By: Judd F. Sneirson*
What is a sustainable corporation and why aren’t there more of them? This Article argues that corporate law’s conventional focus on shareholder profits stifles sustainability efforts inasmuch as sustainable corporations take a broader view of the firm and its goals. The Article also weighs alternatives for increasing the number of sustainable corporations and encouraging corporations of all stripes to act more sustainably. These alternatives include imposing sustainability on corporations, requiring or encouraging sustainability disclosures, and raising awareness that sustainable business practices fully comport with corporate laws and even typically enhance long-term firm value for all of a corporation’s stakeholders.
Sustainable businesses, both corporate and otherwise, seem to be everywhere, trumpeting their bona fides to garner the interest and dollars of consumers and investors. Yet a closer examination of these businesses reveals that their dedication to sustainability is often superficial, driven by and limited to their pursuit of shareholder profits. That is, most mainstream corporations today engage in sustainable business practices only when they appear to create immediate financial benefits for the firm. This Article blames this limitation on corporate law’s conventional focus on shareholder profits and suggests that corporations need not so restrict themselves. In making this argument, this Article addresses three related questions: (1) what is a sustainable corporation, (2) why aren’t there more of them, and (3) what can be done about it?
I. What Is a Sustainable Corporation?
Sustainability, according to its first and best-known definition, denotes the ability to meet current needs without impairing the ability to continue to do so in the future. For a society to be sustainable, it
needs to meet three conditions: its rates of use of renewable resources should not exceed their rates of regeneration; its rates of use of non-renewable resources should not exceed the rate at which sustainable renewable substitutes are developed; and its rates of pollution should not exceed the assimilative capacity of the environment.
The concept of sustainability, originally balancing development with conservation, has since evolved into a broader principle that governments, organizations, and individuals should conduct themselves without impinging on the environment and society, now or in the future.
Applied to the business context, sustainability involves attaining financial goals while simultaneously improving, or at least not worsening, the environment and society in the short or long term. This three-dimensional view of a company’s performance has come to be known as its “triple bottom line”: “the traditional bottom line of financial performance (most often expressed in terms of profits, return on investment . . . , or shareholder value)” plus two additional bottom lines reflecting the business’s environmental and social performance. One commentator prefers the term “triple top line,” taking the more positive view that sustainable businesses should seek to create “financial benefits for the company, natural world benefits, and social benefits for employees and members of the local community.” From whichever perspective, sustainability measures these impacts or benefits over the long term. As a result, a sustainable business takes a view of the firm that is both broader and longer than the typical, conventional focus on short-term financial gains.
A sustainable business should therefore pursue financial goals while at the same time treading as lightly as possible on the earth and its natural resources, supporting the business’s employees and local communities, and developing products, services, and technologies that contribute to larger societal efforts to live more sustainably. This might entail being more than minimally compliant with environmental regulations, more than minimally generous with employees and communities, or paying more for goods and services that are sustainably harvested or produced.
Such efforts might sacrifice profits, at least in the short run in that money that might otherwise be distributed to shareholders as dividends is reinvested in the company, environmental efforts, or employees and communities. But such expenditures often benefit the firm, financially and otherwise, over the long run; indeed, several studies have shown that—particularly in consumer-oriented industries, but in the business-to-business context as well—sustainable business practices tend to pay for themselves and frequently turn a profit.
One means of putting these sustainable business concepts into practice is to seek out areas where the firm’s financial, environmental, and social goals overlap. For example, reductions in energy consumption and waste save on production, fuel, and disposal costs while also improving environmental impact and, in the case of fuel costs, reducing dependence on foreign oil. Firms can also realize “eco-efficiencies” through better design: by designing (or reconfiguring) production systems and products with sustainability in mind, a firm can make better use of manufacturing inputs, use fewer chemicals, create less pollution, make workplaces safer, and benefit financially.
Firms may also use the triple bottom line as an accounting tool. By measuring environmental, social, as well as financial activity over a given period, firms can track and report their performance in each of the triple bottom line areas. In the environmental component, for example, a firm might include its “compliance against [environmental] regulations and other standards; the performance of internal management systems; trends in energy usage, waste production, and recycling; and the use of eco-efficient technologies.” And on the social front, a firm might address “community relations, product safety, training and education initiatives, sponsorship, charitable donations of money and time, and employment of disadvantaged groups.” To the extent that “managers ‘manage what they measure,’” such recordkeeping might impel managers to run their firms in a way that maximizes financial, social, and environmental benefits while minimizing related costs.
