Corporate Governance

Absolutely no plagiarism, must be original and very thorough. Please make sure everything is followed in the question and the grading rubric. Assigned textbook is attached but also must include one other academic relevant outside resource, total of at least 2 references. Must include in-text citations. Please include the free link to the relevant academic source. Supporting material: Please feel free to use these links…Must also include one other academic relevant outside resource. Fisher, D. (2013). Delaware ‘public benefit corporation’ lets directors serve three masters instead of one. Forbes. Retrieved from Knowledge@Wharton. (2002). Global view of corporate governance: One size doesn’t fit all. Retrieved from Committee Resource Guide. (2015). Deloitte. Retrieved from Question:Corporate Governance In your assigned textbook reading this week, Anand (2008) discusses how bad corporate governance can lead to illegal activity such as corruption. In your optional reading this week, Wharton management professor Mauro Guillen stated “a poorly conceived corporate governance system can wreak havoc on the economy by misallocating resources or failing to check opportunistic behaviors”. How can good corporate governance help to check opportunistic behavior or avoid illegal activities? What red flags or warning signs would help address these problems early? Please provide specific examples. Please see grading rubric below. This assignment should be at least 5-6 paragraphs long and very thorough. Make sure you integrate real-life applications to support key points. Criteria Ratings This criterion is linked to a Learning Outcome Quality of Initial Response Initial response displays an excellent understanding of the course readings and underlying concepts and includes the correct use of relevant terminology. Initial response integrates specific real-life application (current events, work or personal experience, prior coursework, etc.) to support key points. Initial response is clear, concise, and compelling. This criterion is linked to a Learning Outcome Research Initial response contains at least one reference to a valid (recent, relevant, high-quality) external source of information pertaining to the discussion topic. Research is cited, in-text, to support key points. Integration of research in initial response exceeds expectations. (This should be along with the provided textbook, so a total of 2 references). This criterion is linked to a Learning Outcome Mechanics Entirely free of mechanical errors. These include: grammar, punctuation, spelling, and formatting (font style and size).


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New Faces of Corporate Responsibility: Will New Entity Forms Allow Businesses to Do Good?
Author: Schoenjahn, Ashley
ProQuest document link
Abstract: This note examines the ability of corporations to be socially responsible in light of the traditional notion
of shareholder primacy and the way courts interpret shareholder primacy today. Newly developing forms of
business entities hope to find middle ground between shareholder primacy and social responsibility. Even if
these new entities find success, their ability to balance shareholder interests and societal goals, without
violating fiduciary duties or losing competitive positioning in the marketplace, is still uncertain. In part II, this note
traces the history of the shareholder primacy norm and the business judgment rule. Part III analyzes the state of
corporate responsibility in the traditional corporation and synthesizes scholarly scrutiny of each of the new
forms. Part IV recommends changes to the new forms to increase their likelihood for success and suggests that
while the future is uncertain for all of them, the limited liability low-profit companies may be more likely to
succeed than the others.
This Note examines the ability of corporations to be socially responsible in light of the traditional notion of
shareholder primacy and the way courts interpret shareholder primacy today. The business judgment rule
protects directors who decide to take actions that benefit constituents other than shareholders, but the rule has
its limits. Newly developing forms of business entities hope to find middle ground between shareholder primacy
and social responsibility. Even if these new entities find success, their ability to balance shareholder interests
and societal goals, without violating fiduciary duties or losing competitive positioning in the marketplace, is still
In Part II, this Note traces the history of the shareholder primacy norm and the business judgment rule. Part II
also introduces the new business entities that aspire to make social responsibility more common in the business
world. Part III analyzes the state of corporate responsibility in the traditional corporation and synthesizes
scholarly scrutiny of each of the new forms. Part IV recommends changes to the new forms to increase their
likelihood for success and suggests that while the future is uncertain for all of them, the L3C may be more likely
to succeed than the others.
Profit-maximization has been a cornerstone of American corporate law and legal education for many years.1 As
the Michigan Supreme Court stated, “A business corporation is organized and carried on primarily for the profit
of the stockholders. . . . The discretion of directors . . . does not extend . . . to the reduction of profits, or to the
nondistribution of profits among stockholders in order to devote them to other purposes.”2 Over the years,
however, scholars and business people began to challenge this fundamental principle as incomplete because it
ignores the interests of other corporate stakeholders.3 To determine where the balance between shareholder
primacy and corporate social responsibility4 lies, it is important to understand the history of each concept.
