2012 ELPR Symposium Presentation Summaries
Table of Contents
DC’s Energy Efficiency Plan for Development:
Green Business and Private Law:
People Versus Planet: Under-Examined Tensions in the Triple Bottom Line (TBL):
Sustainable Commerce: Corporate Governance and Private Ordering Systems:
PETER A. APPEL & DR. RICK IRVIN
Organizational Form and Green Business
In An Age of Green Business, How Does Fair Trade Promote Sustainability?:
The Myth and Reality of Green Business:
DC’s Energy Efficiency Plan for Development
Summary by Brice Fiske
Preston Bryant, Jr., the final speaker of the Symposium, closed the weekend with his presentation on the National Capital Planning Commission’s (“NCPC”) plan for the development of an ‘ecodistrict’ in Southwest Washington, District of Columbia. In 2009, President Obama appointed Mr. Bryant as the Chair of the National Capital Planning Commission, which is the central planning agency for all of the federal buildings in Washington, suburban Maryland and Northern Virginia. He began his presentation by posing the question: “What is the proper role of government in the realm of energy and environmental regulation?”
The focus of Mr. Bryant’s discussion was a comprehensive planning program that the NCPC has been working on for the past eighteen months to turn the Southwest quadrant of the District of Columbia into an ecodistrict. The goal of the plan, called the Southwest Ecodistrict Initiative, is to transform the 10th Street and Maryland Avenue corridors, located south of the National Mall in Southwest Washington. Mr. Bryant explained how the NCPC is currently working with sixteen other federal agencies to turn this district into a showcase of sustainable urban development by 2030.
Mr. Bryant described the area as a mixture of federal agencies and private businesses, but not reflective of the vibrancy of which the District of Columbia was capable. It currently lacks the residential, cultural, and commercial uses that the District prides itself upon. As such, the NCPC seeks to re-imagine the area as a livable, walkable, enjoyable district focused on sustainability.
Mr. Bryant explained NCPC’s vision, including but not limited to: scenic improvements to the major avenues of the District; rehabilitation and redevelopment of existing buildings; new developments on vacant or underutilized lots; construction of new roadways and parks; beautification of existing streets; and construction of new energy and water systems. Of particular interest was the construction of a new energy and water use system, which would have to comply with Executive Order 13514, which encourages federal agencies to be more environmentally responsible.
Under NCPC’s plan as described by Mr. Bryant, the ecodistrict would minimize water usage per person. It would also cut down on the amount of waste going to landfills. Lastly, it would reduce the energy use per person and minimize the amount of gas emissions. Ultimately, the NCPC hopes to turn the area into a net-zero energy precinct by 2030.
Mr. Bryant concluded his discussion by explaining that because the Washington, D.C. ecodistrict would be the most extensive ecodistrict in the United States, it could serve as an example for other major cities in the United States. The NCPC hopes that the Washington, D.C. ecodistrict will serve as a showcase of sustainable urban development, looking at a development plan that would be environmentally viable well into the future. Mr. Bryant ultimately came back to his initial question, explaining that the federal government hoped that it could play a larger role in energy and environmental regulation through leading by example with the NCPC’s oversight of the ecodistrict’s development.
Green Business and Private Law
Summary by Andrea Gregory
Professor Hughes, Professor of Law at the American University Washington College of Law, gave the fourth presentation of Saturday. Through Professor Hughes’ talk, the Symposium shifted gears from a business and sustainable commerce focus to how property rights can be used to protect the environment. Her presentation highlighted three areas of property law that could be targeted to reach this goal: (1) creditor properties and the role of Universal Commercial Code (“UCC”) Article 9; (2) structured finance in real estate; and (3) the common law usage of servitudes and defeasements. She underscored that in order to more successfully incentivize environmental sustainability investment, we must look beyond the private role of businesses.