Firms may incorporate these sustainability principles in their operations to varying degrees. At one end of the spectrum, a firm may have no sustainability ambitions whatsoever and may in fact be out of compliance with applicable labor and environmental laws and regulations. This first type of firm focuses on profits to the exclusion of all other considerations and may even deliberately violate laws in order to maximize profits. A second, slightly more sustainable firm, complies with applicable laws and perhaps engages in generic corporate philanthropy but does little beyond that. Such firms see “no business case” for going beyond compliance or serving stakeholders’ interests; by bare compliance (and paying taxes), these firms see themselves as fulfilling their societal obligations.
A third type of firm goes beyond bare compliance with applicable social and environmental laws but does so only where it would be profitable. These profit-driven firms may view sustainability and social responsibility primarily as a public relations matter, for particularly in consumer-focused industries social responsibility attracts customers and social irresponsibility repels them. Or these companies may simply want to save resources, reduce waste, achieve production efficiencies, and anticipate changing conditions, regulations, and consumer preferences. While these firms may incorporate environmental, ethical, and social considerations at all levels of their operations and decision making, they only act upon these decisions when it would benefit their financial bottom lines.
A fourth type of firm routinely balances economic, social and environmental considerations and does so not in order to comply with applicable laws or to make a profit. Rather, these firms are motivated to “do good” for their various constituencies and for the planet, while still producing returns for their shareholders. These firms also tend to be more pro-active, partnering with government, suppliers, customers, and others in their industry to together innovate sustainable solutions to environmental and other problems.
At the next level, a fifth type of firm integrates sustainability principles into its strategy and business processes, starting with product or service development, such that the way of doing business is “built in, not bolted on.” For example, companies at this stage may rethink their design and production processes to reduce waste and utilize improved, sustainable, and even reusable materials, and in some cases eliminate the use of harmful materials altogether.
And at the sixth and highest level, sustainability “is fully integrated and embedded in every aspect of the organization, which is committed to contributing to the quality and continuation of life of every being and entity, now and into the future.” Here, companies also redesign or “reengineer” their business models, finances, and markets to identify and root out any underlying causes inconsistent with sustainability and social responsibility.
Aside from a few outliers, however, most businesses limit themselves to the first three of these levels; that is, most firms engage in sustainable business practices, if at all, only to the extent it returns profits. While this might encompass a great deal of sustainable business behavior, and have an enormous impact, this limitation is unfortunate and unnecessary. As the next part of this Article argues, corporate law’s conventional focus on shareholder profits fuels this limitation, stifling corporate efforts toward greater sustainability and perpetuating an overly narrow view of the firm and its purposes.
II. Why Aren’t There More Sustainable Businesses?
Why aren’t there more sustainable businesses and why are mainstream businesses seemingly unable to move beyond a profit focus and deepen their commitments to sustainability? The answer to both of these questions lies in the conventional view in law and business that corporations are to be managed for the sole purpose of maximizing shareholder profits.
This attitude—known as “shareholder primacy”—prioritizes shareholder interests above all other considerations and renders deep commitments to sustainability difficult. According to this view, corporate managers may not sacrifice potential profits to benefit society, the environment, or future generations; rather, firms should aim to maximize shareholder returns and eschew sustainable alternatives that are not profit-maximizing. For example, a firm should incur workplace safety costs only to the extent necessary to comply with applicable laws and regulations, or to the extent such expenditures are otherwise financially justifiable (in that they improve employee morale, attendance, or productivity, or that they result in lower insurance premiums or other corporate outlays). Some profit-maximizing firms may even deliberately violate applicable laws and regulations on the view that any fines or penalties incurred are mere costs of doing business and preferable if outweighed by expected costs of compliance.
Perhaps the most famous expression of the shareholder primacy view appears in Dodge v. Ford Motor Company. There, in rejecting the decision of company founder and majority shareholder Henry Ford to suspend the company’s practice of paying special dividends, the Supreme Court of Michigan wrote:
A business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end. The discretion of directors is to be exercised in the choice of means to attain that end, and does not extend to a change in the end itself, to the reduction of profits, or to the nondistribution of profits among its stockholders in order to devote them to other purposes.
Noted economist Milton Friedman echoed this sentiment some fifty years later, writing that a corporate executive’s responsibility is “to make as much money as possible” for the firm’s shareholders, and that expenditures not tied to shareholder wealth amount to stealing what rightfully belongs to shareholders.
These and similar statements create the impression that shareholder primacy is a corporate-law mandate, a social norm that should be abided, and the proper result of market forces. The following sections examine these propositions, and their implications for sustainability, in more detail.
