Finance & Investment
California Climate Disclosure Laws Will Put the Spotlight on Governance

Governance is the sleeper element in the ESG triumvirate; but that’s about to change with California’s new climate disclosure laws. Starting in 2026, large companies doing business in the state will have to report on their direct and indirect greenhouse gas emissions, as well as climate-related financial risks and their plans for mitigating those risks.

These filings — and the work leading up to them — are going to cast a ray of sunshine on how corporate governance practices affect social and environmental performance. It will become apparent that governance is a power that can kick the door to real progress on climate action and social justice wide open — or slam it shut. And that makes this an ideal time to take a fresh look at the structures and assumptions underlying corporate governance, especially for companies with a strong sustainability focus.

Many of these companies have embraced stakeholder capitalism — the idea that companies should benefit customers, employees, suppliers and communities, as well as shareholders. Yet typical governance structures guide decision-makers to prioritize one outcome above all others: creating financial value for shareholders. That orientation clearly has hampered business progress on addressing systemic issues, as the California disclosures will no doubt reveal to those who read between the lines.

These new laws and other calls for accountability reflect a surge of energy behind the search for solutions. Let’s harness that momentum to explore how to create the decision-making and incentive structures we need to meet this pivotal moment.

What if governance and ownership got a divorce?

If we really want stakeholder capitalism, we need stakeholder governance. The core concept here is to disentangle governance from ownership of the company. That sounds like — and is — a heavy lift. But we’re not starting at ground level: We can already see a shift toward greater stakeholder power in the rise of benefit corporations and campaigns for expanded board representation.

Public benefit corporations, a nascent idea just 10 years ago, now number in the thousands and include a growing number of public companies. And activist ESG investors, fed up with the slow pace of change, are filing shareholder proposals mandating that their portfolio companies become benefit corporations. The legal form is available in most states; provisions vary but generally require that benefit corporations specify social and environmental goals, report publicly on progress, and consider those goals alongside profitability and shareholder value when making decisions.

Alternative governance structures will produce even more powerful benefits. One option gaining steam is conversion to a non-charitable perpetual purpose trust (PPT), which owns a majority of voting shares and appoints a board of directors. This is a flexible form and not every iteration solves for shareholder governance. Patagonia, for example, went all in on assuring the company’s mission would continue while allowing the Chouinard family to maintain control over the voting rights.

I’m advocating for more PPTs like the one that governs Organically Grown — which not only preserves the business’s mission and prevents an unwelcome sale but also redefines fiduciary duty to include multiple stakeholders, reinvests profits and shares them with stakeholders, and enables investors to purchase stock and receive dividends even while voting control is held in a trust.

What about competition and access to capital?

People often assume this model is viable only for private companies, niche players or social enterprises. Not so: Pretty much any company could do this, including high-growth startups and publicly traded corporations.

Eyebrows rise when I say that. One common question is, “Can companies survive in competitive markets with this structure?” Absolutely. It often gives them an advantage because customers believe they are making a positive impact by buying from the brand. Patagonia’s restructuring, with its profits now going to fight climate change, makes it an even more attractive brand to consumers and the talent market.

The answer to the follow-up question — “But can they attract capital?” — is more complex. Stakeholder-governed companies struggle to attract capital from sources that have short time horizons or are singularly interested in maximizing their own return. However, they can deliver attractive returns at lower risk — a compelling proposition for long-term, patient investors, especially those focused on impact.

The PPT model is compatible with traditional debt financing, and structures along the spectrum between pure debt and equity provide appealing alternatives. Revenue-based financing, for example, is an underused financing strategy that can be both investor and founder friendly. Convertible notes that generate a dividend and pay off at a predetermined point are another option. Business leaders should be aware, however, that these alternatives require more investor education.

Can stakeholder companies solve big problems?

Skeptics note that the prevailing corporate incentive structure has the virtue of clarity and assures investors that their interests are primary. And it’s true that stakeholder models may need refinement to prevent internal competition for group advantage. These companies need strong board leadership and a healthy process — but that’s the case for all companies, and it’s not as if shareholder primacy guarantees investor security.

The more serious concern is whether separating ownership from governance will create companies that help solve big problems rather than perpetuate them. There’s reason to believe it can: Public-private partnerships are essential for progress and stakeholder-governed companies are by nature collaborative. And many people working in conventionally structured companies know what it would take to have positive impact, but the singular focus on maximizing short-term financial returns keeps them from making those decisions.

The disclosures California will require are certain to reveal areas where companies can reduce carbon emissions faster. Maximizing these opportunities — along with solutions to other systemic problems — may require fundamental changes in who makes decisions, the interests they’re accountable to, and the incentive structures they work within.