Adopting Stakeholder Advisory Boards

Abstract

Over the past decade, interest in socially responsible business has grown exponentially. The social business movement seeks to have firms focus on the interests of all corporate stakeholders, rather than solely the financial interests of shareholders. Coupled with the social business movement of the past decade has been the passage of social enterprise statutes by over thirty states. The social enterprise statutes provide legal frameworks for firms that seek profit alongside broader social and environmental ends. A plethora of social enterprise legal forms have been created in the United States since 2008, including benefit corporations, public benefit corporations, benefit LLCs, low-profit limited liability companies (L3Cs), general benefit corporations, specific benefit corporations, sustainable business corporations, and social purpose corporations.

Despite the interest in social business and the passage of numerous social enterprise laws, the basic corporate governance framework has stayed largely the same. In both socially-focused traditional companies and in newly formed social enterprises, the corporate governance system is one that empowers directors, officers, and shareholders, but largely ignores other stakeholders such as employees, customers, vendors, creditors, the environment, and the community at large.

This Article explores the shortcomings of the current corporate governance framework, reveals inadequacies in previous proposals to focus firms on all stakeholders, and proposes a stakeholder advisory board as a solution. As proposed, the stakeholder advisory board will give all major stakeholders a more direct voice in firm governance and will grant more stakeholders limited but significantly powers, without harmfully disrupting the efficiency of the board of directors. If adopted, the stakeholder advisory board will better align the corporate governance framework with the recent social business movement by including representatives of all stakeholder groups in decision-making. This proposal suggests mandating adoption of a stakeholder advisory board for large social enterprises, and encourages the voluntary adoption of a stakeholder advisory board by all firms that take their social commitments seriously.

Keywords: benefit corporations, L3C, social enterprise, social entrepreneurship, corporate governance, B Lab, social innovation, impact investing

JEL Classification: K10, K20, K22, L31, M14, O35