No corporate law statute or court decision explicitly requires firms to adhere to the shareholder primacy view. While the Dodge case speaks of shareholder profit as the central purpose of the corporation,and three subsequent decisions contain similar expressions, all of these passages appear in dicta, and none of these cases hold or stand for the legal proposition that a corporation must maximize shareholder profits. In fact, later decisions cite these cases for other points of law, if at all.
A few corporate law decisions do seemingly endorse and encourage shareholder primacy, however subtly. For example, under Delaware law, corporate decision makers may have regard for nonshareholder constituencies like workers and the environment, but any decisions that benefit these stakeholders must benefit the firm’s shareholders as well. Thus, in choosing between two competing merger partners, a board may opt for the less generous proposal only if it represents a better strategic combination, preserves valuable company culture, or similarly enhances firm value in the long term. Similarly, in making normal operational decisions, corporate fiduciaries may only benefit nonshareholder constituencies if some benefit will ultimately redound to shareholders.
Corporate law also projects a shareholder-centric bent in describing the nature of corporate fiduciaries’ legal obligations. Although corporate fiduciary duties are generally understood to run to the enterprise, many judicial opinions state “that corporate directors have a fiduciary duty to act in the best interests of the corporation’s shareholders,” or alternatively, that corporate fiduciaries must act in the best interests of the corporation and its shareholders. While, at least in the long run, there may not even be a discernable difference between these three statements, the recurring message is that shareholders and their profits trump all other considerations.
Perhaps the American Law Institute’s (“ALI”) Principles of Corporate Governance best summarizes corporate law on this point. According to the ALI, “a corporation should have as its objective the conduct of business activities with a view to enhancing corporate profit and shareholder gain.” This “enhancing” (as opposed to maximizing) is to be over the long term, and firms may also pursue limited objectives beyond profit and shareholder gain:
Even if corporate profit and shareholder gain are not thereby enhanced, the corporation, in the conduct of its business . . . may take into account ethical considerations that are reasonably regarded as appropriate to the responsible conduct of businesses; and may devote a reasonable amount of resources to public welfare, humanitarian, educational, and philanthropic purposes.
Complicating this conclusion somewhat is the business judgment rule—even if corporate law requires some degree of shareholder focus, the business judgment rule affords corporate decision makers so much latitude as to render any such requirement unenforceable and meaningless. Under the business judgment rule, courts defer to fiduciaries’ business judgments so long as no conflict of interest is present and the decision is reached conscientiously, on the basis of reasonably full information, and with a good-faith belief that the decision is in the best interests of the firm. If these predicates are met, company decisions, including sustainability-motivated decisions that depart from a profit-maximizing objective, will withstand shareholder challenges.
Further, most state corporation codes contain provisions reaffirming this stance. These “other constituency” statutes further protect business decisions made in the interests of the entire firm, typically stating that directors and officers may consider all of the firm’s constituencies—not just its shareholders—when determining what constitutes the company’s best interests. About two-thirds of these provisions are generally applicable, providing an extra measure of comfort where corporate managers make decisions that serve the firm through its nonshareholder constituencies; the remaining third are limited to the takeover context and therefore only offer this statutory protection to a narrower class of decisions.
In sum, while corporate law can be read to encourage adherence to the shareholder primacy view, it simultaneously refuses to enforce any such requirement. Perhaps by this contradiction courts intend to endorse but not enforce a profit-focused norm, in keeping with corporate law’s traditional deference to informed business judgments. For whatever reason, the law fosters this ambivalence, lending support both to the view that corporations exist to serve their shareholders through profit maximization, and to the contrary view that firms may safely engage in sustainable business practices that might detract from shareholder profits. The resulting uncertainty may be enough to dissuade interested firms from aspiring to deeper levels of sustainability.
Even if no law requires shareholder primacy, a prevalent social norm can have much the same effect. That is, whether or not corporate law requires managers to maximize shareholder wealth, social norms may induce many of them to do so, because that is what they learned in business school, because that is how they view their jobs, because that is what they perceive is expected of them, and because they believe—rightly or wrongly—that the law requires them to do so. Some have concluded that such a norm grips mainstream American business culture, has “been fully internalized by American managers,” and constitutes “the appropriate goal in American business circles.”
