Social Justice in Corporate Law

This article evaluates Hobby Lobby Stores, the US Supreme Court case that addresses among other things the debate  of social justice in corporate law. It raises the question of whether current law should require and or expect for-profit corporations to pursue profit at the expense of everything else.¹ We explore the existence and extent of for-profit corporations pursuing more than profits and how they have developed and legislated.

In  Hobby Lobby  the Supreme Court argues that there may be firms following religious and charitable objectives and still be structured as for-profit to maximize their potential to lobby for legislation or political campaigns that follow their social line. The court also points to states that have enacted laws coding “hybrid corporate forms”. The Court is correct when arguing that there are many organizations with goals beyond making money. Clearly Hobby Lobby operated with a purpose beyond the generation of profit and shareholder value.² Intentions that go beyond money are recognized by most corporate laws in the US including Delaware. These laws allow firms to pursue diverse but lawful business purposes,³ providing leeway when chartering the organization and steer it to a particular mission as with Hobby Lobby and other organizations that promote socially responsible programs such as Adidas, Starbucks, IKEA, Apple, Microsoft, Walt Disney and others.⁴ These organizations often use their social responsibility agenda as a marketing mean to position the company more favorably in the eyes of consumers, investors, and regulators. These agendas can help improve employee engagement and retention.”⁵

Although sharing value with profits and social objectives has become accepted norm, companies that practice these objectives do so without properly integrating and aligning their business strategies and objectives with their social responsibility initiatives.⁶ It is also accurate to state that modern corporate law has not only approved nonprofit initiatives by for-profit companies but led many states to enact legislation recognizing “hybrid” forms of for-profit organizations pursuing social missions. In a 2014 article published in the Stanford Social Innovation Review, the authors explain the aim of these organizations as a “form built on the LLC framework with the aim of giving for-profit, social mission-oriented companies the legitimacy necessary to attract certain types of philanthropic funds. They highlight that benefit corporations are legal in over 20 states, including California, and Delaware in 2018.⁷ These socially branded companies “could attract investors, consumers, and governments that wish to quickly identify socially oriented companies⁸.“

These new legal structures vary and are described in different term such as L3C, benefit corporation or low-profit organizations. None have as the main objective generating income or appreciation of assets. They instead are supposed to balance revenue with social good. ⁹ Typically, these corporations must pursue non-profit type societal activities listed in the Internal Revenue Code¹⁰ although they are still taxed under federal law.¹¹

There are some detractors of these modern corporate laws and numerous concerns have been raised. ¹² For example, when branding themselves as social, these entities may be exploited by businesspeople offering a false social narrative that may be used in the market as a competitive advantage. Furthermore, given the corporate structure, limited power is given to the shareholders and the organization is left on the hands of boards with limited accountability as to the pursue of their social mission.

Some of the issues related to the misuse and abuse and to what point current legislation has failed to create accountability for business that claim to pursue these societal goals. Some suggestions to address these concerns have been raised by scholars. These include, requiring large or publicly traded benefit organization to implement boards comprised of stakeholders representatives bestowed with controlled governance rights. ¹³ Another suggestion is to grant non shareholder stakeholders enforceable veto power over specific corporate decisions and enforcement proceedings against the board’s entity.¹⁴

Another approach is to require every entity to collaborate with non-sharing stakeholders to promulgate a tangible public benefit proposal¹⁵. Call for amendments to current laws include “clarifying the priority of the specific public benefit purpose, requiring a partial-asset lock, imposing a charitable giving floor, providing more effective enforcement mechanisms, and reconfiguring the current re- porting requirements.”¹⁶

These issues are not limited to scholars. According to a study by the The Grunin Center for Law and Social Entrepreneurship:

Trends in the social enterprise landscape indicate continued experimentation concerning the changing role of the benefit director, increased discretion in fiduciary duties, the changes as to who can bring enforcement proceedings, and changes in the reporting and certification requirements. This raises crucial questions, such as what is the added value of specialized enterprise forms and what new risks could arise? Should publicly traded companies have different requirements from privately held companies?¹⁷ (emphasis added)

In concluding, current laws regulating corporations allow for-profit organizations to pursue other missions that need not be directed at producing revenue. Laws have supported such structures codifying this dual purpose with hybrid firms. An added consideration is whether these social pursuits are needed given the existing corporate structure, whether they are being properly followed and overseen by current laws.

