By Frederick Alexander, the CEO of The Shareholder Commons and author of Benefit Corporation Law and Governance: Pursuing Profit with Purpose.
Investors should tread lightly in approaching the Allbirds IPO.
The trendy shoe company’s corporate structure includes a toxic combination of two elements. First, it has “dual-class” stock, so the public can be sold low-vote shares while the founders stock with 10x voting power. This means that even as the founders own a reduced percentage of the corporation, they will maintain absolute control. Second, Allbirds is a public benefit corporation (PBC), allowing it to sacrifice financial return for other stakeholder interests.
As a result of this combination, the board will not be directly answerable for shareholder interests either in court or at the ballot box. This is the straight flush of unaccountability.
To be clear, I am a champion of the PBC model — I left my role as managing partner of a Delaware law firm seven years ago to work for a non-profit promoting PBCs and have written a book on the subject. But this is a terrible use case that will set back corporate governance and turn the PBC into a management entrenchment device. PBCs are best understood in comparison to conventional corporations, which, for both legal and practical reasons, prioritize optimizing financial return to shareholders. In contrast, PBCs are permitted to prioritize interests other than financial returns, including the well-being of workers or the environment.
This change in fiduciary duties does not, by itself, leave shareholders unprotected; they generally retain the right to choose the board of directors, who in turn select the CEO. Thus, even in a PBC, it is shareholders, not stakeholders, who call the shots. (Indeed, only shareholders can bring claims for breach of the duty to consider other stakeholders.)
The brilliance of the PBC model is to expand fiduciary duties, so that the board can give greater consideration to other stakeholders, but to leave control with the shareholders. This provides a critically important new tool to investors, because optimizing financial returns at the company level is often not in their best interests.
An example is helpful: the board of a conventional corporation might satisfy its fiduciary duty to optimize the company’s return to shareholders by operating with a large carbon footprint and thus contributing to climate risk, which threatens long-term economic growth. Despite its consistency with fiduciary duty, this decision is bad for most shareholders, because they own diversified portfolios with hundreds of companies that are hurt by slow economic growth. In economist lingo, the carbon emitter is externalizing costs to maximize its own profits, but its shareholders are internalizing those costs through added risk to the rest of their portfolios.
PBC fiduciary duties allow shareholders to insist that executives prioritize the climate and other systemic issues. This is not about altruism. Shareholders will want to do so because as diversified investors, they do not want their company to engage in practices that are bad for the social institutions and environmental systems upon which they rely to support their portfolios (as well as their own well-being).
The Allbirds structure perverts the PBC concept because it not only eliminates the fiduciary requirement to focus solely on financial return, but also undermines the voting power of the diversified shareholders who own most stock in public corporations. The founders will have absolute control of Allbirds, even if they only own 10% of the company. But because their fortune will be concentrated at the company — Allbirds stock will account for an outsized proportion of their net worth compared to the average investor — they will not share the concerns of the diversified shareholder base, so there will be no check on cost externalization that threatens important social and environmental systems. If the founders decide that beautiful wool shoes are more important than the impact of a fabric whose environmental cost can be greater than that “non-natural” fabrics, there will be nothing shareholders can do, even if the decision is bad for profits and bad for the environment.
The PBC structure is commonly misunderstood as one that creates a duty to stakeholders. It doesn’t. Shareholders who own and control PBCs can expect that they will be managed for shareholders’ benefit; the change in fiduciary duties recognizes that shareholders themselves have broader interests than individual company financial returns — interests that happen to line up with some pretty important social and environmental concerns.
By putting control of a PBC into the hands of founders who do not share the broad interests of diversified public shareholders, Allbirds is creating a structure that benefits no one but the founders themselves.
If Allbirds really wants to be a sustainability leader, they ought to rethink this unsustainable corporate structure.