Harking back to the limitations of purely business solutions that were presented earlier in the morning, she advocated for the introduction of new and innovative secured transaction and debt finance rules that could effectively sidestep some of these limitations. Business contracts are limited to the parties, which raises concern over who can, will, and should bring action against a breach and where the proceeds of these remedies should be directed. Under contracts, third parties have not been established as beneficiaries. Property rights, on the other hand, are enforceable against the whole world because property rights have a maximum scope that cannot be exceeded. When these scopes are exceeded, third parties have standing to bring suit.
Beginning with creditor properties, Professor Hughes discussed the governing role of UCC 9 over collateral security. Although the first in time-first in right principle is the default rule for dealing with the order of repayment to lenders following bankruptcy, she drew the audience’s attention to two other principles that have been enacted in some states. The first, priority of purchase-money security interests (“PMSI”) enables business owners to acquire equipment on better financing terms because it allows that later lenders who have a limited security interest can maintain their priority in repayment for those specific authorities. This has been passed as UCC 9.324. The second program that departs from the UCC default of first in time-first in right is the production money financers in agricultural finance (“PRMSI”) and was enacted under UCC 9.324(a). This provides a similar lender benefit but is unique to financing of agricultural needs. Both are state statutory devices that incentivize other forms of credit. Professor Hughes proposed a UCC9.324(b) which would provide the same type of benefit for lenders and would therefore lower of cost of capital for businesses that want to invest, but this time it would be specifically for environmental practice securities. As this would be a state based incentive, it would be completely voluntary in that the state would decide to enact the program and people in the market would elect whether or not to take advantage of it. Although she conceded two potential problems with the program—(1) how to involve “environmental practices” with lenders and (2) potential abuse by green-washing and looting investors—she argued this could go a long way in catalyzing future environmental securities investment.
Secondly, she discussed the dominant mezzanine form of securitization in raising capital in suburban real estate development, which built up around the taxational structure of new subdivision construction. As she found in her article “Securitization and Suburbia,” subdivision builders have a proven form of collateral and a proven model that lowers their transaction costs through repeat dealings. This often results in a queue of projects when the demand is there. Here, she observed a direct correlation between the rise of securitization in the financial market and the taking over of land. But how can we deter this type of overdevelopment, especially of environmentally sensitive areas?
Other scholars have indicated that not all property is ecologically the same, and that it should be treated as such. This concept has become more widely accepted, as is evidence through the rise of ecosystem services. The problem that Professor Hughes discovered was that personal property has fallen into the same classification mechanisms as collateral security—investment property, inventory, etc. She urged that personalties be treated the same as land property and that it be recognized that not all personalties are ecologically the same. She recommended a state legislative proposal that would create a new business form for companies that only hold open space for development. This new form of business would be a limited liability, membership interest that would closely mirror limited liability companies (“LLCs”). If real estate developers open these specific LLCs, the government could define the interests in terms of their ecological sensitivity instead of just viewing them as LLCs under the UCC.
Lastly, Professor Hughes argued for the expansion of servitudes and defeasements to the context of durable goods. Although these mechanisms are largely used to control private land use, they could also be applied to personalty. Software companies have already been largely using these mechanisms to restrict use agreements to one user per device. Similar arrangements could be used to establish machinery rights in severalty. For goods, such as computers, vendors could limit property rights with an alienation restraint. Here, consumers will have acquired a use right, but would have to return or recycle the computer after they are done with it. This would take away the consumer’s choice of simply sending the good to a landfill by making a covenant or easement indicating that it must be returned.
There has been significant research on the application of this type of program in the public law, primarily focusing on the European Union’s approach. However, Professor Hughes’ project takes these questions to the private law sector, factoring in structure demands, rules governing how companies get their money, and state private rules on how people obtain their property. When asked which industries would likely be ripe for such a program, she pointed to high-tech industries. Here, there would likely be a large environmental impact and they are already accustomed to using servitudes. Although in theory consumers should pay less for encumbered rights, they are usually willing to pay more for environmentally friendly products, which would enable companies to sell on these new terms.