Others argue that this description vastly overstates the prevalence of the shareholder primacy norm, observing that corporate managers routinely make decisions that do not maximize shareholder value and citing studies showing “ambivalence” among directors toward shareholder wealth maximization. What is more, norms governing business decision making may be evolving to reflect a business purpose broader than shareholder profit as environmental and social issues continue to enter the American mainstream. Business schools have reflected “this trend, integrating [stakeholder] concepts in core and extracurricular courses, and in the increasing desire by MBA students to fuse social endeavors with profit-making ones.” While these changes may not indicate a wholesale abandonment of the shareholder primacy norm, they perhaps portend a “paradigm shift” toward a new norm of balancing the shareholder-profit objective with longer-term, sustainable, and socially responsible business practices.
Markets—the stock market, the market for capital, the market for managerial talent, and the market for corporate control—also influence corporate decision making by focusing corporate decision makers, in many instances, on shareholder returns. Because stock price is a commonly used metric for assessing executive performance, executives pay considerable attention to it, particularly when their compensation is tied to it. Robust stock prices also facilitate raising capital and fend off unwelcome takeover attempts which might culminate in corporate executives losing their positions. To this extent, corporate decision makers have strong incentives to maximize shareholder returns and stock prices and avoid sustainable behaviors that might detract from them.
However, these pressures should not discourage all sustainable business efforts. As noted above, a great many sustainable business practices contribute to, rather than reduce, corporate profits. These market forces should therefore encourage corporate decision makers to pursue such initiatives, not discourage them from being more sustainable. Furthermore, according to a leading financial economist, running a business in this way—with a broader understanding of the firm, and focused on more than just shareholders and profits—best maximizes the value of the firm over the long run.
III. What Can Be Done About It?
While corporate law, norms, and markets each have the potential to impede sustainability efforts, such does not have to be the case: corporate law permits sustainability considerations in decision making, markets affirmatively encourage a great number of sustainable business practices, and sustainable business concepts are gradually gaining acceptance as a new social norm. What can be done to further sustainability in light of this state of affairs? Some options include requiring firms to be more sustainable through legal requirements, encouraging sustainable behavior through legal and nonlegal means, or simply continuing the current practice of permitting firms to engage in sustainable business practices but doing nothing to promote such activity.
Sustainability is not for every firm, and broadly imposing it would disrupt central tenets of modern corporate law. For one, requiring firms to be sustainable would be inconsistent with corporate law’s enabling approach that permits firms to engage in a broad range of business activity with few mandatory rules. A law requiring sustainability would also be difficult to enforce—under the business judgment rule, informed and disinterested decisions thought to be in the best interest of the firm enjoy deference, whether they are sustainable, unsustainable, or somewhere in between. Discarding the business judgment rule and limiting board authority would constitute a radical change to corporate law, and it would be most unrealistic to expect legislatures or courts in Delaware or elsewhere to take such extreme measures.
A slightly more palatable approach would offer firms the choice of complying with sustainability goals, such as triple bottom line reporting, or following sustainable decision-making procedures, or explaining publicly to their shareholders why they have not done so. This middle ground between mandatory reforms and voluntary action can work to establish the suggested behaviors as new norms supporting sustainability and exert subtle pressure on firms to comply instead of explain.
Other, strictly voluntary ways of encouraging sustainable business would require no changes to current corporate law. One of these involves sustainability reporting. Although the securities laws do not currently require it, many firms voluntarily disclose their environmental and social activities, and investor pressure seems to induce even more firms to follow suit. As noted above, disclosing environmental and social performance alongside financial performance creates incentives to produce results one would be proud or at least not embarrassed to report. Two recognized drawbacks with voluntary triple bottom line reporting have been the variability in formats and related difficulty in comparing different companies’ performances, but the Global Reporting Initiative Sustainability Reporting Guidelines, now in their third version, provide some standardization and may alleviate these problems.
Another voluntary means of encouraging sustainable business draws on private certifications. Like a Good Housekeeping seal of approval, private certifications can be used to harness consumer and investor preferences for sustainable businesses and products. B Labs offers one such certification, blessing corporations that are sufficiently benevolent and responsible with its “B Corporation” mark, and similar private certifications exist for fair-trade coffee and chocolate and for sustainably-harvested wood. As these and similar symbols develop further prominence, they may encourage greater sustainability through the force of the markets for goods, services, and capital.
A final way of encouraging greater sustainability is simply to raise awareness in law and business circles that corporate law does not require shareholder primacy and profit maximization, that firms may wholeheartedly engage in sustainable business practices without breaching legal duties or contravening social norms, and that such efforts even tend to pay off financially. Such efforts, including this symposium, can perhaps have a greater impact on business, the environment, and society than any set of corporate law reforms.
