Last week’s announcement that Danonewave, the newly merged entity of WhiteWave Foods and Danone's North American dairy business, has reincorporated to create the world’s largest public benefit corporation (“PBC”) is the latest sign of the growing mainstream acceptance of the PBC governance model in the United States. Over the past seven years, the number of U.S. companies organized under PBC laws have grown dramatically, and with it, the interest of private equity firms. PBCs are for-profit companies that are legally organized to achieve social goals as well as business ones. Some private equity investors see PBCs as a means to strengthen the long term stability and accountability of target companies, while others remain wary of this largely unproven corporate business model.
By law in all 50 States, the sole directive of directors and officers of traditional for-profit corporations is to maximize the shareholder’s financial returns. Therefore, all corporate actions must be justified in terms of creating shareholder value. In contrast, PBCs are designed to codify additional social stakeholders, values or missions in a company’s certificate of incorporation. In principle, the PBC model provides a company’s leadership with legal protection to consider the impact its business has on society – in addition to shareholders’ economic interests.
Since the first PBC law was introduced in Maryland in 2010, a total of 30 states and the District of Columbia have enacted some form of PBC statute. Today, there are approximately 3,600 PBCs in the United States. Some of the largest and well known private PBCs include, Kickstarter, Ben & Jerry’s, Patagonia, Altschool, Seventh Generation and Warby Parker.
Proponents of PBCs can point to several factors that make the governance model attractive to private equity investors:
Sustainability: By moving away from a traditional shareholder-centric model, PBCs are arguably more likely to favor business strategies focused on long-term and sustainable value rather than riskier short-term gains that are prone to volatility. In turn, companies with strong sustainability practices will provide steady and reliable cash flows for investors.
Greater Transparency: PBC statutes include extensive reporting requirements to allow shareholders to track a company’s social mission performance. In addition, most state PBC statutes (with the notable exception of Delaware) require PBCs to publish periodic public reports. These reporting requirements giving investors access to more information that will allow them to assess the strength of a company’s management and its impact on stakeholders beyond just its shareholders.
PBCs Draw and Retain Talent. Fusing a social mission into a company’s corporate purpose can give PBCs a leg up in the war to draw and retain a talented workforce by attracting prospective employees who identify with a PBC’s social mission and by motivating existing employees. This may be particularly important in the recruiting and retention of millennials. A recent study by the marketing firm Fast Company found that 50% of millennials would take a pay cut to work for a company that matched their values.
However, PBCs are not without detractors in the private equity world. First, skeptics can point to the fact that there is essentially no empirical data demonstrating that PBCs create more responsible, or more profitable, businesses. Without proof that the governance model works, it is hard for some to see why adding a “second bottom-line,” is worth it when it is already hard enough for businesses to be successful. Likewise, given that that PBCs are less than a decade old, there is little understanding about how shareholder litigation stemming from a PBC board’s actions in light of inevitable conflicts between a PBC’s social mission and its shareholders’ pecuniary interests will be interpreted by the courts. The lack of PBC-specific case law means that the outcome of litigation between PBC stockholders and directors is less predictable than that of shareholder litigation against traditional corporations. For these reasons, many private equity firms are content to avoid PBCs for the time being.
Still, while there are both practical and legal issues associated with PBCs that have yet to be resolved, private equity investments in PBCs can be expected to continue grow into the foreseeable future. This past February, another significant milestone in the evolution of PBCs was reached when Laureate Education, the U.S.-based for-profit college chain, completed the first PBC IPO, raising $490 million for the company. As evidence of the success of the PBC model increases along with the number of PBCs incorporated in the U.S., the economy of scale, if nothing else, is sure to result in more private equity investments in PBCs.