A. Dodge v. Ford: Foundation of Shareholder Primacy
Almost every law student who takes a basic course in corporations encounters Dodge v. Ford.5 In the case, the
Dodge brothers,6 minority shareholders of Ford Motor Company, sued for an injunction to stop Ford from
expanding operations and asked the court for a decree commanding Ford to pay dividends.7 The court found
that Henry Ford had philanthropic and altruistic sentiments regarding Ford Motor Company’s profits.8 From
Henry Ford’s testimony, the court concluded his attitude toward shareholders was that they had already
received great profits from Ford, and moving forward, they should be happy to receive whatever he decided to
give them.9 The court further concluded that Henry Ford believed Ford Motor Company made too much profit
and that he desired to share any further profits with the public in the form of more jobs, higher wages, and
lower-priced cars.10
The court declined to file an injunction prohibiting Ford from expanding its operations, but it commanded the
company to pay dividends.11 The court first penned the famous shareholder primacy quote cited above in this
opinion.12 Since that day, the primacy of profit maximization for the benefit of shareholders has rested at the
foundation of corporate law.13
B. The Business Judgment Rule: A Balance Between Shareholder and Stakeholder Primacy?
The business judgment rule “is a presumption that in making a business decision the directors of a corporation
acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests
of the company.”14 Unless the challenging shareholders prove that directors abused their discretion in pursuing
a particular course of action, the court rarely disturbs the board’s decision.15 This Part explores the applications
and limitations of the business judgment rule.
1. Deferring to the Discretion of Boards
In Kamin v. American Express Co., a suit in which shareholders challenged the board of directors’ decision to
issue dividends on a certain group of stocks, shareholders argued it would have been more prudent for the
company to sell the stock for tax purposes.16 The New York Supreme Court held that no cause of action arises
where shareholders merely allege some other course of action would have been wiser or more lucrative than
the one taken, stating, “More than imprudence or mistaken judgment must be shown.”17 Thus, the business
judgment rule most often protects the decisions of directors when those decisions do not in fact lead to higher
profits.18 Operating under the theory of profit maximization, courts apply the business judgment rule because it
is often difficult, if not impossible, for courts to determine exactly what actions would maximize profits.19
2. Limitations on the Business Judgment Rule
The business judgment rule does not blindly protect every decision that boards make.20 For example, the
business judgment rule does not protect directors who breach their fiduciary duties or make decisions without
critically assessing the information necessary to reach an informed decision.21 There are also specific events in
a corporation’s existence where courts have decided that the decisions must place shareholders’ interests at the
forefront.22 A frequently cited case for this principle is Revlon Inc. v. MacAndrews &Forbes Holdings, Inc.23 In
the case, Revlon’s board of directors engaged in a series of defensive moves to prevent a hostile takeover.24
When boards attempt to thwart a hostile takeover, fiduciary standards require that they “determine the best
interests of the corporation and its stockholders, and impose an enhanced duty to abjure any action that is
motivated by considerations other than a good faith concern for such interests.”25 The directors in Revlon erred
by considering the interests of other constituents-note holders-when deciding how best to handle the
Courts allow boards to consider other corporate constituencies when making decisions as long as some
“rationally related benefits accru[e] to stockholders.”27 However, the Revlon Court found the board’s concern
for non-stockholders was inappropriate given the circumstances because “the object no longer [was] to protect
or maintain the corporate enterprise but to sell it to the highest bidder.”28 Thus, because the “object” changed
from furthering the corporation’s existence to selling to the highest bidder, the business judgment rule no longer
protected the board’s decision as one in the best interest of the company.29
3. Applying the Business Judgment Rule to Charitable Decisions
The business judgment rule also applies when corporations make profit-sacrificing decisions in favor of
promoting charitable causes.30 Most states have laws that permit corporations to engage in charitable giving.31
However, like in operational business decisions, courts encounter difficulty when attempting to determine which
donations have a sufficient corporate nexus and which are profit-sacrificing.32 In cases challenging corporate
donations, courts have often evaluated such donations with an ambiguous standard that seems to take into
account both the amount of the contribution and the possible benefit to the corporation.33
C. An End Run Around Shareholder Primacy: New Business Forms that Attempt to Evade Traditional Rules
It is likely that a corporation that decided to donate the majority of its profits to a charitable cause would run
afoul of the shareholder primacy norm.34 Several new entity forms hope to alleviate that concern by allowing
