Business leaders Jean-Dominique Senard and Nicole Notat present their recommendations for new corporate purpose laws to French ministers on March 9, 2018. (Photo by Twitter @Economie_Gouv)

In October, the French National Assembly passed Article 61 of the government’s Action Plan for the Business Companies’ Growth and Transformation (Loi PACTE). Article 61 follows recommendations made by business leaders Jean-Dominique Senard, CEO of Michelin, and Nicole Notat, founder of Vigéo, on how to make businesses more sustainable and in line with collective social and environmental interests. If the Senate passes it after examination in early 2019, which is necessary for it to become law, it will revise the very definition of corporate purpose. 

Three Things the Law Will Change if It Passes

1. Corporations will need to consider the social and environmental stakes of their activities. The law revises the definition of corporate purpose in the civil code for the first time since it was drafted in 1804. The original Article 1833 stipulates that a société(a corporation, whether private or public) “must have a lawful object and be created for the common interest of the partners.” The new law adds that corporations must “be managed in the interest of the corporation itself, while considering the social and environmental stakes of its activity.”

2. Corporations will be able to define a purpose beyond profits. According to the new law, a corporation can specify in its charters a raison d’être—the principles it gives to itself to guide its business policy and strategic decisions. 

3Corporations will be able to adopt a new corporate form.The law also creates a new corporate form called the société à mission. A public or a private company can register as this form of corporation if: 

  1. The corporate charters stipulate a mission, or social or environmental goals beyond profit. (The corporation binds itself to pursue these goals, and while shareholders can amend the goals, they must have a supermajority to do so.)
  2. The company forms a second board, distinct from the board of directors and including at least one employee of the company, to evaluate whether and how the company fulfills its mission. 

Distinguishing the Law and the Benefit Corporation 

While the obligation to consider the social and environmental impacts of one’s activities borrows from US constituencies’ statutes, as well as the UK Company Act of 2006, the option to incorporate as a mission-lead corporation follows the growing movement of benefit corporations, which emerged in the United States but is now spreading to Latin America, Australia, and Europe (Italy). The French law, however, is distinctive in several ways: 

  • It combines both the obligation and the option, while most countries introduce only one or the other. 
  • Compared to the benefit corporation, the société à missiondoes not require the assessment of the company’s activities according to any third-party standard. On the contrary, the definition of the mission is left to the company, as are the methods to evaluate its implementation. 
  • The flexibility to define the mission comes with greater accountability. The French bill does not leave the evaluation of the mission to the board of directors. It introduces a special board, in charge of reporting on the mission, with the necessary means and power to investigate and evaluate the implementation of the mission. If this board dysfunctions, then the corporation can lose its status of société à mission.
  • Another particularity of the French law is that it does not formally create a new right for entrepreneurs. It paradoxically includes an option that companies already have. In France, there are no fiduciary duties for directors to maximize shareholder value. And some companies—such as Nutriset, which develops new therapeutic food to fight malnutrition, and Camif, an online furniture distributor committed to supporting ecofriendly models—have already defined their own social or environmental goals in their charters. 

Regarding the latter, one might ask: Why does the French state bother with a new corporate form if this is already possible? Interestingly, what motivated the law are not legal constraints but new fundamental proposals about the enterprise. Two of Senard and Notat’s recommendations deserve special attention: first, the necessity to offer legal protection to those entrepreneurs and companies that invest heavily in social innovations, and second, the theoretical distinction between the corporation and the enterprise. 

Legal Protection for Social and Environmental Innovation

Shareholders opting for quick financial returns will always question long-term social or environmental initiatives. And research and development efforts, which are by nature long-term and uncertain, are especially fragile. Senard and Notat point out that current corporate law does not protect long-term and responsible policies. What legal measure can, for instance, protect an entrepreneurial aim of developing a new technology for capturing carbon dioxide, if new shareowners decide they have other priorities? This is what thesociété à missionaims to address: By contractually committing the corporation to pursuing social or environmental projects, it provides entrepreneurs with the necessary conditions to secure long-lasting efforts. 

A New Conceptualization of the Enterprise in Law 

Allowing a business to have a raison d’être that goes beyond the sole interests of stockholders is a particularly important breakthrough. Many legal and economic scholars distinguish the interest of the corporation from the interests of stockholders. But the problem is that corporations usually have only the voice of their shareholders.Here, Senard and Notat go further, building on the distinction between “corporation” and “enterprise.” The French language makes this distinction but, as lawyer Jean-Phillipe Robé has noted, the law has ignored the enterprise. The corporation is fundamentally a legal contract between shareholders to organize the sharing of profits and losses. The enterprise, by contrast, is more than a tool to generate profit; it is an organized collective action, often with the intent to develop some scientific, social or environmental progress, such as developing new therapies for cancer or new solutions for ecological agriculture. So while the purpose of a corporation may be for its stockholders to benefit from profit that results from an enterprise, the purpose of an enterprise is broader. The notion of raison d’être makes visible in lawthe motive and the essence of the enterprise.

Thus, the entreprise à mission not only protects corporate social responsibility initiatives, but also invites corporations to specify which desirable future they are ready to commit themselves to building. If the Senate passes the reform, and irrespective of the number of corporations that will become a société à missionin the months that follow, it will unquestionably open new ways to articulate corporate freedom and corporate responsibility.