Liquid Investment; Lasting Value
The most important event to take place in the financial world in 2017 has already happened. It was a simple stock offering. But one facet of that otherwise unremarkable transaction signals that the capital markets are open to a change that might just save the planet.
On January 31, Laureate Education completed an initial public offering, raising $490,000,000. Laureate was the first company to go public as a “benefit corporation,” a corporate form that did not even exist ten years ago. While 4,500 benefit corporations have now been created, each of them was privately held until last week’s IPO.
The benefit option is now available in 30 states (including Delaware, where Laureate and most public companies choose to incorporate). This choice entails one simple, but profound change in corporate governance: a benefit corporation must balance the interests of all its stakeholders in operating its business — it cannot maximize wealth for shareholders, while ignoring the costs imposed on others. Laureate thus has rejected the market paradigm of “shareholder primacy,” and asked the public to invest in an entity specifically designed to treat customers, employees and communities as the shareholders’ partners, rather than as tools to be exploited for maximum financial gain. Doug Becker, the Chairman of Laureate, declares their creed as “here for good.”
Investors, who must preserve the value of the systems into which they invest, should take note. While government action often dominates discussions of social and environmental policy, our private allocation of financial capital is a critical factor for almost all of these issues, from fighting disease and hunger, to wrestling with climate change and resource scarcity, to addressing inequality. Our future is likely to be decided more by the choices made in capital markets than by those made in capital cities.
The Laureate IPO proceeds will be invested in for-profit higher education, a controversial industry that raises important questions. Are investors allocating that capital to build long term value in a sustainable system? Will it be used to create educational opportunities for underserved populations in the 25 countries where Laureate operates, or simply for the purpose of generating a financial return, with the educational outcomes being a mere by-product of secondary importance? Laureate and its new shareholders addressed that very legitimate concern by choosing a business form that requires them to balance profits with the interests of students and the communities in which they live. (In order to put transparency and accountability behind that choice, Laureate has also chosen to be certified as a B Corp™, an NGO certification that testifies to a corporation’s positive impact on its stakeholders.)
Of course, traditional corporations do not necessarily create poor outcomes. Corporate law allows business to aggregate capital from many investors and put it under centralized professional management. This enables a market economy that creates essential goods and services. Moreover, for many of these corporations, treating stakeholders well is the best recipe for shareholder return. So corporations often “do well by doing good.”
But not always; under traditional corporate law such positive outcomes are contingent on optimizing profit and “maximizing value.” If management has an option to create a better return that isn’t good for workers or the environment, the current market regime encourages them to take the lower road. Current corporate governance isn’t evil — it’s just amoral, and this absence of a moral compass is producing a system that creates long term headwinds for the very investors who provide the capital.
The issue is that all this individual “maximizing” burdens the systems that support business activity. It creates a classic tragedy of the commons, with the negative outputs from each individual company dragging down the economy and creating systemic risk and instability. Consider the profit chasing that lead to the 2008 financial crisis, or the fact that carbon emissions and rising inequality have no cost on a balance sheet: it is not hard to connect the dots between a culture of individual maximization and collective disaster. This systemic damage threatens long term investors to an extent that individual maximizing cannot make up for. Greed is bad.
The Laureate IPO means that mainstream investors have now bought into the new paradigm — literally. Apply this change in thinking to the $70 trillion invested in publicly traded stocks around the world, and to the $10 trillion in private equity and venture capital. Good health at a fair price could become a primary corporate goal for healthcare companies, and not simply an outcome contingent on profit-seeking. Energy companies could have a duty to balance the effect of their decisions on the planet with the return they provide to shareholders, adding a new dimension to value creation. And before closing a factory to move jobs to a low wage jurisdiction, a benefit corporation would have to consider the effect on its workers and the surrounding community.
But it isn’t enough for investors to accept benefit corporation governance — they must insist on it. The clock is ticking, and investors must act to preserve the long term value of their holdings and the society in which those investments are embedded. They must insist that corporations move beyond one dimensional shareholder primacy, and, like Laureate, govern themselves to build lasting value for all of us.
Frederick Alexander is the Head of Legal Policy at B Lab, the NGO that provides the B Corp™ certification, and Counsel to Morris, Nichols, Arsht & Tunnell, a law firm based in Wilmington, DE.