As the benefit corporation model spreads, the opportunities and challenges grow.
By John Elkington
You may have missed it, but July 17th marked a key milestone in the evolution of capitalism.
The late business-of-business-is-business economist Milton Friedman probably rolled in his grave. On that day Delaware Governor Jack Markell signed innovative “benefit corporation” (B Corp) legislation into state law, giving at least some business leaders new freedom to make decisions in the best interests of society as well as of their corporate bottom lines and shareholders.
“In the short term,” Governor Markell explained, this new type of company “will create high quality jobs and improve the quality of life in our communities. In the long term, as many enter the public capital markets, they will help combat the plague of short termism that we have seen over the last five years can undermine a shared and durable prosperity.”
I was particularly interested in all of this because two companies I co-founded became B Corps this year: Volans (Britain’s second B Corp) and SustainAbility (the third). Other (much bigger) companies that have also gone this route include Ben & Jerry’s, Method and Patagonia.
In adopting the legislation, Delaware became the 19th American state to enact such rules, which may sound a bit me-too. But as the legal home of no less than one million businesses, including 50 percent of all publicly-traded companies in the U.S. and 64 percent of the Fortune 500, Delaware is the most important state for businesses seeking access to the venture capital, private equity, and public capital markets.
So this is potentially very big news.
Key Strengths of Benefit Corporations
According to B Lab, the non-profit organization behind the phenomenon, “B Corp certification is to sustainable business what Fair Trade certification is to coffee.” Successful B Corps are certified as meeting rigorous standards of social and environmental performance, accountability, and transparency.
To find out where this trend may be headed, I spoke to Dave Chen, a co-founder at Equilibrium Capital and, more importantly, a Board member at B Lab. What does he see as key strengths of the B Corp format?
“First, the certification process," he said. “I liken this to ISO standards, a process of improvement and benchmarking. Second, the adoption of the law in a growing number of states across the United States changes the scope of fiduciary duty, giving the B Corp the protection of the law for making choices that consider factors beyond shareholder value. In some ways, I would even argue that becoming a legal benefit corporation actually heightens the bar for fiduciary duty.”
The B Corp approach, he explained, appeals to both liberals and conservatives. There were no votes against the new law, for example. But what should governments be doing here?
“Governments globally are considering the benefit corporation laws philosophy, and potential laws,” he replied, “as a way of redefining capitalism and the corporate role in society. Chile is an example."
"U.S. government agencies are considering the use of the B Corp standards as a benchmark of better corporations. Philadelphia grants B Corps in good standing a beneficial tax rate. Other states are considering granting B Corps preferential status in government procurement processes."
New Construct For Business
We also spoke to a second B Lab board member, Debra Dunn, associate professor at Stanford D-School (that’s D as in design). She has the advantage of having worked both in a very large corporation (HP) and, increasingly, in the B Corp space.
But why the interest in B-Corps?
“In 2005,” she explained, “as I was leaving HP, co-founders Jay [Coen Gilbert] and Bart [Houlahan] contacted me to get my input on their plan for launching B Lab. My HP experience had led me to a couple of key conclusions."
"First, we have no hope of tackling the major social and environmental issues that we face without the full participation of the business sector. And, second, building social responsibility into the DNA of a company is simply inadequate. We need a new construct for business because otherwise shareholder primacy can completely trump social responsibility.”
And what does she see as the strengths of the B Corp format?
“It’s a robust, integrated approach to aligning businesses with social and environmental interests,” she said. “B certification requires a corporate mission that encompasses social and environmental impact, a governance structure that supports that mission and measurement, and transparency of social and environmental impact using a comparable yardstick.”
Challenge: Maintaining Integrity While Scaling Up
Are there any particular weaknesses or threats?
“While it’s not exactly a weakness or a threat,” Dunn said, “the biggest challenge [for B Lab] in my view is striking the right balance between keeping the bar high and scaling as quickly as possible. We are very open and transparent in our approach and want as many organizations as possible to use the B ratings system (also known as GIIRS) to assess and improve their organizations even if they don’t choose to become certified B Corps."
"We also want to build the community of certified B Corps as quickly as possible because scale increases our effectiveness in influencing policy, consumer behavior and even public companies.”
Are there potential applications in big business?
“Yes,” Dunn replied. “Having clear, transparent, verified measurement of social and environmental impact is applicable to big business. Indeed, the entire B Corp model is absolutely workable for big companies — though getting a current public company to adopt B Corp status is almost inconceivable, because the shareholders would have to agree to give up their primacy.”
But she predicted that we will have big public B Corps fairly soon, probably as current B Corps go public. The hope: that over time, these innovative models of value creation will help inspire major changes in the business mainstream.