After closing, a few areas of further research were identified during the question and answer session. Namely, on the impact these types of programs will have on the international market place and on enforcement mechanisms. Professor Hughes also highlighted that her proposals require state-based reform. In order for her ideas to work, one must believe that these types of reforms are possible at the state level, as opposed to federal or local levels. One issue that arises from this is that these private laws are not enacted in a uniform way like the UCC was. This could drive state competition. Another potential issue that focuses on her second topic of creating a new form of LLC is that land use would have to be transferred from the municipal to the state level. This appropriation of power could be controversial.
People Versus Planet: Under-Examined Tensions in the Triple Bottom Line (TBL)
Summary by James Gorsuch
On Saturday morning at the Symposium on Green Business, Professor Robert Katz of the Indiana University Robert H. McKinney School of Law presented the opening stages of his new research project, a study of the “Triple Bottom Line (TBL)” as a new norm in the corporate form and a model for sustainable business. He began with a basic idea of the “bottom line,” that where the last line of the profit & cost ledger determines the goals and success of a business. From this most basic model he introduced the idea in business of “Corporate Social Responsibility,” or the phenomenon of businesses gradually beginning to identify additional responsibilities and goals outside the profit-only conception of the bottom line. It identifies a duty of business to its “stakeholders”: not only shareholders but also employees, suppliers, and customers as well. Professor Katz indicated that this has infiltrated the business model over time, although there is not a definite moment when it began to do so. The first move in the corporate DNA away from the bottom line, however, was the Double Bottom Line, which integrated the ideas of corporate responsibility into the core of businesses, continuing to proliferate this idea of “stakeholderism” and encourage a business to benefit those it is involved with in addition to simply maximizing profits.
From this double bottom line framework, businesses began to feel pressure to consider the environment and their impact on it in their decision-making process. This “corporate sustainability” trend began to impact businesses as well, adding yet another concern to their bottom line, resulting in the “Triple Bottom Line” framework. Professor Katz identified the core of this triple bottom line as “Profits, People, Planet.” However, Professor Katz continued to argue that this framework is really a method of adding more and more people to the businesses focus: from shareholders, to stakeholders, to communities and gradually the global population.
Professor Katz emphasized some of the potential benefits of the Triple Bottom Line model: it addresses externalities in the business world that reach beyond a business’s stakeholders, accounts for the “hypothetical” people of future generations, and deals with the moral relationship between people, businesses, and the environment. Additionally, Katz argued that the triple bottom line will promote accountability and transparency in business, an apparently positive trend, and clarifies the moral predicament of business in deciding for whose benefit they should act. Professor Katz stressed that he is in the beginning stages of his research on this topic, but described the addition of new priorities to the bottom line of businesses and provided a framework for businesses following the triple bottom line: one that maximizes profits, improves the lives of those with whom it interacts, and protects the environment.
Organizational Form and Green Business
Summary by Gary Godman
Professor Antony Page from the Indiana University Robert H. McKinney School of Law provided the second presentation of Saturday, titled “Organizational Form and Green Business.” He posited the question: How do you start a business that both makes a product and helps the environment? How, or rather, can the law help you do this?
Buzzwords fly regarding this topic: “social business,” “creative capitalism,” and “social entrepreneurs.” Businesses can thus pick their own sustainable-sounding moniker, and this allows their consumers to see what social goals they wish to see. Social entrepreneurship is embedding green values in the company’s mission, production, and organization. This makes companies hybrids of the former business forms of for- and non-profit. These corporations do not want to be seen as evil. They seek a way to maximize profit while addressing sustainable topics without harming shareholders.
This brings conflict to corporate purposes: do they hold shareholders over all else, or must they also consider moral, social, and environmental obligations? In the 1970s, for example, some believed that only focusing on profits was the center of all business. Now, there has been some shift to focus at least partly on sustainability. Corporate law, however, is not about to change.
