It was one year ago that the Business Roundtable, an influential group of CEOs of large American companies, reversed its commitment to the “primacy” of shareholders, endorsing instead “a fundamental commitment to all of our stakeholders.” This pivot arose from a landmark shift in thinking about the role of corporations in a free market economy, in which corporate leaders are recognizing the importance of long-term value over short-term expediency and the absolute necessity of a more inclusive prosperity.
It’s well-settled law that directors and officers of Canadian companies owe no duty to shareholders in particular. They’re required to act in the best interests of the company itself, taking into account the interests of relevant stakeholders. But the debate over what a commitment to stakeholders other than shareholders actually means, how it can be enforced, and what “long-term value” and “sustainability” mean to any given corporation and the economy as a whole endures. And with global investors with significant capital now demanding that corporations demonstrate a commitment to sustainable and responsible environmental, social and governance practices, theoretical discussions of corporate value creation have moved to the forefront.
Corporations, corporate boards and corporate leadership will now have to discern more carefully what a corporation’s interests and impacts are in a way that guides their decisions. And if financial results are not the only measure of success in achieving a corporation’s purpose, they will have to find a reliable and consistent method of accounting for and disclosing non-financial results.
Into this unsettled time for corporate governance comes the “benefit company,” a new form of corporate vehicle in Canada, now available under British Columbia’s corporate statute. Following in the footsteps of 36 U.S. states, Canadian businesses now have a corporate vehicle for evolving stakeholder capitalism. Like a regular corporation that aims to generate profits, “benefit companies” must also promote one or more public benefits and, importantly, conduct business in a manner that is, in the words of the new law, “responsible and sustainable.” They must have a clear public purpose, enshrined in their articles, and they must pursue that purpose in a way that expressly takes into account the well-being of stakeholders and uses a fair and proportionate share of available resources, the determination of which is still to be interpreted.
Further, benefit companies are required to disclose an assessment of how they are meeting their stated public benefit objectives measured against a third-party standard. Unlike regular corporations, these are legal requirements, enforceable against the corporation by shareholders.
While the absence of the “primacy” of shareholders in our corporate law makes the need for benefit companies in Canada somewhat redundant, or at least less stark than in the United States, the deliberate push by global capital toward purposeful, long-term, sustainable corporate behaviour makes room for benefit companies even in Canada. The power of a benefit company’s shareholders to enforce the company’s commitments to purpose and sustainability, and the requirement to report publicly on non-financial results against a third-party standard, will add solidity and transparency to the goals and stakeholder considerations of benefit companies, even those that are not exposed to the same investor pressure as larger, public corporations.
In that sense, even if the need from a purely legal perspective is less pronounced, the benefit company comes to Canada at a convenient time.
The decision-making that lies at the heart of corporate governance has never been simple, and the resurgence of “stakeholder capitalism” is exposing some of the intricacies of how business judgment is, and should be, exercised when detached from shareholder primacy. Without considering other corporate stakeholders, Indigenous Peoples, the environment, as well as a range of social factors, focusing solely on “shareholder value” and “growth” fails to answer the key questions that corporate leaders inevitably face around “why” and “how” an organization should grow and generate value. The benefit company is aimed at answering those questions. And now Canadian corporations that choose to become benefit companies can give their boards and executives a purpose to guide their decisions.
Valerie Mann, ICD.D, partner, Lawson Lundell LLP
Chat Ortved, partner, Lawson Lundell LLP