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California’s Bold Move to Legitimize Sustainable Business
A bill introduced in California’s state Senate last week holds enormous potential to give sustainable business a push by making it — well, legal.
Under current law in California and most other states, companies can be sued by their shareholders or investors for taking environmental or social measures that negatively affect shareholders’ financial returns. The proposed bill would enable a new form of for-profit corporation, encouraging and expressly permitting companies to pursue other things besides simply making money.
This is no small matter. The legal issue of fiduciary responsibility has long been seen as a barrier to companies taking more proactive social and environmental measures. In many cases, it has given companies a fig leaf to avoid taking substantive measures to, say, clean up pollution or avoid sourcing from sweatshops. Indeed, the requirement for companies to put profits above all else has been blamed for much of society’s ills — at least the kind allegedly propagated by business. And the alternatives have been a cold cup of tea: to become a nonprofit organization, a hybrid model championed by social entrepreneurs, or some other legal entity frowned upon by capital markets. That pretty much guarantees that these "good" companies are destined to remain small.
For years, groups of socially responsible investors, social and environmental activists, and others have tried to change this state of affairs, with little success. Maryland and Vermont recently enacted measures to allow “for-benefit” companies, such as those advocated by the nonprofit group B Lab, and a few other states are considering them. However well-intentioned, these laws are limited in scope in that they focus principally on smaller, privately held firms.
Getting large publicly held companies to change has been all but impossible, which is why SB 201, the Corporate Flexibility Act of 2011 (download - pdf), introduced in California’s State Senate on February 8, is of such significance. It would authorize and regulate the formation and operation of a new form of corporate entity known as a “flexible purpose corporation.”
Under SB 201, “Any company establishing in California will be permitted to negotiate to include a social and environmental mission that is given equal weight, perhaps even greater weight, than profits,” Susan H. Mac Cormac, who co-led a working group that helped draft the bill, told me recently. “We have given additional protection to boards and management if they do that. We also have a metric for shareholders to enforce the social and environmental mission, just the same as shareholder value.” It’s a model, she says, that can be used by both public and private companies.
SB 201 differs from the “for-benefit” statutes in at least one significant way: It doesn’t proscribe what a company must do. The Maryland and Vermont laws, in contrast, spell out the requirements of a “benefit corporation” — a checklist that hews largely to B Labs’ model for sustainable business.
There are good arguments for both approaches. On the one hand, a set of criteria sets a standard for what a company must do to be “beneficial.” On the other, it lets legislators and regulators set those criteria, a process that often ends up muddled or worse. Unfortunately, traditional California corporations are not able to amend their articles to “embed” environmental and social criteria without considerable risk, thereby creating an issue for California corporations seeking “B Corporation” status.
Cormac, who co-chairs the 550-lawyer Business Department as well as the Cleantech Group at the law firm Morrison & Foerster, has been working on these issues for the better part of a decade. As co-chair of the California Working Group for New Corporate Forms, she and a small team spent nearly 18 months deliberating and drafting this proposed new division of the California Corporations Code. Along the way, the group solicited comments from an advisory committee comprised of members of the California legal and communities.
"We have the conservative folks behind us from the chamber of commerce," she says. "We have a lot of support and have spent a lot of time working with folks to get it right."
Cormac admits that big corporations aren’t likely to quickly adopt this new legal form should it become law. “The companies that could easily do this are the ones where there’s a really strong link between their profitability and their sustainability — the Methods or Revolution Foods of the world,” she says.
Even if SB 201 passes, it will be just one step in a longer journey to transform mainstream business to pursue environmental and social goals as aggressively as they do financial ones. To gain traction, these companies will need the support — or the demands — of institutional investors, such as large pension funds, embracing flexible purpose corporations. It will take leadership companies, government agencies, universities and other large buyers of goods and services to adopt policies giving procurement preference to these companies. And it may well take preferential tax treatment for flexible purpose corporations, or other policy mechanisms, such as fast-track permitting or reduced oversight.
All of which is only one part of the puzzle, says Cormac. “I’ve looked at every part of the system, and it’s not just corporate structure that ties it to profitability. It’s executive compensation with stock options. It’s the analysts on Wall Street and the quarterly reports, and a whole confluence of factors that lead to this unholy emphasis on shareholder value.”
I asked Cormac how she and her law firm would benefit if SB 201 became law. After all, she heads the corporate division of one of America’s larger law firms.
“This is pro bono,” she says. “We have no skin in this game.” To back it up, she explains that she is working working with law schools at Stanford, Berkeley, and UCLA to establish free legal help for companies that want to set up flexible purpose corporations. "This is a passion, not a business opportunity."
