The Dark Side of Colombia’s Benefit Corporation

Recently, this Blog featured a post covering Colombia’s new reform that makes it possible for commercial companies to pursue public interest objectives. It was claimed the “Beneficio e Interés Colectivo” (BIC) can be expected to “contribute to the promotion of responsible capitalism in Colombia”. In this post, I challenge that claim by suggesting that, whilst the BIC is a welcome innovation in some respects, it also has a dark side.

There are problems with the BIC that may well reduce the likelihood that it could contribute to the promotion of responsible capitalism.

In addition to what that post had to say about the BIC’s positive aspects, I would add the following. The legislation is desirable because it equips interested firms that do not wish to take the traditional non-profit form with a route to contributing to the common good. In this way, it injects more optionality into the corporate legal ecosystem so that market actors can experiment with hybrid formulations of corporate purpose, which has not historically been possible in Colombia. Moreover, the BIC is not a corporate form in the usual sense – it is a juridical “label” or “sticker” that can be gained by adhering to particular requirements in Ley 1901 de 2018. For the moment, it is only available to commercial companies, but in future it could be extended to a wider range of private law entities. This is attractive because it opens the door for other types of entities to operate for public benefit, which may create the conditions necessary for the emergence of a so-called “fourth sector”. Indeed, this is the approach taken in European jurisdictions such as Denmark and Luxembourg.

But there are problems with the BIC that may well reduce the likelihood that it could contribute to the promotion of responsible capitalism. True, the legislation says that BICs need to both operate in a responsible way generally and also express a specific mission in the articles of association. For example, a firm would be in breach where it positively advances the chosen public benefit objective of clearing industrial waste whilst at the same time it mistreats workers. Similarly, a firm would fall short where it maintains ethical, local supply chains but does not further the chosen corporate purpose of providing subsidised eyeglasses to the worse off. These “general” and “specific” components of purpose are, theoretically, meant to prevent a firm from “purpose washing” (i.e., giving the false impression that it is adhering to higher standards of corporate social responsibility when it is not). In practice, though, I think it will be far more difficult to do so. I shall give two examples, which I consider from a comparative perspective. Namely, the Colombian legislation emulates, to a greater or lesser extent, the “benefit corporation” model that is prevalent in many US jurisdictions. I shall, loosely, focus on Delaware as a representative illustration.

The Colombian legislation relies on directors to “do the right thing”. They must use their business judgment and discretion to integrate stakeholders’ interests into their firms’ agendas. The mandate this provides is a double-edged sword.

First, like the Delaware statute, a BIC’s directors have a positive duty to account for multiple stakeholders’ interests – the interests of the firm, its shareholders, those non-shareholder constituencies materially affected by firm conduct and the public benefit objective defined in the articles of association. On the one hand, that the law does not prescribe how these interests ought to be balanced is helpful, because it allows individual firms freedom to discover what works best for them in practice. On the other hand, however, with no specification of even a rudimentary methodology for how to quantify and pursue multiple interests simultaneously, this task is left to the discretion and judgment of directors. Of course, a given firm’s articles of association could furnish such a methodology, but in the absence of that possibility the Colombian legislation relies on directors to “do the right thing”. They must use their business judgment and discretion to integrate stakeholders’ interests into their firms’ agendas. The mandate this provides is a double-edged sword. Granted, to some degree they have breathing room under this arrangement from shareholder value pressure, but it also positions directors to behave selfishly (or foolishly), which may lead to increases in agency costs and resource waste.

This is a perennial objection against “stakeholder” capitalism, and one that has been consistently raised by commentators researching US benefit corporations, not just in Delaware but more broadly. Whilst a BIC’s shareholders could sue, that does not mean that they would be successful. So long as directors are clever, it would not be difficult for them to justify any number of choices that might balance in different ways the multiple interests they can pursue (including their own). The only exception would likely be where directors take truly extreme decisions that consistently and for an extended period systematically discount or ignore a firm’s purpose-related agenda.

Consumers could be paying higher premiums for what they believe are ethical goods or services, when in reality the excess gains are being funnelled to shareholders (and possibly management).

Second, if the Delaware experience is any indicator, BICs may attract the interest of traditional private equity firms focused on profit maximisation. This could be a problem since, like the Delaware model, the BIC does not place legal constraints on profit extraction. Recent empirical evidence from the US suggests significant amounts of capital are flowing into Delaware firms from venture capitalists, particularly in consumer-facing industries. Whilst there are alternative explanations, it is just as likely that this phenomenon is being driven by purpose washing. Put differently, profit-seeking investors may be attracted to the form because it is not difficult to externally signal a commitment to social good and simultaneously operate the firm internally like a traditional corporation. Therefore, consumers could be paying higher premiums for what they believe are ethical goods or services, when in reality the excess gains are being funnelled to shareholders (and possibly management). Obviously this depends upon ownership structure, but if a specific BIC is private-equity-backed, which necessarily entails augmented control rights, it is implausible that shareholders would act to divert gains to other stakeholders. This defeats the whole legislative rationale of the BIC.

Stakeholders must proactively take interest in the affairs of a BIC and be willing to hold it accountable, and the regulator must have the resources and bandwidth to police the regime

Disclosure is one way to prevent both of these problems. Consistent with the Delaware framework, the BIC does require a management report explaining how a firm’s activities have created societal or environmental value, which must be assessed against an independent standard approved by the “Superintendencia de Sociedades”. The legislation is clear that interested stakeholders can alert the regulator to possible reporting abnormalities, and it also makes provision for random audits. However, the experience with US benefit corporations suggests abysmal reporting compliance, and there are also issues surrounding a lack of enforcement by individual jurisdictions. For things to pan out differently in Colombia, stakeholders must proactively take interest in the affairs of a BIC and be willing to hold it accountable, and the regulator must have the resources and bandwidth to police the regime, neither of which are foregone conclusions.

Therefore, taking the above analysis as a whole, whilst the BIC is a positive development in some ways, it is debatable whether it will actually usher in a new era of responsible capitalism in Colombia.

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J S. Liptrap is an assistant professor of law at the University of Sussex, and a research associate in the Centre for Business Research, Judge Business School, University of Cambridge.

This article is in response to 'Colombian Benefit Corporations in Perspective' by Francisco Reyes Villamizar which featured in our 'Spotlight on Latin America' issue.

This article reflects solely the views and opinions of the author(s). The ECGI does not, consistent with its constitutional purpose, have a view or opinion. If you wish to respond to this article, you can submit a blog article or 'letter to the editor' by clicking here.