STAKEHOLDER OR SHAREHOLDER

by W. David Pardue

In 1919, Henry Ford was expanding his company as fast as he could, building more and bigger plants so that he could build more and more cars, and so that more and more people could have these cars, and more and more workers could become employed. Henry was making a lot of money but, according to some, he wasn’t distributing enough of that money in the form of dividends to his shareholders. Two shareholders in particular insisted that he start distributing more to the shareholders instead of plowing so much of it back into the company. These two men were brothers and their last names were Dodge. The Dodge boys filed a lawsuit. The Michigan Supreme Court agreed with the Dodges and said that Henry had to substantially increase shareholder dividends, because Ford Motor Company’s paramount duty was to maximize shareholder investment.

So, the Dodge brothers got a lot of money and started their own automobile company and that company later became part of the Chrysler Corporation. Apparently, Dodge v. Ford was a seminal decision. Now, courts across the country more or less routinely require corporations to pay shareholder benefits first and everything else later.

But, as Rana Foroohar points out in her well-researched analysis of corporate America in her book “Maker and Takers” (2016, Crown Publishing Group, a division of Penguin Random House), this principle that the purpose of a for-profit corporation is to maximize shareholder value, has serious adverse consequences. (The subtitle of this book is “The Rise of Finance and the Fall of American Business.”)

BENEFIT CORPORATIONS

If you read her book, you’ll find that Foroohar describes this culture, and now law, that requires that a corporation’s first duty is to maximize the profit margin for the benefit of the shareholders. She describes the modern for-profit business model as “financialization.” Apparently, in response to damages that financialization has sown across America’s landscape, a growing number of states have enacted laws enabling individuals to form benefit corporations. Thirty states have enacted statutes allowing for the creation of benefit corporations.

Benefit corporations are different than business corporations, even though both corporations can be engaged in the exact same business, have the exact same kind of customers, the exact same product, and the exact same number of shareholders, officers, and directors. If you look at the corporate mission statement of a typical benefit corporation, you might be surprised to see the words curious, conscientious, and moral. Benefit corporations focus on stakeholders. We all know who shareholders are. Stakeholders, on the other hand, are customers, workers, society as a whole, and even the environment. Benefit corporations are required by statute to include the interests of employees, suppliers, customers, and the community. They are also required to produce an annual report reflecting this commitment.

Oklahoma State Senator David Holt tried unsuccessfully to get legislation passed in 2016 that would authorize Oklahomans to create benefit corporations. So, we don’t have a benefit corporation statute in Oklahoma. However, Oklahoma does allow foreign corporations to be domesticated in Oklahoma. That means that someone in Oklahoma can do business in Oklahoma through a foreign corporation that was formed as a benefit corporation pursuant to that state’s laws.

If I have piqued your curiosity, go online. There are some really good articles about benefit corporations. One even reflected on a study finding that investors are becoming more prone to invest in benefit corporations. These investors seem to have concluded that investment for long term growth is best achieved with stakeholder driven business models.

If your company is not a benefit corporation or you’re wanting to form a corporation now and not wanting to form it in a foreign state, consult with your lawyer and discuss with him the possibility of issuing non-voting shares to your investors, and restricting or limiting the rights to shareholders pursuant to existing statutes. Okla. Stat. Tit. 18 § 1032 grants or restrict rights of shareholders. Okla. Stat. Tit. 18 § 1049, the principle statute regarding payment of dividends, should also be carefully studied if you’re wanting to improve the contribution of the corporation to the stakeholder. Discuss with your lawyer the possibility of drafting the Articles of Incorporation or Articles of Organization with a stakeholder bias. The same can be said for your Bylaws or your Operating Agreement as well as your Subscription Agreement.

My limited review of this approach to solving some of the problems that America’s communities, employees, the environment, and the long-term growth of business is facing did not reveal to me whether or not you can accomplish as much by changing the bylaws of the Articles of Incorporation or Subscription Agreement, or the type of stock that you could issue, as you could if you operated as a benefit corporation. I certainly think it’s worth looking into. If investors sign off on a stakeholder corporate mission statement and agree that as investors they are committed to the company transcending beyond the short term profit demands of shareholders, I don’t see how they can complain about the size of the dividends that they subsequently receive, and that is assuming the investor will automatically make less and not more from being an investor in a benefit corporation.

In closing I urge you to read an article by Dale Denwalt in the October 27, 2016, Journal Record. This article is on the front page and is entitled “Benefit Corporations Appeal to Millennials.” Are you a taker or a maker?


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