As longtime readers of Continuations know, I have been a strong proponent of the Benefit Corporation. I am therefore thrilled that Delaware, which is the home to almost all venture backed corporations, has introduced Benefit Corporation legislation. This will allow companies to charter or recharter in Delaware and add one or more public benefits as goals that are on equal footing with maximizing shareholder value. This is critical for allowing mission driven companies to raise money from private investors and go public without using supervoting stock or other artificial controls to protect their mission.
Previously there were only two choices: be a for profit and put everything in the service of shareholder value or be a not-for profit and be subject to all sorts of restrictions on fundraising, compensation, value creation, etc. Benefit Corporations offer an attractive third way that provides commitment to a mission but still allows the market to operate. It is useful to examine why that is more important today than ever and also why this form is possible today (and would have been much harder if not impossible pre Internet).
Let’s start with why we need mission driven companies now more than ever. The reason is simple: capitalism as currently practiced is failing to address major existing and emerging problems, including damage to the environment and wealth and income inequality arising from the dramatic changes in the labor market. Our governments at the federal, state and local level are largely broke and cannot adequately address these problems either. Yet at the same time there is a glut of private capital that could be put to work. We simply need to create ways for that capital to flow more efficiently to companies that will make a change for the better.
That raises another important question. Why don’t the existing capital markets, especially public markets, accomplish this? Even if you were still a believer in the efficient market hypothesis anything that’s a social externality is not captured by the company providing it and will be underpriced and hence underinvested with the current setup. That’s because in the absence of a credible commitment to the mission there is always an opportunity for short term rent extraction. The Benefit Corporation fixes that problem.
The Internet’s ability to provide a rich information channel is critical in enabling this new form. Historically we had to provide massively condensed information about companies, such as EBITDA, as it was virtually impossible to widely distribute and analyze more detailed information in a timely manner. Much regulation was focused on enforcing the proper way of calculating these summary measures. Of course, as the world got more complex we encountered vast abuses of the ability to manipulate summary measures (cf. Enron). Today, mission oriented companies can provide realtime detailed information about the degree to which they are succeeding both financially and with their mission. With a higher level of transparency multiple independent third parties can help validate this information.
In summary then what Benefit Corporation legislation does is facilitate a market that is badly needed: the market for mission driven companies. For me as an investor that is exciting news.