Take, for example, Ben & Jerry’s. They were one of the first to include social initiatives in their bottom line, such as supporting small farmers in their supply chain. Looking back, all of these initiatives were claimed to be profit-maximizing. But then the company sold itself to Unilever, claiming that it was forced to do so because of corporate law forcing them to sell in the interest of shareholder value maximization. A significant number of other social business firms have sold themselves to large multinational corporations. This causes a “legacy problem,” whereby these social assets become lost through integration into these large companies.
How do non-profits fit in? They face the problem that incoming capital cannot easily leave the non-profit. They can’t give stock to donors, and there is no equivalent that they can use to incentivize investors.
There is a third way between traditional for- and non-profits: hybrid corporations. Current examples include community interest corporations in the UK and low-profit limited-liability corporations (“L3Cs”) in nine states (which have been hindered by lack of recognition by the Internal Revenue Service). There are also “benefit corporations” in seven states, B Lab or B Corporations in the private sector, and flexible purpose corporations (currently only in California).
Benefit corporations differ from traditional corporations in that they have a general and a specific public purpose. They must materially contribute to green-oriented purposes. In the states with legislation promoting these corporations, benefit corporations must also produce a benefit report, which is public information allowing for outside performance reviews against third-party criteria. Benefit corporations are also open to challenge in benefit enforcement proceedings that could be brought to enforce balance in the corporations’ purposes, but these may be difficult to enforce due to traditional views of needing to protect stockholder interests. Further, these corporations can only be changed by a supermajority vote of shareholders. Finally, the Board of Directors would need to have a “Benefit Director” to oversee these purposes.
A flexible purpose corporation is a sort of benefit corporation “lite.” They only have a specific public purpose, so there is a wide range of purposes that can be pursued. The benefit report only compares the company to its own criteria and not that of third parties. FPCs also would be subject to benefit enforcement proceedings and supermajority shareholder votes.
Legally, however, these forms do not counter the legacy problem. It is still difficult to overcome the desire to “sell out” to multinational corporations. Ben & Jerry’s, when considering selling to Unilever, even had the bolstering effect of state law allowing them to consider environmental and social policies when viewing offers to buy; they still sold to Unilever. They also had the protections of the “poison pill” law and a staggered board. Their capital structure placed Ben and Jerry themselves as majority shareholders, and they still chose to sell. The Ben & Jerry’s Foundation controlled preferred stock which gave them veto power over all transactions, which, again, was not used. This traditionally take-over proof company acquiesced to the sale.
This leads to two arguments. Are these benefit corporations unnecessary, since it is obvious that they can still sell to traditional corporations? Secondly, are they dangerous? Are they just green-washing while placing profit first in a traditional, “evil” way? These risks are minimized by the possibility of benefit enforcement proceedings; even if they are difficult to enforce, they can still take up time and create negative publicity. Also, transparent benefit reporting allows investors and consumers to review the practices of these corporations.
There are still several advantages to benefit corporations and flexible purpose corporations. There is a lowering of transaction costs as forms and procedures are standardized. A signaling function is also created; for-profits may see that benefit corporations attract more business and decide to change to that form. Preference-shaping allows benefit corporations to have different objectives. Finally, there is also an improvement in transparency.
In conclusion, these changes may ease market pressures, leading to modest improvement for green businesses. The number of green businesses may increase. The legacy problem will continue to exist; benefit corporations will still be able to “cash out.” There could be ways to discourage this via longer-term boards or more preferred stock with veto power. The benefit director could also have a stronger say. The point is that law is only part of the story. The founders and individuals of these corporations will be the ones who guide the growth of these hybrid businesses.
Sustainable Commerce: Corporate Governance and Private Ordering Systems
PETER A. APPEL & DR. RICK IRVIN
Summary by Rachel Procopio
Professors Peter A. Appel, the Alex W. Smith Professor of Law at the University of Georgia School of Law, and Dr. Rick Irvin, an Adjunct Professor at the College of Pharmacy, University of Georgia, began the second day of the Symposium with a presentation on sustainable commerce. Their talk focused on the ways in which corporations, acting via private ordering systems, could exert more influence over the implementation of sustainable commerce as compared to many government initiatives.
