Wednesday, June 16, was a typical day in Albany. After arguing about ancient gladiators, senators approved a bill legalizing mixed martial arts in New York; the comptroller promoted a Web video scolding lawmakers for wasting time on the delayed state budget; and gubernatorial candidate Carl Paladino asked supporters to vote on names-Give Me Liberty, Joe Citizen, LiberTea-for his new party.
But then, quietly, something else happened. By a vote of 60 to 1, the State Senate passed a bill that if signed into law will create an entirely new species of company in New York. Sponsored by a state senator named Daniel Squadron, a 30-year-old who beat 30-year incumbent Marty Connor last election, bill No. S7855 makes room in state corporate law for a legal middle ground between nonprofits and ordinary businesses.
It is what’s known as a benefit corporation, which, as an idea, has been around for years. But state laws allowing them to be established have been passed only in Maryland and Vermont, and so recently that they haven’t yet gone into effect.
“I’m both a member of the New York State Senate and an eternal optimist,” a bearded and bespectacled Mr. Squadron said this week. “You have entrepreneurs and investors who want to do good, but also want to do it in the context of all the capital and all the resources in the for-profit world.” But the corporate duty to develop shareholder value, he said, doesn’t leave room to pay serious attention to missions.
“From a left-wing perspective, you can say it would bring to New York the kind of corporations that care about the environment or reach out to underserved communities,” said Andrew Greenblatt, an investor and N.Y.U. public administration professor who worked on the bill. “From a right-wing perspective, what this bill does is, it lessens the regulatory grip that New York State has over corporate purpose by saying you can now create corporations that have missions beyond just profit maximization.”
Mr. Greenblatt used to work for Ben Cohen of Ben & Jerry’s, the ice cream company that was taken over a decade ago by Unilever. Both founders have blamed the sale on directors who felt they couldn’t turn the conglomerate away. “Right now, the law compels companies to be guided solely and exclusively by company profit. And companies can be sued for veering from that,” said Jamie Raskin, the Maryland state senator who sponsored the bill there, and a professor of constitutional law at American University. “We’re living in a time where the crises are piling up all around us from corporations that ignore the public interest. We said that we need a new business model that companies can opt for.”
According to the New York bill, which could potentially be voted on by the Assembly before its summer break, a benefit corporation’s leaders will be allowed-and required-to consider stockholders, employees, suppliers’ workforce, customers, communities and the environment when making decisions. The idea, almost quaintly, is for them to make a difference while making money.
MR. GREENBLATT HAPPENS to live in an apartment in Mr. Squadron’s downtown district. Two years ago, he got a request from a friend: Would he take the candidate through his Battery Park complex to knock on doors? He didn’t know much about the politician, but he also didn’t like Mr. Connor, the incumbent.
While they were walking, Mr. Squadron asked what he did for a living. Mr. Greenblatt happened to bring up his qualms with the current concept of fiduciary duty, which binds a company’s leaders to the pursuit of profit. Mr. Squadron said it sounded interesting, and that they should talk about it if he got elected. “What a good politician,” Mr. Greenblatt thought. “I’m not going to fall for that, but good for him.”
A few months later, Mr. Greenblatt happened to spot Mr. Squadron at a fund-raiser for his two kids’ public school. “I doubted he would remember me, and if he did, I certainly wasn’t going to pester him on my little problem,” he said. “He walks right up to me: ‘Hi Andrew. How’s Miles? How’s G.G.?’” His kids had been home when they start knocking on the doors.
He raised the fiduciary problem, which led to phone calls. Eventually, Mr. Greenblatt introduced him to Andrew Kassoy, a former private-equity executive at Credit Suisse and at the billionaire Michael Dell’s investment firm. Mr. Kassoy left to start a nonprofit called B Lab with two college friends in 2006, a year after they’d sold their basketball apparel company, And 1. The idea is to unofficially certify companies as benefit corporations: So far they’ve named more than 300, with combined revenue of $1.1 billion.
This spring, working along with the Philadelphia attorney William H. Clark, Jr., who penned his state’s corporation law, they drafted their New York bill. “We’re going to have one bad piece of news after the next as long as business is being done by the old rules,” Mr. Kassoy said this week. “I think it’s pretty clear: Short-term value maximization is a bankrupt strategy.”
Actually, the corporate world has been talking about the bigger picture for decades. Goldman senior partner Gus Levy, who died when Gerald Ford was still president, was famous for his mantra of long-term greed. And as The Observer wrote last week, what Wall Street calls its corporate social responsibility, or community reinvestment, or responsible finance, or global citizenship, has been in full effect lately. “I’m glad that people do it, and I think it’s a start,” Mr. Clark said about C.S.R. programs. “But it’s just a step along the road.”
LAST WEEK, THE morning after the bill passed, Mr. Greenblatt got in a Zipcar and drove to Albany to start rounding up support in the Assembly, where the bill needs approval before it’s signed into law. The one nay in the Senate came from a Republican named Owen H. Johnson, who did not return several messages. Mr. Squadron said he didn’t understand that lone vote.
The bill allows a company the option to become a benefit corporation if it can show “material, positive impact on society and the environment.” And an existing company can try to be named one after a two-thirds shareholder vote. “I support it because it’s an option,” said Republican Assemblywoman Jane Corwin, the ranking minority member on the Corporations, Authorities and Commissions Committee, who just signed on to cosponsor the bill.
Mr. Squadron wants a quick Assembly vote before the summer recess, but Ms. Corwin isn’t confident. “I don’t see this passing immediately,” she said. “Right now, I just don’t know how much time we have.”
The commissions committee chairman, Richard Brodsky, a Democratic candidate for attorney general, sees other problems. “The bill has technical components that need to be fixed,” he said this week. For example, he said, it may inadvertently interfere with shareholders’ rights to bring lawsuits.
Mr. Squadron said his colleague’s issues were fixable. “We’re in a race with other large states to be the first to offer this opportunity to entrepreneurs and investors,” he said. “Here’s the thing: Vermont and Maryland are very important, it’s very exciting. But for this to happen in New York is a very big deal.”
Mr. Clark said that similar legislation is going to be introduced in Pennsylvania and New Jersey. Oregon, Washington and Colorado are interested as well. And California has been dealing with its own version of a benefit corporation statute.
“When we talk about this stuff,” said Mr. Kassoy from B Lab, “people say, ‘Well you can’t start thinking about these issues; companies will take their eye off the ball. It will cause total erosion in profits and margins!’ My response to that is the strategy of short-term value maximization eroded a couple trillion dollars of value over the past two years. … To me, in many ways, it is intuitive that business will be more successful if it actually pays attention to its impact.”
Mr. Clark isn’t as sure that a benefit corporation’s goodness will always be lucrative. “The honest answer is, we don’t know. We hope it is. That’s one of the things we’re going to find out.”