For now, it’s all about getting this bill passed — it needs to pass the gauntlet of two committees, then the full Senate, then the State Assembly and getting Governor Jerry Brown to sign it. It’s looking good, says Cormac, but we’ve all seen “sure things” blow up at the last minute.
This will take everyone’s best efforts — letters of support and all of the other usual tools of the trade. (You can send letters to Senator Mark DeSaulnier, State Capitol, Room 2054, Sacramento, CA 95814.) And it will take mainstream companies and investors standing up to be counted.
Without such a law, we’ll be stuck with business as usual — companies hamstrung by their legal obligation to put shareholders’ financial returns above all. But if bellwether California can get this passed, it will make it legally possible, once and for all, for companies to truly integrate the triple bottom line.
February 14, 2011 in Business Practices, Money Matters | Permalink | Comments (7)
The State of Green Business 2011
Today, we publish our fourth State of Green Business report, GreenBiz.com's annual effort to take the pulse of what and how the world of sustainable business is doing.
It's an interesting time to take this accounting, to say the least. In society, environmental issues seem to have faded from view, at least in the U.S., thanks in large part to the recession. "Saving the earth" has taken a back seat to simply saving the day. The politics of the moment seem to have made clean air, clean water, biodiversity, and planetary survival a controversial thing — something we can afford only in "good times." Consumers continue to sit largely on the sidelines, taking small (but, for them, meaningful) actions, like recycling, employing reusable shopping bags, and buying energy-efficient products.
And climate change, that inconvenient truth, has conveniently faded from view as an issue of national import.
It's a different story in the business world. In fact, it's hard to find a big company these days that isn't engaged in environmental issues in a meaningful way. Indeed, a dramatic shift is occurring in business: Companies are thinking bigger and longer term about sustainability — a sea change from their otherwise notoriously incremental, short-term mindset. And even during these challenging economic times, many have doubled down on their sustainability activities and commitments.
Exactly how and why is the story we tell in the State of Green Business 2011, a free downloadable report. As in the past, we identify ten key trends and measure the greening of the U.S. economy through 20 indicators, from carbon intensity to cleantech investing to corporate reporting.
The verdict? As always, it's mixed. Of the 20 indicators, 7 were found to be "swimming" — that is, making progress; 2 are deemed "sinking" — losing ground; and the other 11 are "treading" — just hanging on.
The bigger picture, though, is more positive. From the introduction:
During 2010, we saw a steady march of progress, with some of the world’s biggest companies and brands putting a stake in the ground in the name of environmental (and sometimes social) sustainability. Some are companies that hadn’t previously been visible in these ways. Others, it turned out, had been quietly taking action, walking more than talking, only recently discovering that modesty is no longer an asset in a world that increasingly demands transparency. Still others have only recently elevated sustainability to a level of importance, hiring their first senior executives to oversee and coordinate sustainability commitments and goals.
Some of the areas we found encouraging were energy efficiency (it now takes less than half the energy to produce a dollar of GDP than in 1970); green office space (the square footage of commercial green buildings continues to grow, a bright spot in an otherwise dismal real estate market); packaging intensity (the amount of packaging needed to produce a dollar of GDP has declined steadily since we began measuring it five years ago); and paper (every year, we use less paper per dollar of GDP and recycle more of it, nearing the point where all the paper that can reasonably be recycled is being collected).
But it's not all good news. Electronic waste recycling continues to grow, but so does the amount of e-waste coming into the waste stream); carbon intensity (the amount of energy-related greenhouse gases produced per dollar of GDP went up last year after dropping steadily); organic agriculture (it's growing, but still represents less than 1 percent of all U.S. cropland). On many of our indicators there was only a hint of progress, far too little to make a difference.
As always, a mixed bag. That's the way of the green business world.
What's encouraging about this year's report is the momentum we see, embodied in the stories my colleagues at GreenBiz.com bring every business day. While not every story is earth-shattering, the corporate commitments and achievements continue to grow every year in both size and scope. During 2010, for example, we saw major corporate commitments from Procter & Gamble and Unilever; major commitments to buy electric vehicles by GE and other companies; a new wave of water footprint assessments by several large companies; zero-waste accomplishments by GM, Kraft, and others; a new generation of green chemistry coming from Dow, BASF, and others; plant-based plastics being used by several major consumer packaged goods companies.
I could go on (and on). These aren't stories you would have seen two or three years ago, and that's the point. The state of green business is moving forward — sometimes way too slowly, but there's progress at every turn.
That's our story. Please read the report and let me know if you agree.
February 1, 2011 in Business Practices, State of the Art | Permalink | Comments (1)