Professor Appel began the presentation by outlining each topic to be covered in the talk. To begin his explanation of the overarching observations on sustainable commerce and corporate governance, “sustainable commerce” was defined as “products and practices which minimize environmental impacts and optimize commercial value while realizing public and private environmental benchmarks.” According to Professor Appel, the drivers of sustainable commerce are the public legal system and private environmental benchmarks. The public legal system drives sustainable commerce by requiring corporations to comply with government standards. Private environmental benchmarks drive sustainability by the implementation of corporations’ own standards to fulfilling their business objectives: brand promotion and cost reduction.
Professor Appel cited the need for corporations to look at sustainability from the private side. Additionally, he emphasized the role of lawyers in this initiative. Both corporate counsel and lawyers in private practice are provided with tools from the corporate governance that allow companies to perform better environmentally and increase their profit margins. Professor Appel went on to outline ways for both corporate counsel and outside counsel to achieve this proposal. He also highlighted the law gaps that may be preventing some corporations from implementing sustainable commerce initiatives.
Next, Professor Appel explained the ways in which federal law pre-empts certain sustainable commerce initiatives. He described one such situation where, in Long Beach and Los Angeles, attempted regulations on drayage were held to be pre-empted by federal regulations.
Dr. Irvin began his portion of the presentation by explaining that the “private law,” private organizations’ ordering systems, is often more influential than the environmental regulations that are set forth in the “public law.” Internal mechanisms such as contract, tort, and corporations law should be used to promote objectives such as sustainability. Dr. Irvin gave several examples of success stories in which companies implemented their own regulations that were later adopted across the industry. Two examples included the automotive quality standard and the global social accountability standard. These standards have been put in place through contract. Dr. Irvin suggested that sustainability could also be achieved via contract law.
Dr. Irvin went on to give in-depth examples of the success of the use of private ordering systems on promoting sustainability initiatives. One example was Murray, a lawnmower manufacturer, in Lawrenceburg, Tennessee. In order to do business with the British home improvement company B&Q, Murray had to meet the company’s sustainability standards. Murray was successful in implementing the standards and decreased its toxic chemical generation by 50%.
To finish the presentation, Dr. Irvin explained his and Professor Appel’s Quality and Environmental Management Systems Plan – Do – Check – Act Model that is used to help establish corporate sustainable commerce programs. Throughout his description of the model, Dr. Irvin highlighted the role of attorneys. Attorneys are needed to draft contracts and ensure confidentiality for companies seeking to increase sustainability. Additionally, Dr. Irvin described three ways in which private ordering systems support sustainable commerce programs. These drivers include improved profitability and operations, customer requirements, and global capital markets.
Dr. Irvin concluded the presentation by reemphasizing the notion that sustainability is not science- or government-driven, but in fact is driven by corporate America. Lawyers have an important role to play in the movement toward sustainable commerce.
In An Age of Green Business, How Does Fair Trade Promote Sustainability?
Summary by Jordan Bowman
Professor Paulette Stenzel, a Professor of International Business Law at the Michigan State University Broad College of Business and the second speaker of the Symposium, delivered an energetic presentation about the importance of fair trade. Many products today are enjoyed at the disadvantage of the workers who produced them. Often, these workers labor long hours in poor conditions and receive inadequate compensation. Fair trade helps insure that there are public accountability and respect for cultural identity, and that products are made in an environmentally sustainable way.
Professor Stenzel began her presentation with an overview of fair trade, and discussed how different member organizations affect the process of a product receiving fair trade certification. Most importantly, the new Fair for Life symbol will likely become an important certification because the Institute for Marketecology will be able to offer both fair trade and organic certifications without producers having to go to different organizations to obtain these certifications. Professor Stenzel showed how the idea of fair trade is not a new idea, but can be seen in much older philosophies such as the Great Law of the Iroquois: “In our every deliberation, we must consider the impact of our decisions on the next seven generations.”
