If You Love Freedom, You Should Love the Benefit Corporation

Let’s start with an assumption: freedom is good.  Other things being equal, the more free you are the better.  This is the view of F.A. Hayek, who described his aim in The Constitution of Liberty as showing that “liberty is not merely one particular value but that it is the source and condition of most moral values.”

As with Hayek, this assumption is often appealed to as a defense of capitalism and less government involvement in the lives of individuals and businesses.  It also, however, justifies the existence of Benefit Corporation legislation—a unique legal entity specifically designed for social enterprises.

Freedom and the Pursuit of Self-Interest

All too often, the importance of freedom is coupled with self-interest.  Freedom is good, people say, because people know what they want and freedom lets them get it.  Both individuals and corporations should therefore be permitted to pursue their own best interests (within the confines of the law) by accumulating wealth and maximizing profit.

But the value of freedom, even as Hayek describes it, is not so one-sided.  It’s not just about doing what is in your best interest, or even about doing what you want; it’s about being able to choose.  This means being able to act against your own best interests (if you wish) or even against your wishes—because it’s nice to know that you would be able to choose differently if your desires were different.  It is good that we are free to donate a kidney or hold the door open for someone even though those things are not in our self-interest.  We can choose these actions, but we don’t have to.

Imagine if this wasn’t the case.  Suppose I was required to hold the door for all people, and even required to donate my kidney.  It seems pretty clear that this would not be a good world to live in.  For this reason, the pursuit of self-interest should therefore be permissible.  Now imagine a world where holding the door for others, donating kidneys, and all other non-self-beneficial acts are completely forbidden.  Like the first example, this world also doesn’t seem very good.  We should at least be just as permitted to act against our own self-interest.

Freedom and the Benefit Corporation

It is a matter of debate whether business corporations and their leaders have this freedom.  On one view a corporation is obligated to act in ways that maximize shareholder profits, meaning the corporation must act in its self-interest.  While this view is controversial, legal precedent seems to imply it.  The decision in Dodge vs. Ford states:

“A business corporation is organized and carried on primarily for the profit of the stockholders.  The powers of the directors are to be employed for that end.  The discretion of directors is to be exercised in the choice of means to attain that end, and does not extend to a change in the end itself, to the reduction of profits, or to the nondistribution of profits among stockholders in order to devote them to other purposes” (Dodge v. Ford Motor Co. 170 N.W. 668,684 (Mich. 1919).

This decision indicates that a corporation is legally restricted in its motivations and actions, and is not free to pursue other interests besides its own benefit.  Coercing corporations to act in this way, however, restricts their freedom and therefore runs counter to the value of freedom that is central to a moral defense of capitalism.

Letting businesses incorporate as Benefit Corporations—which can take into account not only the interests of shareholders but stakeholders (all individuals who are affected by the actions of the business) as well—solves this problem by increasing the choices, and the freedom, of businesses on two separate levels.  First, this additional legal option gives nascent companies an additional option when deciding how to structure their company.  Instead of being forced to choose between being purely non-profit or for-profit, a business can elect to be a hybrid—the ideal selection for social enterprises.  Of course, Benefit Corporation legislation does not require that all companies classify themselves as Benefit Corporations; it merely serves as an additional option for individuals to consider and potentially choose.  This gives fledgling entrepreneurs more freedom to mold and preserve the structure of their company in the way they see fit.

Second, if a company so chooses to register as a Benefit Corporation, decision makers will be free to make decisions based on a wider array of considerations.  This means that they are free to seek profit, but are also free to consider the interests of others, like consumers, employees, and the world at large without repercussion.  The flexibility of the Benefit Corporation therefore means that as a legal entity it provides the most freedom for the organization itself.  It gives founders the option to protect the intent of their mission throughout changes in personnel, potential takeovers and successions, and in general allows the business to “hold the door for others” even if that provides no profit to the company itself.

An easy way to argue for benefit corporations as a separate legal entity is to say it will serve the public good.  Benefit Corporation legislation can benefit society by aiding the impoverished, protecting the environment, and solving other social problems not by raising taxes or expanding government, but by empowering individuals and businesses to solve these issues with an entrepreneurial mindset. This in itself is a reason for legislators to consider Benefit Corporation legislation, and for entrepreneurs to consider registering their companies as such.  However, there is another reason to favor Benefit Corporation legislation—it provides more freedom in choice and decision making, and freedom is a good thing.

 

This post was originally posted on SocialEarth.org and was written by B Revolution associate Dan Osusky.

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