by Cydney Posner
As previously discussed on this blog, a few companies have gone public as “Certified B Corporations,” but now we apparently have the first company to file for its IPO as an actual Delaware “public benefit corporation” (PBC). Earlier this month, Laureate Education, Inc., a global network of degree-granting higher education institutions, filed an S-1 for an IPO led by first tier underwriters. As first reported in this DealBook column, Laureate will soon find out if a company can “scorn profits and still be embraced by Wall Street.” (Update: this offering was declared effective on January 31, 2017.)
A “public benefit corporation,” according to the Delaware General Corporation Law, “is a for-profit corporation …that is intended to produce a public benefit… and to operate in a responsible and sustainable manner. To that end, a public benefit corporation shall be managed in a manner that balances the stockholders’ pecuniary interests, the best interests of those materially affected by the corporation’s conduct, and the public benefit or public benefits identified in its certificate of incorporation.” As described in this article in the Institutional Investor, a PBC is a corporation that is “legally permitted to consider its impact on people and planet to be equally important as its impact on shareholders’ wallets….”
Sidebar: By comparison, companies that are Certified B Corporations are simply certified by B-Lab to meet certain standards; they are not corporations whose legal status is administered by the state. A PBC is required to provide to its stockholders a periodic statement using a third-party standard and/or to provide a third-party certification assessing its success in promoting the public benefit identified in its charter; Laureate has indicated that it will be assessed by B-Lab.
As Laureate states in its prospectus, its “public benefit is to produce a positive effect for society and students by offering diverse education programs both online and at campuses around the globe…. Our stated public benefit is firmly rooted in our company mission and our belief that when our students succeed, countries prosper and societies benefit. Becoming a public benefit corporation underscores our commitment to our purpose and our stakeholders, including students, regulators, employers, local communities and stockholders.”
It will be interesting to see if public investors share in that commitment. As Laureate’s prospectus warns, as a PBC, its “focus on a specific public benefit purpose and producing a positive effect for society may cause our board of directors to make decisions that may not be in the best interests of our stockholders,” and being a PBC “and complying with our related obligations could negatively impact our ability to provide the highest possible return to our stockholders.” Further, Laureate warns, as a PBC, “since we do not have a fiduciary duty solely to our stockholders, we may take actions that we believe will benefit our students and the surrounding communities, even if those actions do not maximize our short- or medium-term financial results. While we believe that this designation and obligation will benefit the Company given the importance to our long-term success of our commitment to education, it could cause our board of directors to make decisions and take actions not in keeping with the short-term or more narrow interests of our stockholders. Any longer-term benefits may not materialize within the timeframe we expect or at all and may have an immediate negative effect.” And so on….
In his DealBook column, the Deal Professor muses cynically that it “all seems so fantastic — what could be wrong with a company with a social purpose? Don’t we all want to make the world a better place?” Needless to say, it doesn’t stop there, as he questions whether the specific public benefit is too vaguely defined to be meaningful (or “assessed”), and instead might just involve the “use of a public-relations-enhancing social purpose to fritter away money without oversight.” But, as he acknowledges himself, that might be too jaundiced a perspective. The more compelling concern he raises is whether the changes to fiduciary duties and other governance issues will present too high a hurdle for those investors, such as mutual funds, that “in many cases have an explicit fiduciary duty to invest for profit. So the question is whether many of the big institutions will avoid investing in Laureate because of its status.” Ultimately, however, he questions the need for PBCs at all: “Companies today, even for-profit entities, can do many things that are not immediately profitable. They make donations and support causes all the time. So the real question may be, what is this corporate form good for?”
Perhaps the Deal Professor should have a conversation with Chief Justice Strine of the Delaware Supreme Court. As discussed in this PubCo post, there is a fierce debate ongoing regarding the extent to which, in making decisions, boards of traditional corporations may take into account other constituencies, such as employees and the larger community or must consider only the impact on stockholder value. Chief Justice Strine has made clear his view that the concept promoted by some academics and other commentators that corporate directors are entitled to take into consideration the interests of constituencies other than stockholders is naïve, tiresome and misguided. Not to mention ineffective (because, he believes, the concept does little to change the incentives of directors to take the interests of these other constituencies into consideration). By articulating new corporate purposes and mandates, in Strine’s view, the PBC tweaks the normal corporate accountability structure that makes corporate managers accountable to only one constituency—stockholders:
“That is what is refreshing about the benefit corporation movement. Rather than ignore the importance of the accountability structure within which corporate managers operate, the benefit corporation movement set out to change it. In the liberal tradition of incremental, achievable reform rather than radical renovation, the benefit corporation is a modest evolution that builds on the American tradition of corporate law. But that evolution is potentially important because, if it gains broader market acceptance, the benefit corporation model puts some actual power behind the idea that corporations should be governed not simply for the best interests of stockholders, but also for the best interests of the corporation’s employees, consumers, and communities, and society generally.“
However, Chief Justice Strine observes, PBCs must, in effect, help investors to overcome that high hurdle regarding profitability by proving the principle underlying the concept of PBCs. They must
“generate results for equity investors that inspire confidence that companies doing it the right way will generate long-run returns consistent with prudent portfolio growth. One of the reasons why entrepreneurs of all generations find the benefit corporation model appealing is because of its supposedly better alignment with the time horizons required to make a business most sustainably profitable. Many hard-headed executives find the public markets’ and institutional investor community’s obsessive focus on quarterly earnings and rapid portfolio turnover to be inconsistent with the need for the managers of actual productive enterprises to develop new products and services, bring them to market, and deliver value to consumers that leads them to become committed customers. The benefit corporation model supposedly addresses that concern by providing breathing room to corporate executives from short-term pressures. Not only that, advocates for the benefit corporation argue that doing things the right way is the profitable way in the long run, because regulatory shortcuts, product quality compromises, and the like tend to get discovered and result in corporate failures and underperformance. ”
In that regard, the Laureate IPO may well be the beta test for this new model.