There’s no neutral position

Every company has a purpose – whether its founders and employees know it or not. Purpose is not a mission statement or a marketing slogan. It’s the specific legal obligation that tells companies what they have to maximize and optimize for. 

In the US, every corporation has a legal charter in the form of a founding document filed with a state government. This charter declares what the company exists to do. That, rather than whatever vision or ideal it was founded on, is its purpose. 

Many people claim that today’s standard charters are neutral on the question of purpose. This is understandable, as most corporate charters these days use a standard formulation: the corporation exists to “conduct or promote any lawful business or purposes.”

That sounds pretty open-­ended, right? 

But there is no neutral position. Every organization serves something. And in today’s world, this “neutral” charter is widely interpreted to mean that the company is obligated to maximize returns for shareholders. 

This way of thinking, in which the board’s role transforms from “defenders of the corporate bastion to auctioneers charged with getting the best price for the stockholders at a sale of the company” – also known as shareholder primacy – is commonly referred to as the Revlon doctrine. 

Over the course of the 1980s, Delaware courts enacted into law the idea that the sole responsibility of a corporation is to increase its profits. Cases like Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc. treated the corporation not as an entity with a mission that needs to be tended to and maintained but merely as a financial instrument for generating returns. 

This week, the Delaware court affirmed for the first time that incorporating as Public Benefit Corporations (PBCs) negates the Revlon doctrine. Noting that focus on share price “would be inconsistent with the public benefit corporation statute’s requirement that directors consider and balance other interests against stockholder pecuniary interests” it concludes that “Revlon does not impose a standard of conduct on public benefit corporation directors”.

As a proponent of PBC status as one of many ways to counter shareholder primacy, this news is very exciting. 

It also sparked some great ideas and requests in the Incorruptible Community. Hoping to help the discussion spread even further, community member Jorge Reyna, CEO of Frilly, which is a PBC, said: “This is great news for sure. I'd love to have resources written by voices of authority …regarding the PBC structure to send to fellow founders and potential investors to educate them on what it is.” If Jorge has these questions, I bet others do, too. This legal implementation guide was written in collaboration with Virgil, a tech-enabled law firm I co-founded that works frequently with companies looking to implement Incorruptible principles into their structure (among other things). 

Jorge also noted that “It seems that because the Revlon Doctrine has been the law of the land for the last 40 years, people look at alternatives with suspicion….Having a list of articles that focus on dispelling the myths and misconceptions would be awesome.” Two to get started: The Shareholder Value Myth from Lynn A Stout and Rethinking Shareholder Primacy in the New Innovation Economy from Center for Strategic and International Studies. 

Community member Grant Millin suggested a great catch phrase for the work that can be done by incorporating as a PBC: “Maximize Sustainable Value Creation.” He added, “If the SVC side of the market is better at winning market share; the investors don’t have much of a laggard logic.”

Finally, founder Patty Simonton addressed the investor aspect: “A sustainable, resilient future that does not put shareholder primacy first will require a different mindset from funders across the board.” 

If this type of conversation is interesting to you, you’re invited to join the free Incorruptible Community to connect with people committed to building organizations that last, including founders, executives, investors, employees, and customers. 

Hope to see you there,

Eric