The Benefit of a Benefit Company
“There's this recognition that companies with purpose can create long-term value in a way that pursuing profit alone cannot. That's why this group has become quite relevant quite quickly.” – Chat Ortved
On Episode 14: The Benefit of a Benefit Company – Mark Fancourt-Smith and Alix Stoicheff speak with Valerie Mann and Chat Ortved about the recent growth in impact investing, and how the introduction of benefit companies to the Canadian market can support businesses and their sustainability efforts.
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Why was the Social Impact and Business Sustainability Group created? 00:44
What is driving this increased focus on impact investing? 04:59
What is the purpose of creating this new type of corporation? 08:46
Who can be a benefit company? 11:51
How has the pandemic affected the future of ESG investing? 12:49
Transcript
Mark Fancourt-Smith 00:08
Welcome to LawsonInsight. I'm Mark Fancourt-Smith.
Alix Stoicheff 00:11
And I'm Alixandra Stoicheff. Thanks for joining us. On today's episode, we will be speaking with Val Mann and Chat Ortved who are both partners based in our Vancouver office and head up Lawson Lundell’s Social Impact and Business Sustainability Group.
Mark Fancourt-Smith 00:23
As you'll hear, the group brings together lawyers with a wide range of corporate law and transactional experience as well as those with experience in assisting clients with environmental, social and corporate governance, investing and provide legal services for investors and companies bringing purpose, sustainability and social impact are central. Val, Chat welcome to the podcast!
Chat Ortved 00:42
Thank you.
Valerie Mann 00:43
Thank you very much.
Mark Fancourt-Smith 00:44
Now I wanted to start, Val, with you. I know that you had considerable experience in helping clients and social impact ventures, and then funds from long before the group was created. And I wanted to ask you what prompted the creation of the group within the firm? And to what extent does it involve adding new expertise or leveraging expertise that we already had?
Valerie Mann 01:04
Well, you know, I think it was time to form the actual group. But we have been working in the area for quite a while. The first few clients, if I think back who I can say we're in social impact, started with companies involved in environmental technologies, organic food manufacturers, sustainable product manufacturers. There's a big industry and BC of a lot of natural food and beverage producers. And you know, like any company going through a growth trajectory, they look for capital, they attract private equity investment and venture funding interest and they acquire other companies, they get acquired. And those are all the things that we did and do in our corporate practice. So there was definitely crossover of a number of different areas. Our tech law practice, started about just over 20 years ago, we were acting for companies that were in clean tech and environmental tech types of companies and our fund formation practice, coincidentally, also started just around or just over 20 years ago, and they've grown together. And so all these pieces have kind of intersected to now have us involved not only with the companies, but funds whose sole purpose and thesis is impact investing.
Chat Ortved 02:20
I agree with what Val said, and I have a bit of an academic interest in why this group became relevant. In a similar way to how Hemingway described going bankrupt, it was gradual, and then and then quite sudden. I think we need to go back to back a little ways to see the way the role developed, in our, I guess, sort of Western open societies. The very first corporations had to be formed by Royal Charter, so that you had to go to the King or Queen and ask them for permission, and it's very clear, if you look at those companies constitutions, what they were formed to do, their purposes were inherent in their governing documents. And as the corporate law developed, companies could be incorporated for any lawful purpose. And you can see that now in the articles of most companies, they can they can pursue any lawful purpose. That obviously is allowed a huge expansion of commerce. But what it also was allowed is, is these various theories of what businesses are for and what corporations specifically are for, to kind of wax and wane over time. And in the latter half of the 20th century, this theory took hold, it's now largely called shareholder primacy. And its associated with the economist, Milton Friedman. And what shareholder primacy says is that the sole purpose of a corporation is to generate profit for the benefit of the shareholders. But what a lot of people are thinking about now is, even though it is attractive, why it has proved to be so inadequate in so many ways. It's become clear that one of the problems with treating shareholders as the sole beneficiary of the corporate endeavor is that we've promoted this almost pre-Copernican idea that our commercial activities we and our activities are somehow isolated from the planet in which we live and what we're seeing now. And as Val said, this is ultimately investor driven. It's driven by others too driven but now by legislators and regulators and obviously activists who've been there from the beginning and academics but primarily by providers of capital by investors. The evidence is in and there is no long-term value for a company that hasn't engaged with the risks and the opportunities that are associated with climate change specifically, but the environment more broadly. And the other groups that a company's activities impact. And that's why ESG factors are so important now to investors, and therefore, to the companies they invest in, that's why we're seeing the growth in social impact investing. That's why we're seeing these new corporate vehicles like benefit companies that are designed to integrate the factors that go to long-term value. So in a sense, we've come full circle, where there's this recognition that companies with purpose, can create long term value in a way that pursuing profit alone cannot. And that's why this group I think, has become quite relevant quite quickly.
