The ethical bottom line

I belong to an organization called Vermont Businesses for Social Responsibility (VBSR). The name explains the mission. The organization offers education for owners and managers, networking opportunities, holds conferences, and lobbies the Vermont legislature on relevant issues. The key expression in the group is “the triple bottom line.” This means that a business can, and should, judge its performance not just by the financial outcomes, but also by social and environmental outcomes. Sounds good.

The problem with this philosophy is the body of law on fiduciary responsibility. Corporate officers are required by law to attend to the financial well being of their company. They can be criminally liable if they don’t keep their eye on the financial bottom line. Given two business practices, one that makes the world a better place and another that makes more money, they could find themselves prosecuted for choosing the first. Even the most well meaning CEO has to pause and think about the relative financial implications of socially responsible and irresponsible practices.

The hard fact of the matter is that socially and environmentally sound practices are generally at odds with financial gain. Sustainability is a marathoner’s strategy in a sprinter’s world. The pressure of the fourth quarter financial report is in direct opposition to the traditional Iroquois consideration of the effect of today’s actions on the seventh generation hence. By law and practice, the traditional bottom line wins.

It isn’t practical to try to change existing fiduciary constraints on corporate officers, at least in the short run. The institutional inertia on that subject is huge. Millions of investors have placed their money in stocks with the assumption of fiduciary priority. What we need is a new option for people forming corporations. Call it an E-corporation, to contrast with the usual S-corporation.

An E-corporation would be formed in the same general way as an S, with a registration, bylaws, officers, and the like. The essential difference would be in the focus of corporate responsibility. The laws establishing the E-corp would specifically place the social and environmental responsibility of the corporate officers above their fiduciary responsibility. The rule would be, “If you can’t make money with practice X without destroying the environment or being unjust, then do something else.” Investors in an E-corp would expect that while their financial investment would gain value in the long run, the benefits they receive from it would be a combination of financial, environmental, and social. The corporate charter would be established for a particular period of time, or for the accomplishment of a particular task. The renewal of the charter would not be a mere matter of paperwork, but a substantive process of review and evaluation. The corporation and its officers would be judged by the achievement of numerical goals (not necessarily financial) and adherence to rules laid out at the time of incorporation. The periodic charter review would give management, employees, and stockholders an ongoing incentive to monitor and correct the behavior of the corporation.

So why would an investor, by definition someone trying to make money, want to put money into an entity that places social responsibility above finance? The answer lies in a sentence in the third paragraph above: “Sustainability is a marathoner’s strategy in a sprinter’s world.” More socially conscious companies generally don’t rocket up the charts, but they have been shown to be stable performers over time. A socially and environmentally conscious company will tend to retain trained and productive personnel, avoid lawsuits and labor actions, and have lower energy and waste disposal costs. A socially responsible company will not become the next Enron. Every portfolio should be diversified between higher performance, higher risk and lower performance, lower risk investments. An E-corp can be part of that low risk anchor at one end of the portfolio.

The establishment of an E-corporation law would give entrepreneurs and investors a bona fide socially responsible alternative to the S corporation and its fiduciary straightjacket.

Comments

[Not a Jedi Yet]

Excellent idea - now, send it to Bernie Sanders and Pat Leahy - maybe it can become real!