For several years, we’ve witnessed a fierce debate regarding the extent to which, in making decisions, boards of traditional corporations may take into account constituencies or stakeholders other than shareholders, such as employees and the larger community, or must consider only the impact of the decision on shareholder value. In a 2014 article In the Harvard Business Law Review, then-Chief Justice Leo Strine of the Delaware Supreme Court argued forcefully that, notwithstanding the allure of “stakeholder capitalism,” current corporate accountability structures make it difficult for directors to “do the right thing.” However, he contended, there is a way to effectively shift the power balance to create incentives for good corporate citizenship: the public benefit corporation. By articulating new corporate purposes and mandates, in Strine’s view, the PBC tweaks the normal corporate accountability and incentive structure that traditionally has made corporate managers accountable to only one constituency—shareholders. (See this PubCo post.) But while there have been a few corporations willing to take the IPO plunge as PBCs, there haven’t been any that have taken the risk, as public companies, of changing to the benefit corporation form—until now that is. And what’s most intriguing is that the shareholder vote at this company in favor of becoming a PBC was overwhelming. Is there more public shareholder support for PBCs than we thought?
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.” To put it another way, 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….”
According to Strine, what was “refreshing” about the benefit corporation movement was that,
“[r]ather 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.”
But would there be broader market acceptance? Since 2013, when Delaware adopted provisions allowing PBCs, we have not exactly seen a stampede to adopt the PBC form, especially among companies that are publicly traded or aiming to go public in the near term. At my last count, there were only three publicly traded PBCs.
That may be, in part, because, compared to the traditional corporate form, there are some risks to shareholders associated with PBC status. For example, directors of a PBC do not owe a fiduciary duty only to shareholders, but also need to take into account the company’s specific public benefit and the interests of other stakeholders. As a result, a board decision could, at least in theory, disfavor shareholders for the public benefit of the larger community. The PBC statute mandates that the board of directors manage the business and affairs of the PBC by balancing “the pecuniary interests of the stockholders, the best interests of those materially affected by the corporation’s conduct, and the specific public benefit or public benefits identified in its certificate of incorporation.” The statute provides that, with respect to a decision implicating the “balance requirement,” directors of PBCs will be deemed to satisfy their fiduciary duties to shareholders and the corporation if their decision “is both informed and disinterested and not such that no person of ordinary, sound judgment would approve.” That and other similar risks may have been some of the reasons that, in adopting laws authorizing PBCs in 2013, the Delaware legislature made it particularly difficult to convert a traditional corporation to a PBC. Originally, the shareholder voting requirement for a corporation to become a PBC was set at 90% of the outstanding shares; that was reduced to 2/3 of the outstanding shares in 2015—still a rather high hurdle, especially if the company is already public. Then in 2020, the 2/3 voting requirements was eliminated, making it easier to convert a traditional corporation to a PBC or a PBC to a traditional corporation. Now, only the standard shareholder vote provisions are applicable—generally a vote of a majority of the outstanding shares. In addition, the 2020 amendments also amped up the protections for directors of a PBC.
But none of those amendments were even necessary to enable Veeva Systems, an NYSE-listed provider of cloud-based software for the global life sciences industry, to convert from a traditional corporation to a PBC (as first noted on thecorporatecounsel.net blog). Veeva Systems has announced that it is the “first publicly traded company and largest-ever to convert to a PBC.” And what’s most stunning is that the proposal to convert to a PBC achieved an astonishing vote level: “99% of voting shareholders support the company’s proposal to become a public benefit corporation (PBC), including the vast majority of Veeva’s largest shareholders.” (The company does have dual-class shares; according to the Form 8-K, there were approximately 136 million shares of Class A common and 15 million shares of Class B common entitled to ten votes per share. But still, what proposals ever receive 99% support?)
In Veeva’s proxy statement, its CEO positioned the conversion proposal as not only a way to adhere to Veeva’s core value of “do the right thing,” but also to enhance its “ability to create shareholder value.” According to the CEO, Veeva believes it
“should demonstrate leadership and innovation not only in our products and services, but in everything we do. We are proud to be the first large public company in the U.S. to propose a PBC conversion to its shareholders. Why us and why now? As we have grown and as our customer relationships have deepened, we have become increasingly important to the life sciences industry’s ability to improve health and extend lives. Looking ahead, Veeva has the potential to become essential to the process of developing medicines and cures and bringing them to patients. Society’s interest in the success and sustainability of this process is clear. Our vision is not sustainable over the long term if it is only about financial returns. We have also always believed that our deep commitment to customers, employees, and our core value of ‘do the right thing’ enhances our ability to create shareholder value.”
In addition, in the proxy statement, Veeva contended,
“PBC conversion better aligns our legal responsibilities to our core values—do the right thing, customer success, employee success, and speed—and our approach to decision making. More specifically, we believe that becoming a PBC is valuable for our customers and employees, does not diminish the rights of our investors, may benefit our relationships with other key groups, and can be beneficial to our long-term financial performance. We believe that these factors accrue to shareholder value creation….Long-term purpose alignment with our customers and the industry we serve is important as we ask our customers to make even deeper commitments to Veeva for technology systems they may use for decades. We believe our proposed public benefit purpose (and our PBC commitment to consider the interest of customer stakeholders) solidifies this alignment and can give our customers increased confidence to invest in Veeva’s technology solutions, which has the potential to make our revenue base more durable and enhance our ability to invest in innovation for our customers. We believe these customer benefits translate to better shareholder returns over the long term.”
In recent years, we have witnessed intensifying investor focus on sustainability as a strategy. For example, in his 2020 annual letter to CEOs, Laurence Fink, CEO of BlackRock, the world’s largest asset manager, announced a number of initiatives designed to put “sustainability at the center of [BlackRock’s] investment approach.” (See this PubCo post). And swelling numbers of companies have declared their commitments to all stakeholders, as reflected, for example, in the Business Roundtable’s adoption of a new Statement on the Purpose of a Corporation (see this PubCo post) and the World Economic Forum’s Stakeholder Principles in the COVID Era (see this PubCo post). Veeva may reportedly have been the first publicly traded company to ask its shareholders to approve its transformation to a PBC. The question is, will it be the last?