The Future or Fancy? An Empirical Study of Public Benefit Corporations

72 Pages Posted: 11 Aug 2019 Last revised: 24 Apr 2020

See all articles by Michael B. Dorff

Michael B. Dorff

Southwestern Law School

James Hicks

University of California, Berkeley - School of Law; University of California, Berkeley - Berkeley Center for Law, Business and the Economy

Steven Davidoff Solomon

University of California, Berkeley - School of Law; University of California, Berkeley - Berkeley Center for Law, Business and the Economy; European Corporate Governance Institute (ECGI)

Date Written: Feburary 4, 2020

Abstract

The public benefit corporation (“PBC”) is one of the most hyped developments in corporate law, due to the PBC’s unique social purpose. Unlike the traditional corporation, directors of PBCs are required under their fiduciary duties to consider the impact of their decisions on a range of stakeholders and communities. This new form is hailed by many as a framework for a reformed capitalism. Critics, on the other hand, have assailed PBCs as unworkable—at best allowing corporations to “greenwash,” providing a thin disguise for ordinary corporate profit-seeking behavior.

What has been lacking in this debate is evidence about whether and how the new form is being adopted. We fill this gap with an empirical study of early-stage investment in PBCs. Early-stage investment, consisting of venture capital and similar funds, presents an interesting test case for PBC funding, because these investors have profit-maximizing incentives and fiduciary duties of their own. Using our novel dataset, we can discern whether for-profit investment is occurring in PBCs, and if so, whether it is different in kind from ordinary early stage investment.

We find that PBCs are receiving investment at significant rates, and that funding is coming from typical sources of venture capital—including traditional, profit-seeking VC firms. We also find that VC firms are investing in more consumer-facing industries, as well as investing smaller amounts than traditional investments at the same stage, raising concerns about greenwashing. While the ultimate arc of the PBC remains uncertain, our results show that it is gaining acceptance as an investment that can earn an acceptable rate of return—though, as we argue, the PBC status itself may be a secondary factor in VCs’ decisions.

We use these results to develop a theory of future PBC development, which asserts that in the medium term, investment in PBCs is likely to remain siloed in smaller, newly formed firms. We conclude that widespread adoption of the form will take time, as network effects build and experience with the form becomes embedded within the entrepreneurial and legal ecosystem. The PBC is not a failure. But it is in its infancy, and any full embrace will take a significant period of time.

Keywords: Public Benefit Corporations, Venture Capital, For-Profit Investment

JEL Classification: K20, K22, G34

Suggested Citation

Dorff, Michael B. and Hicks, James and Davidoff Solomon, Steven, The Future or Fancy? An Empirical Study of Public Benefit Corporations (Feburary 4, 2020). Harvard Business Law Review, Forthcoming, European Corporate Governance Institute - Law Working Paper, 495/2020, Southwestern Law School Research Paper No. 2019/10, Available at SSRN: https://ssrn.com/abstract=3433772 or http://dx.doi.org/10.2139/ssrn.3433772

Michael B. Dorff

Southwestern Law School ( email )

3050 Wilshire Blvd.
Los Angeles, CA 90010
United States

James Hicks

University of California, Berkeley - School of Law ( email )

215 Boalt Hall
Berkeley, CA 94720-7200
United States

University of California, Berkeley - Berkeley Center for Law, Business and the Economy ( email )

Berkeley, CA 94720-7200

Steven Davidoff Solomon (Contact Author)

University of California, Berkeley - School of Law ( email )

215 Boalt Hall
Berkeley, CA 94720-7200
United States

University of California, Berkeley - Berkeley Center for Law, Business and the Economy ( email )

Berkeley, CA 94720-7200

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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