Making it Easier for Directors to 'Do the Right Thing'?

Harvard Business Law Review, Vol. 4, P. 235, 2014

U of Penn, Inst for Law & Econ Research Paper No. 14-41

21 Pages Posted: 18 Dec 2014

See all articles by Leo E. Strine

Leo E. Strine

Government of the State of Delaware - Supreme Court of Delaware; Harvard Law School; University of Pennsylvania Law School

Date Written: 2014

Abstract

Some scholars argue that managers should take constituencies other than stockholders into account when running a corporation, and refuse to put short-term profit for stockholders over the best interests of the corporation’s employees, consumers, and communities, as well as the environment and society generally. In other words, they argue that managers should “do the right thing,” while ignoring that in the current corporate accountability structure, stockholders are the only constituency given any enforceable rights, and thus are the only one with substantial influence over managers. Few commentators have proposed real solutions that would give corporate managers more ability and greater incentives to consider the interests of other constituencies.

This Article posits that benefit corporation statutes have the potential to change the accountability structure within which managers operate. These statutes create incremental reform that puts actual power behind the idea that corporations should “do the right thing.” Certain provisions of the Delaware benefit corporation statute are discussed as an example of how these statutes can create a meaningful shift in the balance of power that will in fact give corporate managers more ability to and impose upon them an enforceable duty to “do the right thing.”

But this Article acknowledges that several important questions must be answered to determine whether benefit corporation statutes will have the durable, systemic effect desired. First, the initial wave of entrepreneurs who form benefit corporations must demonstrate a genuine commitment to social responsibility to preserve the credibility of the movement. Second, because the benefit corporation model relies on stockholders to enforce the duties to other constituencies, socially responsible investment funds must be willing to vote their long-term consciences instead of cashing in for short-term gains. To that end, it is crucial that benefit corporations show that doing things “the right way” will be profitable in the long run. Third, benefit corporations must pass the “going public” test. Finally, subsidiaries that are governed as benefit corporations must honor their commitments and grow successfully, if the movement is to grow to scale.

Keywords: Law and economics, corporate governance, social responsibility, stakeholders, benefit corporations, mergers and acquisitions, M&A, Delaware corporation law, social entrepreneurship, sustainability, return on investment, profitability

JEL Classification: G38, G39, K22, L21, L31, M14

Suggested Citation

Strine, Leo E., Making it Easier for Directors to 'Do the Right Thing'? (2014). Harvard Business Law Review, Vol. 4, P. 235, 2014; U of Penn, Inst for Law & Econ Research Paper No. 14-41. Available at SSRN: https://ssrn.com/abstract=2539098

Leo E. Strine (Contact Author)

Government of the State of Delaware - Supreme Court of Delaware ( email )

820 N. French Street
P.O. Box 1997
Wilmington, DE 19801
United States

Harvard Law School ( email )

1563 Massachusetts Ave
Cambridge, MA 02138
United States

University of Pennsylvania Law School ( email )

3501 Sansom Street
Philadelphia, PA 19104
United States

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