Risk & Responsibility

New corporate form lets companies pursue sustainability with less chance of backlash

In January, the California legislature created a new kind of company: the Flexible Purpose Corporation. This is the latest effort to create a corporation targeting social purposes alongside shareholder value. The traditional corporate form does not prevent companies from pursuing social goals; the corporate "business judgment rule" allows boards and managers to weigh environmental and social factors when considering shareholder interests. In practice, however, those factors are often put on the back burner due to concerns about short-term results and shareholder lawsuits.

"Most of the incentives run counter to looking ahead to the long term or doing anything that could jeopardize today's bottom line," says Morrison & Foerster partner Susan Mac Cormac, who co-chaired the group that formulated the new legislation. Typically, too much emphasis on social issues that does not translate into improved financial performance is seen as risky—and avoided.

FPCs are required to identify social and/or environmental purposes in their charters, pursue them, and report annually on progress. "The premise is that management agrees with shareholders on one or more social purposes. They have a fiduciary duty to them," she explains. As a result, directors and management are largely protected from liability when they make these decisions.

Existing corporations can merge into or convert into an FPC with approval of at least two-thirds of shareholders. "It takes time for corporations to change, but we may not have a lot of time left to meet our social and environment challenges," says Mac Cormac. "The hope is that this will help speed things up.

New Forms for New Challenges

Business is playing a growing role in addressing issues like the environment, social problems, and resource usage. Some companies have "bent" the traditional corporate form to include sustainability as a goal. But that approach often has limited success, and it can create legal risks for management and board members. Thus, over the past decade, new types of corporate forms have emerged aimed at balancing the traditional focus on profits and shareholders with the new mandates for social and environmental action.

Rethinking Responsibilities

Over several decades, corporate responsibility has moved from theories and manifestos to government policies, global conferences, and a plethora of efforts by corporations...