The profit of normal products in a marketplace is evaluated by a product’s economic “bottom line.” Professor Stenzel showed how fair trade products take into account not just an economic bottom line, but also environmental and social equity bottom lines. Only when a product meets each of these three standards is it truly sustainable. Indeed, Professor Stenzel suggested that there may even be a fourth bottom line for sustainable products, which could be important principles such as education or spirituality.
Ultimately, fair trade products give more compensation to the producer of a good. In turn, these families have more funds for food, clothing, education, housing, and health care. Respect for the cultural identity of producers is also important, and to this end, fair trade products are often made in a cooperative workplace model.
With regard to the environment, fair trade products place an emphasis on sustainability in general, reusing natural resources, protecting ecosystems, protecting workers from toxic chemicals, and seeking organic certification.
Today, fair trade products are becoming more popular. In Europe, seventy-two percent of consumers recognize the fair trade certification mark, and the industry is worth $1.5 billion each year. Although the United States lags behind, these same trends are true to a lesser extent.
Professor Stenzel concluded with recommendations for policies that would support consumption of fair trade goods. For the government, there should be a focus on funding fair trade through grants and using procurement contracts to purchase fair trade products. Private consumers should continue to “vote with their pocketbooks” and to educate themselves and others about fair trade products.
The Myth and Reality of Green Business
Summary by Vanessa Steltenpohl
The ELPR symposium began with visiting professor Judd Sneirson from the Maurice A. Deane School of Law at Hofstra University. Professor Sneirson started his lecture on green business by discussing the conventional way of doing business as personified by the movie character Gordon Gecko from Wall Street. He proposed a competing mantra from Gecko’s “Greed is good,” mainly that “Green is good” and that companies can benefit financially from green business practices.
Green business involves a business practice that benefits the environment while benefitting the company financially. This is typically discussed as a double bottom line accounting method. Companies are now concerned with both financial goals and environmental goals. Good performance in both categories is considered success. For example, eco-efficiency practices such as saving energy typically amount to both a financial and environmental benefit. Companies also recognize that consumers now want and ask for green products, even when these products may be more costly to purchase. An example of this is hybrid cars; however, companies commonly overlook the important social sphere when designing business plans.
When a business neglects its social responsibilities, the difference between green business and sustainable business is especially apparent. Professor Sneirson explained that green business involves a contemplation of both financial and environmental concerns, while sustainable business involves these important concepts as well as social and societal impact.
Professor Sneirson spoke at length about a continuum of green business achievement, which ranged from noncompliance with legal obligations to full integration. He explained that most companies are at the profit-driven level on this continuum, where companies will engage in green business practices only when those practices will result in greater financial benefits. An integrated company goes above and beyond what is expected of them by law; however, the integrated company still neglects the social impact sphere of sustainable business. For example, Nike has been commended for developing green business strategies such as replacing toxic glue products with stitching; however, the company still struggles with employing fair wages in other parts of the world where its products are developed.
Professor Sneirson then developed several theories as to why more businesses were not aiming for a fully integrated green business strategy. The business world is currently focused on a shareholder profit, which stems from ambivalent case law, market pressure, and behavioral norms. Professor Sneirson believes that this way of looking at profit margins will slowly pass as consumers and businesses strive for greener products and greener practices.
In order to encourage more green business policies, Professor Sneirson believes that the most success lies with a private certification process from such companies as the Benefit labs. These independent companies examine businesses and their corporate governance procedures to determine if the business meets the requirements of a B-label company. Professor Sneirson also advocates for more green business education, relying on the theory that if more companies were aware of the fact that green policies could be enacted either more cheaply than or as cheaply as conventional practices, more companies would make the change.