The Industrial Revolution led to an unprecedented rise in economic activity as businesses leveraged new technologies and manufacturing processes. The U.S. GDP, the average standard of living, and even the population size grew rapidly between 1760 and 1840. But this era saw one other innovation that would forever alter the business-society relationship: the large-scale adoption of incorporation.
The word “corporation” has etymological roots with the Latin word corpus, meaning body, thus the term itself gives businesses a human form. Incorporation — the legal act of forming a corporate entity — established businesses as persons with their own legal rights.
Businesses in the Industrial revolution grew quickly, but they needed capital to fuel that rapid expansion. Incorporation created a new company structure that allowed businesses to attract investors as company shareholders, giving companies access to outside capital.
But adding shareholders into the mix meant businesses were now bound to the wants of their investors. So many companies began limiting the liability of shareholders. By doing so, business managers were free to take risks that encouraged innovation and entrepreneurship, but in some cases, it also meant they could conduct destructive business practices with little worry of reprehension.
Incorporation narrowed the scope of business from then on; the great economist Milton Friedman held that since business managers legally are agents of the shareholders, to do anything other than to maximize profits would essentially be stealing from them. There is even a case law, eBay v. Newmark, in which shareholders sued managers for not maximizing profits. Shareholders can also vote to terminate managers who do not uphold their fiduciary duties. Considering these systemic conditions, a strictly-monetary incentive structure can lead to the destruction of our natural environment, a record-high wage gap, and other consequences that benefit the interests of the corporation in the short term at the expense of others. Greed is rewarded while goodness can be punishable.
The entire concept of “corporate personhood” ushered in decades of accumulating wealth and power used to influence Justices and members of Congress. Corporations today are granted “rights” that embolden them to impede upon the rights of ordinary citizens. For example, in Citizens United v. FEC, the Supreme Court ruled that corporate dollars used to persuade politicians are protected as “free speech,” which corporations exploited in order to flood our legislative branch and regulatory agencies with lobbyists peddling the interests of their businesses.
American citizens fed up with this corporatocracy are presented with two different paths of systemic change — the path of revolution or the path of renaissance. On one hand, revolution is represented by extrinsic forces of change toppling one institution to prop up another. Conflict is inherent. On the other hand, renaissance is an intrinsic and internal force of change, in which these “corporate persons” adopt more sustainable business practices of their own volition and by the will of the shareholders.
Shareholder activism is an intrinsic force of change. It can mold corporations to serve the interests of all stakeholders, including our Earth’s ecosystems. In the past couple of years, many shareholder activists have advocated for the adoption of public benefit corporations (PBCs), a new type of corporate entity that requires the board of directors to create value for the planet and the greater community, in addition to seeking profits.
In 2020, Delaware — by far the most popular state to incorporate businesses — made it easier for an existing corporation to become a PBC by lowering the required shareholder vote from a two-thirds to a simple majority. Shortly after, Veeva Systems and United Therapeutics became the first two public companies to convert from C-Corps into public benefit corporations. By making these changes, Veeva Systems and United Therapeutics, codified into their corporate governing documents a steadfast commitment to social and environmental responsibility. Now, their decisions are made in the context of the triple bottom line, forever imbuing these “corporate persons” with a stronger ethical and moral code.
Shareholder activists’ co-opting of the public benefit corporation legal structure is a relatively new tactic, and we have yet to see the full extent of its effectiveness, but it is one strategy in which changing a corporation’s identity could change its motivations for the better. Holding similar goals, the shareholder activism and PBC movements can combine forces to achieve greater awareness and impact — a coalition of intrinsic forces of change, reimagining the purpose of doing business, and turning corporations into good people.
The views expressed are those of the author at the time of writing, are not necessarily those of the firm as a whole and may be subject to change. The information contained in this advertisement is for informational purposes and should not be regarded as an offer to sell or a solicitation of an offer to buy any. It does not constitute a recommendation or consider the particular investment objectives, financial conditions, or needs of specific investors. Investing involves risk, including the loss of principal. Past performance is not indicative or a guarantee of future performance. We do not provide tax, accounting, or legal advice to our clients, and all investors are advised to consult with their tax, accounting, or legal advisers regarding any potential investment. The information and any opinions contained in this advertisement have been obtained from sources that we consider reliable, but we do not represent such information and opinions are accurate or complete, and thus should not be relied upon as such. This is particularly true during periods of rapidly changing market conditions. Securities offered through Fennel Financials, LLC. Member FINRA SIPC.
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‘Tis the season — the season where some of the largest public companies have their annual general meeting (AGM) and shareholders get to vote on important business decisions.
Let's take a look back at some of the things that happened during last year's AGM season.