SOURCES

¹ Burwell v. Hobby Lobby Stores, Inc., 573 U.S. 682 (2014).

² In accordance with those commitments, Hobby Lobby’s statement of purpose committed to operating the company following Biblical principles. This includes closing stores on Sundays, even though it implies losing considerable revenue. . Id., at 1122; App. in No. 13–354, at 136–137.

³ A corporation may be incorporated or organized under this chapter to conduct or promote any lawful business or purposes, except as may otherwise be provided by the Constitution or other law of this State. Delaware General Corporation Law, 8 Del. Laws § 101(b).

⁴ Sally Aquire, 14 Best Socially Responsible Companies That Are Making Impact, Donorbox.org (May 6, 2022).

⁵ Tim Stobierski, ‘Types of Corporate Social Responsibility to be Aware of’ (2021) Business Insights, Harvard Business School.

⁶ V. Kasturi Rangan, Lisa Chase, and Sohel Karim, ‘The Truth About CSR’ (January-February 2015) Harvard Business Review.

⁷ Koushyar, J., Murray, H., Lee, M., & Cooney, K., ‘Benefit Corporation and L3C Adoption: A Survey’ (2014) Stanford Social Innovation Review. https://doi.org/10.48558/4XEZ-4964.

⁸ J Haskell Murray, ‘Societal Enterprise Innovation: Delaware’s Public Benefit Corporation Law’ (2014) Harvard Business Law Review Vol. 4, P. 357.

⁹ Mohsen Manesh, ‘Introducing the Totally Unnecessary Benefit LLC’ (2019) 97 N.C. L. Rev. 603.

¹⁰ Section 170(c)(2)(B). Describes these organizations as “organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals. “

¹¹ L3C are taxed as a for-profit entity, not eligible for federal tax exemption. “L3Cs hope to encourage an influx of new capital into charitable causes that are too risky for for-profit ventures and that nonprofit dollars alone cannot sustain” Nicole Campbell, ‘The Possibilities of the L3C’, Not For Profit/Exempt Organizations Blog (2009) Proskauer.com

¹² “When legislatures enact statutes that explicitly authorize certain businesses to advance public benefit and grant those businesses the “benefit” label, it creates a false dichotomy. It suggests that conventional corporations and LLCs do not benefit the public, that such businesses are “detriment” entities.” Mohsen Manesh, Introducing the Totally Unnecessary Benefit LLC, (2019) 97 N.C.L. Rev 603.

¹³ Mohsen Manesh, ‘Introducing the Totally Unnecessary Benefit LLC’, 97 N.C. L. Rev. 679 (2019), Citing Murray, Adopting Stakeholder Advisory Boards (2017) American Business Journal.

¹⁴ Manesh, ‘ Introducing the Totally Unnecessary Benefit LLC’, 97 N.C. L. Rev. 679 (2019), citing Alicia E. Plerhoples,

‘Social Enterprise as Commitment: A Roadmap’(2015) 48. W ASH . U. J.L. & P OL ’ Y 89, 127–31.

¹⁵ Manesh, ‘ Introducing the Totally Unnecessary Benefit LLC’ (2019) 97 N.C. L. Rev. 679.

¹⁶ J Haskell Murray, ‘Societal Enterprise Innovation: Delaware’s Public Benefit Corporation Law’ (2014) Harvard Business Law Review Vol. 4, P. 370.

¹⁷ ‘The Stage of Social Enterprise and the Law’, Grunin Center for Law and Social Entrepreneurship, NYU School of Law (2019-2020).