For too long, the shareholder primacy view and its incessant focus on profits have stifled corporate efforts to become more sustainable. As a result, shareholders have profited at the expense of the environment, society, and the future. This need not be the case: corporate laws, norms, and markets should not stand in the way of sustainable business efforts and, to a large degree, should affirmatively encourage corporate decision makers to pursue sustainable goals for the benefit of the entire enterprise. Only then, when corporations take a broader view of the firm, its purposes, and fiduciary obligations to it, will we create a future where business, the environment, and society may all continue to thrive.
* Visiting Associate Professor, Hofstra University School of Law. B.A. Williams College; J.D. University of Pennsylvania. I thank Alan Palmiter and Kent Greenfield for inviting me to take part in this wonderful symposium, my fellow panelists and conference participants for their helpful and insightful comments, the dedicated editors of the Wake Forest Law Review for their hard work on this symposium and Article, and Joshua Ebersole for his adept research assistance.
-our-common-future (last visited Aug. 28, 2011).
/heal.pdf (noting that corporate social responsibility is more positively related to profitability in advertising-intensive, consumer-oriented industries); see also Elkington, supra note 2, at 110, 119 (relating anecdotes on business-to-business transactions).
(1) directly reducing their own regulated—or unregulated—environmental impacts in ways that will reduce regulatory risk, improve company brand, and allow firms to get out in front of anticipated regulations; (2) reducing their customers’ environmental impacts and decreasing their customers’ exposure to unhealthy substances; (3) increasing their reuse and recycling of materials used in the production process; (4) improving their energy efficiency or that of their customers; (5) improving their resource productivity or that of their customers; (6) implementing systems to indentify waste reduction, pollution prevention, energy efficiency, or resource productivity opportunities throughout the company or facility; (7) collecting and disseminating more information about the firm’s environmental impacts and performance than the law requires; (8) providing more opportunities for stakeholder input into corporate environmental decision making than the law requires; and (9) financing and investing in green products and business models, such as those described above.
Hirsch, supra note 5, at 1072.
The team decided on a mixture of safe, pesticide-free plant and animal fibers for the fabric: wool, which provides insulation in winter and summer, and ramie, which wicks moisture away. Together these fibers would make for a strong and comfortable fabric. Then we began working on the most difficult aspect of the design: the finishes, dyes, and other process chemicals. Instead of filtering out mutagens, carcinogens, endocrine disrupters, persistent toxins, and bioaccumulative substances at the end of the process, we would filter them out at the beginning. . . .[W]e eliminated from consideration almost eight thousand chemicals that are commonly used in the textile industry; we also thereby eliminated the need for additives and corrective processes. Not using a given dye, for example, removed the need for additional toxic chemicals and processes to ensure ultraviolet-light stabilization (that is, colorfastness) . . . . What might seem like an expensive and laborious research process turned out to solve multiple problems and to contribute to a higher-quality product that was ultimately more economical.
The fabric went into production. The factory director later told us that when regulators came on their rounds and tested the effluent (the water coming out of the factory), they thought their instruments were broken . . . . Not only did our new design process bypass the traditional responses to environmental problems (reduce, reuse, recycle), it also eliminated the need for regulation, something that any businessperson will appreciate as extremely valuable.
The process had additional positive side effects. Employees began to use, for recreation and additional workspace, rooms that were previously reserved for hazardous-chemical storage. Regulatory paperwork was eliminated. Workers stopped wearing the gloves and masks that had given them a thin veil of protection against workplace toxins. The mill’s products became so successful that it faced a new problem: financial success, just the kind of problem businesses want to have.
William McDonough & Michael Braungart, Cradle to Cradle: Remaking the Way We Make Things 107–09 (2002); see also Sneirson, supra note 7, at 994 (discussing Nike’s efforts at “considered design,” including the sportswear company’s switch from chemical adhesives to stitching in some of its footwear lines).
In discharging the duties of their respective positions, the board of directors, committees of the board, individual directors and individual officers may, in considering the best long term and short term interests of the corporation, consider the effects of any action (including without limitation, action which may involve or relate to a change or potential change in control of the corporation) upon employees, suppliers and customers of the corporation or its subsidiaries, communities in which offices or other establishments of the corporation or its subsidiaries are located, and all other pertinent factors.
805 Ill. Comp. Stat. 5/8.85 (2011). Most of the states that enacted these provisions did so during the surge of corporate-takeover activity in the 1980s, often to help local corporations fend off out-of-state suitors. See Sneirson, supra note 7, at 997–98.