businesses to form in ways that do not lead investors to expect shareholder primacy.35 These forms also seek
to allow companies to operate with the primary purpose of furthering a social cause.36
1. The Beneficial Corporation
Beneficial Corporations (B Corporations) are traditional corporate entities that receive a certification indicating
that the corporation is socially responsible.37 The idea for B Corporations came from B Lab of Pennsylvania, a
501(c)(3) non-profit organization that advocates for corporate social responsibility.38 B Lab also certifies B
Corporations using a rating system it developed.39
To become a B corporation, a company must complete two steps: (1) attain a passing score on B Lab’s “B
Rating System,” which measures “a company’s social and environmental performance,” and (2) amend its
articles of incorporation to include a duty of responsibility to “its employees, suppliers, consumers, community,
and environment.”40 The rating system evaluates the company on such areas as: commitment to social or
environmental performance in governing documents, transparency with employees, and commitment to
community service.41 The point of amending the articles of incorporation is both to highlight the company’s
social motive for investors-who will hopefully invest in causes that are important to them-and to protect the B
Corporation’s values should the company change management or face a takeover.42
B Lab aspires to create an entirely new corporate form that each state will recognize and that the IRS will grant
tax-preferred status.43 Currently, five states have enacted B Corporation statutes: Maryland, Vermont, Hawaii,
Virginia, and New Jersey.44 In Maryland, for example, a corporation may become a B Corporation by electing
to do so in its corporate charter.45 A B Corporation must have the purpose of creating a general public
benefit,46 defined as “a material, positive impact on society and the environment, as measured by a third-party
standard, through activities that promote a combination of specific public benefits.”47 B Corporations
circumnavigate the shareholder primacy norm via statutory language which states that in deciding what is best
for the company, directors have a duty not only to shareholders, but also to employees, subsidiaries, suppliers,
customers, the community, and the local and global environment.48
Comparatively, Vermont’s B Corporation statute contains many provisions similar to those enacted in
Maryland.49 One difference between the two statutes is that Vermont’s law specifically states that directors do
not have to prioritize the interests of any group to which it owes a duty over the interests of any other group.50
Vermont’s law also calls for each B Corporation to maintain an independent benefit director who would be
responsible for preparing an annual report detailing the corporation’s successes or failures in achieving its
beneficial purpose.51 Vermont’s law contains no requirement that a B Corporation qualify as such from an
independent organization.52 Thus, a B Lab distinction is not needed in Vermont; the corporation simply must
file an annual report detailing its beneficial work.53 Hawaii, Virginia, and New Jersey have also recently enacted
B Corporation statutes.54 Other states considering B Corporation legislation at this time include Colorado, New
York, North Carolina, Michigan, Pennsylvania, and California.55
2. Cross-Sector Partnerships
Another new entity form recognizes that the corporate form by itself-due largely to the shareholder primacy
norm-is mostly incapable of operating for the explicit purpose of furthering a social cause.56 “Hybrid
businesses,” also known as cross-sector partnerships, attempt to combine the for-profit corporate model’s profitmaking potential with the non-profit model’s ability to further a social cause.57 Commonly, cross-sector
partnerships form when a non-profit seeks to gain access to greater funding opportunities through linking with a
for-profit corporation.58 Hybrid models offer great flexibility because for-profit arms are able to generate
revenue that non-profits are ineligible to generate due to tax consequences.59 An example of a way a
partnership could form is the for-profit arm issuing stock and then donating the proceeds from the IPO to the
non-profit organization.60
Also referred to as “fourth sector businesses” and “social entrepreneurship,”61 these hybrids operate with the
intent of achieving a social purpose through a business method.62 The social purpose is a “core commitment”
to a social goal “embedded in its organizational structure.”63 The business method is “any lawful business
activity that is consistent with the business’s social purpose and stakeholder responsibilities.”64 Notable
examples of cross-sector partnerships include the Omidyar Network, a hybrid of an LLC and a 501(c)(3)
nonprofit entity,65 and, the philanthropic arm of the Google corporation.66
3. Limited Liability Low-Profit Companies (L3Cs)
An L3C is an example of a hybrid entity outside of the corporate form; it combines the legal structure of a
Limited Liability Company (LLC) with the mission of a non-profit.67 This new legal status intends to make it
easier for an L3C to obtain investments from non-profit foundations to further its social mission.68 L3C statutes
accomplish this by requiring L3Cs to model their operating agreements after IRS regulations for granting
projects status as Program Related Investments (PRIs).69 For private foundations to avoid tax penalties, they
must distribute five percent of their assets annually; this distribution usually goes to non-profit organizations