Alix Stoicheff 04:59
I'm wondering if you can speak a little bit to what is driving this increased focus on impact investing. You both mentioned that it was investor driven, but I'm just wondering if you can expand on that a little bit?
Valerie Mann 05:08
So the term impact investing, and I thought going back 20 years was a long way, but Chat’s taken us all the way back to Kings and Queens…
Mark Fancourt-Smith 05:16
Actually, he went to Copernicus!
Valerie Mann 05:17
Well, that's true, actually. He went to Copernicus, your right. So impact investing itself, as a term, although this has all been evolutionary, and I agree with Chat, that we've come to this place, not by surprise, but by evolution. The term is relatively new compared to what investors were doing. And really, I think it traces that terminology or coining that term and using it in the in the way that we use it now. It really came about, interestingly enough, around the time of the financial crisis in 2008 and 2009. I think it was a little bit before that, and it was kind of a marriage between investing for financial gain, and what was really philanthropic investment and philanthropic dollars being pooled. If you put those on two ends of a spectrum, where you've got financial gain on one hand, and philanthropic giving on the other, this meets somewhere on that spectrum, more or less to one side or the other. And you'll see that impact funds have come from agendas of one side of the other, and they marry up in the middle to effectively have investment activity that needs more than one goal. So it's not just meeting the goal that as Chat referenced of shareholders, primacy and financial return, it's also meeting returns for social, environmental and environmental benefit. The so-called triple bottom line, and it is a growing market and in dollars are coming into it. And they're coming into it because investors, people who are also consumers are thinking about their consumer dollars, they're thinking about their investing dollars in a different way than they used to. And companies themselves are realizing they have to or they're being told that they have to deal with environmental, social governance, types of types of issues and talk about them and incorporate them into their business model. And so when dollars flow into that kind of market it they have to go somewhere. So they're coming in, from institutions, from foundations, from large investors with dollars parked somewhere, they need to deploy it. And if those decision makers are deploying that capital towards businesses that are sustainable, it is changing what they're what investors are looking for, in terms of their, quote, unquote, return.
Chat Ortved 07:40
It's a staggering amount of money and growth has been focused on this type of investing. And I think it's worth pointing out that there's not a specific definition of what ESG investing actually means. But the fact that there is this category that's attracted so much capital is really amazing. And one of the things that's accelerated is it's not just philanthropic investing, or someone who's solely interested in a triple bottom line, there are investors out there that are solely seeking returns the way they always did that are seeing value in this type of investing as well. And that's been a major accelerant. And so the growth has been incredible.
Valerie Mann 08:14
And you know, investors like pension funds, which is a huge amount of investment dollars in this country. They in you know, they invest in it in a broad range of financial products, public to private. Their view is that investing in ESG is really is really a way of minimizing risk over time. And that does speak a lot to climate change mitigation, but that to them is part of their overall strategy, which doesn't just speak to a, you know, a sense of well, we have to because we're supposed to do it. We have to because that is a prudent investing activity, if we're mitigating our risk.
Mark Fancourt-Smith 08:46
Chat, I wanted to go back to one of the things you had mentioned in terms of sort of coming full circle for statements of purpose of companies. And, and tying this back to whether it's a willingness to see, you know, by investors to see creation of value in different ways or in different timescales, or even the decisions by these large, you know, asset managers to require that and ask you about the growth of benefit corporations in, which is a concept which has migrated up to BC, at least from the States in the sense of what's the purpose of creating this new type of Corporation? And what is the or put one way, what's the benefit to a company of being a benefit company?
