In my recent article published in the Journal of Corporate Law Studies—‘British Social Enterprise Law’—I take a fresh look at the UK’s community interest company (CIC). In so doing, I make several contributions to the legal literature, but for the purposes of this post I focus on one of them. Namely, although commentators have endeavoured to grapple with the CIC’s structure on occasion, these fall well short of full and systematic treatments. Therefore, I offer a comprehensive analytical model of the CIC. I contend that there are both general and major distinctions between it and the traditional for-profit corporation.
As a general matter, the CIC is at odds with the traditional for-profit corporation because it is not nearly as contractually customisable or economically efficient in the orthodox sense. More specifically, there are four major distinctions between the CIC and the traditional for-profit corporation.
The first major distinction concerns the theme of public benefit. A traditional for-profit corporation can either generate public benefit indirectly or depart from the pro-shareholder position and select a corporate objective that more directly produces specific public benefit. However, this choice is purely contractual. The CIC is a very different creature—the regulatory regime explicitly stipulates that creating public benefit is a mandatory and irreversible legal requirement. A CIC cannot be formed without the specification of proposed activities to be carried on for public benefit, and the CIC Regulator has broad discretion to determine whether the stated activities would do so—both at the point of registration and if a firm later elects to alter its objects.
The second major distinction concerns the board of directors. A CIC is a kind of publicly embedded social institution, accountable for prioritising a legislatively imposed goal—the creation of public benefit—that supersedes its various human participants’ private individualities and interests. Thus, a CIC’s board of directors must formulate and execute a strategy in which the firm engages in productive processes and generates profit, instrumentally, in the pursuit of the selected public benefit. Whilst this is not the same thing as arguing that CICs cannot pursue profit, pursuing profit must nevertheless be consistent with the objects clause and ultimately tied back to the selected public benefit. As such, the board of directors has a differently constituted duty of loyalty that is not owed to the corporation for shareholders’ private benefit, but rather to the firm itself as a separate socio-institutional entity.
This reality, in effect, blunts the economic and non-economic rights that shareholders would otherwise enjoy, which is the third major distinction that disconnects the CIC from the traditional for-profit corporation. Whilst shareholders in a CIC still perform a risk-bearing function, the law precludes shareholder wealth maximisation. Therefore, the residual economic rights that shareholders do hold ought not to be viewed as a reward for risk-taking. At the most, shareholders can expect only a modest return, which makes them more like bondholders or quasi-donors. This essentially downgrades shareholders’ interests in a CIC, making it wrong and damaging to a firm’s social legitimacy to consider or prioritise their interests in the pursuit of profit if it cannot be shown to serve the selected public benefit. We can say that a CIC’s shareholders have non-economic rights to oversee the board of directors. But this oversight jurisdiction can only be exercised if it is in conformity with the objects clause and the overall requirement to prioritise the creation of public benefit. Otherwise, it is liable to be voided. Ultimately, shareholders’ central role is to monitor firm performance and the board of directors.
Under the ‘shareholder’ theme, I also show that there is a role for non-shareholder constituencies within the context of monitoring. True, whilst the CIC Regulator views non-shareholder constituencies’ approval as important, consulting them and taking account of their views is not hard ‘law’ but rather good practice. However, there are a couple of significant scenarios in which non-shareholder constituencies can have a quantifiable impact upon internal firm governance. The most pivotal is that, if a CIC has an identified class of beneficiaries, the CIC Regulator will not customarily consider an application to amend the objects clause unless they have been consulted. Non-shareholder constituencies also have information rights that allow them to monitor, for example, mid-stream profit distribution to shareholders and directorial remuneration. If anything appears improper, non-shareholder constituencies can bring this to the attention of the CIC Regulator, which can investigate and take enforcement action where necessary. The same is true if the board of directors or shareholders contravene the objects clause and the selected public benefit. Whilst this is not the same thing as equipping them with governance rights, the ‘stakeholder monitoring backstop’ engineered into the regulatory infrastructure can nonetheless bypass firm insiders. Although a CIC’s shareholders are the first line of defence, this provides non-shareholder constituencies with a route to holding the board of directors accountable if shareholders fail to act, or if shareholders otherwise exercise their suffrage to the detriment of a firm’s separate interests. This goes well past the status of non-shareholder constituencies in the traditional for-profit corporation, not least because there is supervisory machinery installed that gives them access to a state regulator with broadly framed and arguably interventionist powers to administratively review just about anything a given CIC does, either in the boardroom or at the general meeting.
The fourth major distinction is that, unlike the traditional for-profit corporation, the CIC features mandatory and irreversible protective mechanisms that are designed to limit pecuniary self-interest and the extent to which private ordering for that purpose is permissible. These include the CIC Regulator, the objects clause, the new directorial duty of loyalty, a limitation on mid-stream profit distribution to shareholders, a rule requiring forfeiture of all capital in excess of the initial contribution upon winding up, a constraint on directorial remuneration, extra transparency obligations through the CIC Report, the ‘public benefit reserve fund’ and a residual asset transfer rule.
J S Liptrap is a research associate at the Centre for Business Research at the Judge Business School, University of Cambridge.