualitative raison d'être.

Present structure of a for-profit corporation paired with a non-profit
foundation is less ambiguous.