which do not need to qualify as PRIs.70 If a foundation desires to distribute this income to a for-profit venture
and avoid tax penalties, the for-profit must qualify as a PRI.71 It is difficult and expensive to qualify as a PRI, as
it currently requires applying for a private letter ruling from the IRS.72 If a foundation invests in a for-profit
venture that turns out not to qualify, it suffers significant tax consequences.73 As of today, the IRS has not
spoken as to whether it will automatically recognize L3Cs as qualifying PRIs.74 Proponents of L3Cs hope that
the IRS will recognize the entities as automatic PRIs.75 Ideally, if this happens, L3Cs will attract investments
from both foundations and commercial sources by allocating the most risk to the investing foundation, and
offering commercial investors the opportunity for higher returns at lower rates of risk.76
Currently, nine states-Illinois, Louisiana, Maine, Michigan, North Carolina, Rhode Island, Utah, Vermont, and
Wyoming-legally recognize L3Cs.77 The Illinois statute, for example, requires that “[a] low-profit limited liability
company shall at all times significantly further the accomplishment of one or more charitable or educational
purposes . . . .”78 Also included in all of the state statutes are the requirements that: (1) no significant purpose
of the entity is the production of income or acquisition of property; (2) the entity may not seek to accomplish a
political or legislative purpose; and (3) the entity must include its decision to qualify as a low-profit limited liability
company in its articles of incorporation.79
The new business entities described above promise to allow business organizations to conduct business with
some type of social or charitable focus in mind. This Part first discusses the current state of corporate social
responsibility and analyzes what some economic and entrepreneurial minds feel is the best way forward. Next,
this Part discusses the strengths and challenges the new forms of socially motivated entities face. This Part also
questions whether socially motivated businesses can remain competitive with businesses that choose profit
A. Traditional Corporate Charitable Giving
In 2008, U.S. corporations donated $7.7 billion to developing countries.80 Another 2008 study of 137
companies revealed domestic contributions of $11.25 billion.81 These numbers show that many corporations
already participate in furthering some social cause; however, this giving is usually a relatively small percentage
of the revenues these corporations generate.82 Corporations might make charitable donations to take
advantage of tax breaks83 or generate good will in the community.84 However, the relatively small percentage
of charitable giving compared to corporate revenue suggests that corporations are not very successful in any
attempts to put social causes or missions before profit generation.85
1. Is Shareholder Primacy a Myth?
The notion of shareholder primacy advanced in Dodge has developed a reputation as an integral part of
corporate law; however, not all scholars agree that it should hold such a lofty position.86 Although Dodge
technically remains good law, the Supreme Court has not cited the case since 1986, and Delaware courts have
not cited it in a published opinion since 1960.87 Some scholars argue that shareholder primacy, supposedly
advocated for in Dodge, is little more than dicta.88 The argument goes that the actual holding in Dodge was that
by denying special dividends, although Ford had such large profits and cash on hand, Henry Ford breached his
duty of good faith to minority stockholders.89 Scholars who accept this argument further reason that the law
allows directors to make decisions with ends other than profit maximizing in mind so long as they do not breach
any fiduciary duties.90 Assuming that boards have limited freedom to make decisions that sacrifice some
shareholder profit for the benefit of other stakeholders, it is important to next analyze the ways in which
traditional corporations can realistically exercise this freedom.
2. Creative Capitalism
In his remarks to the World Economic Forum, business leader Bill Gates made a push for a new type of
capitalism, “creative capitalism.”91 He argues there are two forces that drive human behavior: self-interest and
care for others.92 He believes that to improve life for the poor, governments and non-profits should work
together to create a new type of system.93 This system will use profit incentives to entice corporations to
participate in activities that benefit those in need.94 However, Gates realizes this is not always possible.95
Where profit incentives are impossible, Gates advocates that recognition will enhance the company’s reputation
and draw bright, young, motivated employees to the organization.96 Gates seems to suggest that the
recognition that would come from participating in “creative capitalism,” or activities that benefit a social good,
would make up for any lost profits by driving up stock prices-through enhanced corporate reputation-and
increasing human capital-through attracting higher quality employees.97
a. Profit Incentives
On paper, Gates’s idea appears promising, but not all scholars agree with its workability in the marketplace.98
Gates argues the primary incentive to persuade corporations to take action towards decreasing poverty should
be profits.99 However, scholars argue that in many cas …
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