If You Love Freedom, You Should Love the Benefit Corporation

For F.A. Hayek, it’s all about freedom…

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 free markets and less government involvement in the lives of individuals and businesses.  It also, however, justifies the existence of Benefit Corporations, 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 this 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 after all it’s nice to know that you would be able to choose differently had your desires been 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, and it is also good that we are not always required to do these things.

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

Freedom and the Benefit Corporation

It is a matter of debate whether 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 own self-interest.  While this view is controversial, it seems to be implied by legal precedent.  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)).

According to this decision, it seems 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 free markets.

Letting businesses incorporate as Benefit Corporations, which can take into account not only the interests of shareholders but stakeholders as well, solves this problem by increasing the choices, and the freedom, of businesses on two separate levels.  First, it gives start-ups an additional option when deciding how to structure their company.  Instead of being forced to choose between purely non-profit or for profit, a business can elect to be a hybrid without being vulnerable to potential conflicts with profit-seeking shareholders.  Of course, benefit corporation legislation does not require all companies to incorporate as Benefit Corporations; it merely serves as an additional option to consider and gives the entrepreneur more freedom structuring the company.

Second, if a company chooses to register as a Benefit Corporation, decision makers will be free to make decisions based on a wider array of factors.  This means that they are free to seek profit, but are also free to consider the interests of others, like consumers, employees, society, and the environment.  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  growth in investment, 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 that 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.  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.  I think even Hayek would have to agree.

Photo Credit: Cato Institute

Questions about Benefit Corporations?  Interested in becoming one?  Contact Dan at Osusky@BRevolution.com.

Dan Osusky

Dan Osusky is an Associate at B Revolution Consulting, a benefit corporation consulting firm that advises social entrepreneurs in business plan development and strategy, and COO of B Revolution’s ezBcorp service, an online services platform that provides quick and convenient business solutions for social entrepreneurs. He has a graduate degree in Philosophy and believes that as a complement to the passion of social entrepreneurs it is necessary to develop an intellectual framework that can provide insight into the societal, economic, and moral implications of social enterprise.

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