Jasper van Brakel
Published 3 weeks ago.
About a 5 minute read.
Image: Zetong Li
Let’s use the momentum behind the new mandates to rethink the corporate structures that hold back environmental and social progress.
Governance is the sleeper element in the ESG triumvirate; but that’s about to
change with California’s new climate disclosure
Starting in 2026, large companies doing business in the state will have to
report on their direct and indirect greenhouse gas emissions, as well as
climate-related financial risks and their plans for mitigating those risks.
These filings — and the work leading up to them — are going to cast a ray of
sunshine on how corporate governance practices affect social and environmental
performance. It will become apparent that governance is a power that can kick
the door to real progress on climate action and social justice wide open — or
slam it shut. And that makes this an ideal time to take a fresh look at the
structures and assumptions underlying corporate governance, especially for
companies with a strong sustainability focus.
Many of these companies have embraced stakeholder
— the idea that companies should benefit customers, employees, suppliers and
communities, as well as shareholders. Yet typical governance structures guide
decision-makers to prioritize one outcome above all others: creating financial
That orientation clearly has hampered business progress on addressing systemic
issues, as the California disclosures will no doubt reveal to those who read
between the lines.
These new laws and other calls for accountability reflect a surge of energy
behind the search for solutions. Let’s harness that momentum to explore how to
create the decision-making and incentive structures we need to meet this pivotal
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If we really want stakeholder capitalism, we need stakeholder governance. The
core concept here is to disentangle governance from ownership of the company.
That sounds like — and is — a heavy lift. But we’re not starting at ground
level: We can already see a shift toward greater stakeholder power in the rise
of benefit corporations and campaigns for expanded board representation.
nascent idea just 10 years ago, now number in the thousands and include a
growing number of public
And activist ESG investors, fed up with the slow pace of change, are filing
mandating that their portfolio companies become benefit corporations. The legal
form is available in most states; provisions vary but generally require that
benefit corporations specify social and environmental goals, report publicly on
progress, and consider those goals alongside profitability and shareholder value
when making decisions.
Alternative governance structures will produce even more powerful benefits. One
option gaining steam is conversion to a non-charitable perpetual purpose
trust (PPT), which owns a majority of
voting shares and appoints a board of directors. This is a flexible
and not every iteration solves for shareholder governance.
for example, went all in on assuring the company’s mission would continue while
allowing the Chouinard family to maintain control over the voting rights.
I’m advocating for more PPTs like the one that governs Organically
— which not only preserves the business’s mission and prevents an unwelcome sale
but also redefines fiduciary duty to include multiple stakeholders, reinvests
profits and shares them with stakeholders, and enables investors to purchase
stock and receive dividends even while voting control is held in a trust.
People often assume this model is viable only for private companies, niche
players or social enterprises. Not so: Pretty much any company could do this,
including high-growth startups and publicly traded corporations.
Eyebrows rise when I say that. One common question is, “Can companies survive in
competitive markets with this structure?” Absolutely. It often gives them an
advantage because customers believe they are making a positive impact by buying
from the brand. Patagonia’s
with its profits now going to fight climate change, makes it an even more
attractive brand to consumers and the talent market.
The answer to the follow-up question — “But can they attract capital?” — is more
complex. Stakeholder-governed companies struggle to attract capital from sources
that have short time horizons or are singularly interested in maximizing their
own return. However, they can deliver attractive returns at lower risk — a
compelling proposition for long-term, patient investors, especially those
focused on impact.
The PPT model is compatible with traditional debt financing, and structures
along the spectrum between pure debt and equity provide appealing alternatives.
for example, is an underused financing strategy that can be both investor and
founder friendly. Convertible notes that generate a dividend and pay off at a
predetermined point are another option. Business leaders should be aware,
however, that these alternatives require more investor education.
Skeptics note that the prevailing corporate incentive structure has the virtue
of clarity and assures investors that their interests are primary. And it’s true
that stakeholder models may need refinement to prevent internal competition for
group advantage. These companies need strong board leadership and a healthy
process — but that’s the case for all companies, and it’s not as if shareholder
primacy guarantees investor security.
The more serious concern is whether separating ownership from governance will
create companies that help solve big problems rather than perpetuate them.
There’s reason to believe it can: Public-private partnerships are essential for
progress and stakeholder-governed companies are by nature collaborative. And
many people working in conventionally structured companies know what it would
take to have positive impact, but the singular focus on maximizing short-term
financial returns keeps them from making those decisions.
The disclosures California will require are certain to reveal areas where
companies can reduce carbon emissions faster. Maximizing these opportunities —
along with solutions to other systemic problems — may require fundamental
changes in who makes decisions, the interests they’re accountable to, and the
incentive structures they work within.
Published Nov 6, 2023 7am EST / 4am PST / 12pm GMT / 1pm CET
Jasper J. van Brakel joined RSF Social Finance as its president and CEO in March 2018. He is convinced that innovative approaches are needed to address the significant social, cultural, and economic challenges of our time, and guides RSF as it builds on its success in transforming the way individuals and organizations work with money.