Chat Ortved 09:28
Yeah. So that's a great question. And Val and I've spent a fair bit of time talking about this, and then there's a fair bit of debate with this law coming into BC last year that a lot of benefit companies to be formed about what purpose they actually serve. I'll start with where they came from in the first place. In a place where I mentioned shareholder primacy, where shareholders are the beneficiaries of the corporate endeavor where the business is run for their benefit. That is not our law in Canada. In the last almost 20 years now, it's been clear that shareholders are, there is no shareholder primacy here, at least in that sense. But in the United States, there has been, because there is that view, their benefit companies are very useful from a corporate governance perspective. And there's some very influential corporate commentators in the US who are calling for not just new companies, and not just triple bottom line companies, but all major public companies to shift towards benefit corporations for that very reason. Because there's, it allows them to get away from the obligation to treat the shareholders as the prime beneficiaries of the corporation. In Canada, we don't have that law. It’s very clear that the board and managers have to act in the best interest of the corporation itself. A company whether it is a benefit company, or a regular Corporation, has to have a purpose and act in the best interest of the corporation involves pursuing that purpose. So from a governance perspective, there may be no benefit at all to being a benefit company. But that doesn't mean that there is no benefit to being a benefit company. It just means from that one perspective, there could be lots of other reasons that companies want to be benefit companies. A clear one to me is the company has to state explicitly in its constitution, what its purpose is, and who it wants to benefit. So even if a regular company has to have a purpose, it doesn't need to be stated. And it almost never is stated in its governing documents. A benefit company has to have that there are non-legal reasons why companies might want to be benefit companies, their customers might like them better, and apparently do like them better. In some circumstances, talent may like them better, it may be easier to recruit top people to work for your organization, if you are a benefit company, and you've made it clear what your purpose is. And ultimately, it may be true that that if this investment movement is right, and that there is long term value in having a purpose that's explicit, it may actually be that returns are as good or better in a better company that is yet to be seen.
Alix Stoicheff 11:51
And Chat, you mentioned that companies have to promote one or more public benefits under the legislation. And I'm wondering if this is only for companies that have a clear social or charitable bent to them, or if the definition of a benefit is broad enough to encompass a wide variety of industries?
Chat Ortved 12:08
It is very broad, it's cast very broadly in legislation, and that's on purpose. The legislation calls it a positive effect. And then it gives some examples of what that might include. But it's so broad that it could be anything and to me, that's a good thing. Because benefit companies aren't just for a company that wants to do good above doing well. It should be for everyone. Even an oil explanation company could be a benefit company, if it can find a way to express how that is a benefit to a group of persons and how the company can pursue that purpose in a responsible and sustainable manner. Whatever that might mean, under the statute. We don't have law on that yet. We just have the words, but ultimately, we will. And that'll be very interesting to see.
Alix Stoicheff 12:49
So for our last point here, we wanted to ask you both: What do you see as the future of ESG investing and I asked that particularly in light of the COVID-19 pandemic and whether you think that's affected at all?
Valerie Mann 13:00
You know, every time the world goes through some kind of knock and we're going through when now as we know. I think things change and we were evolving into ESG and impact investing and, you know, a different view of governance already before we hit the pandemic. I like to think that we've learned something in the last in what will turn out to be 18 to 24 months probably. And that it will, it will just put a little bit even more gas into thinking about where are where people's dollars go, how companies invest, what companies need to do. I'm optimistic about this continuing on the path, and maybe even at a faster pace because of what we've been through globally.
Chat Ortved 13:48
Law firms aren’t always leaders in these things. Val and I aren't starting a new movement by this, we're reacting to a demand that has been growing for a long time. And there was so much dissatisfaction with the way that it maybe capitalist at large is working after the financial crisis. And when we came into this pandemic, there was a lot of talk about how the movement toward ESG was going to fall away, and everyone was just going to flip back towards saving, and the opposite happened. And it's accelerated some of these trends that have been that have been around for at least since 2008. And I don't expect that to change. And we're, we're here with this group, which I which I think the great thing with this group is I think it really expands really throughout the whole firm in a way because I think every company is going to have to think about its sustainability over the long term at some point. And we're there to help them do that. And to think about to think about how to think about why that matters.
Mark Fancourt-Smith 14:42
Val, Chat, thanks so much for being on the podcast.
Valerie Mann 14:45
Thank you for having us.
Chat Ortved 14:47
Yeah, thanks very much. It’s been a pleasure.
Mark Fancourt-Smith 14:48
Thank you for joining us on LawsonInsight and thanks again to Val and Chat for joining us today.
Alix Stoicheff 14:53
You can also stay up to date by connecting with us on social media using the handle @LawsonLundell, and by subscribing to the podcast on Apple, Google or Spotify podcasts. Thanks very much for listening.
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Hosted by partner Mark Fancourt-Smith and associate Alix Stoicheff, LawsonInsight is a look inside the legal mind. If you would like us to cover a particular topic, please email your requests to inquiries@lawsonlundell.com
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