Part two of an ongoing series about B corporations explores how B Corporations add social value.
By Dirk Sampselle
In response to a great comment on my last post Becoming a B: What Is The Difference Between a B Corporation and a Benefit Corporation, I decided to explore the B Corporation efficacy question in this week’s segment.
Are B Corporations really better for the world?
An accurate reply must begin with understanding the question – better than what, and better for whom? B Lab’s premise for the B Corporation certification and benefit corporation legal entity (my discussion of the distinction) is twofold:
- "Current corporate law makes it difficult for businesses to take employee, community, and environmental interests into consideration when making decisions."
- "The lack of transparent standards makes it difficult to tell the difference between a 'good company' and just good marketing."
The premise lends itself to the idea: better than traditional corporations, better for consumers and all the stakeholders the products and operations of the B Corporation affect. But let’s break it down into more economic terms:
Lower Investment Transaction Costs
In economics, “transaction costs” refer to a cost incurred in making an economic exchange. Informational uncertainty is a key driver in increasing transaction costs – think of the time it takes you to search for the right product, at the right price, and perhaps, if you’re in the B Corp camp, with the right values.
Well, investors deal with that problem too, when they screen new businesses in which they may want to invest capital.
First, the B Corporation certification provides investors with quantitative tools to assess which business they want to invest in: are they effective at producing environmental impact? How about their treatment of employees? It is distilled into a quantitative score.
Second, the benefit corporation legal entity provides a standardized governance architecture to house the impact investments that fund social enterprises: over time, impact investors will be able to rely on established precedent governing how social enterprises are run, rather than having to iterate new complicated impact-protecting term sheets and bylaws provisions for each investment – with no real comprehensive doctrine governing courts’ interpretation of those provisions.
Lower Consumer Transaction Costs
How can you, as a consumer, know not only which products fit your values, but whether the companies that produce those products are creating them in a way that fits your values? Judging by the mission statement on the package may not lend you the results you seek.
Take, for example, an un-named conglomerate that makes organic rice that is sold in biodegradable packaging, but which also produces an array of over 5,000 other products which are sustainable neither in their nature nor in their production method.
How would you know?
You wouldn’t without the B Corporation certification, which analyzes over 120 aspects of a business’s operations, including its treatment of suppliers, customers, and employees, as well as the financial and governance infrastructure of the corporation, and how it treats the environment. B Lab only provides the certification label to those that achieve a score of at least 80/200.
B Corporation certification makes it easier for consumers to find the right products and services, from the right company.
Raise Government Revenue Without Raising Taxes…
Yes, I did it. I brought up politics. And taxes, no less.
But it’s true. B Corporations raise government revenue without raising taxes.
B Corporations are private, for-profit businesses that are also required to pursue the public good. The consequence of this is manifold. First, you’ve got people who would have formed nonprofit tax-exempt organizations now creating financially sustainable B Corps that don’t rely on fickle donor support to prop up their mission. These organizations will now be taxable, generating revenue for the government, putting quality products and services in your homes, and doing it all in a way that holds them accountable to best practices in corporate social and environmental responsibility.
They make the world a better place, and they pay their taxes too.
…And With Lower Government Costs
What! But you just said they raised revenue… I know, I know, it’s pretty supercalafragelistic. Here’s how B Corporations hit both sides of the balance sheet.
Today, we face global problems of an unprecedented scale. One of those is our own national poverty rate – now 15.1 percent of Americans, the highest level in nearly a decade. In response, in this year alone, the federal government will spend $680 billion on 126 programs to fight poverty.
Meanwhile, the federal deficit hovers over $1 trillion, and as a result, just last year the U.S. credit rating was downgraded for the first time in national history.
This is an enormous matter of national import: the downgrade reflected independent ratings agencies’ opinion that the federal budget plan and politicians on the hill would not be able to tame the nation’s debt over time, and that leaders would not be able to achieve savings in the future.
B Corporation Greenlight Apparel reduces the need for government poverty intervention by creating organic, sustainable athletic apparel while donating 25 percent of its profits to microfinance and education programs that help stem poverty. In addition to helping fill the social services gap, B Corporations conserve the environment as well.
On the environmental side, B Corporation Farmland LP acquires conventional farmland and converts it to organic, sustainable farmland. This reduces the need for fertilizers, pesticides, and herbicides – pesticides, which the EPA reports, can cause health problems with unique risks to children. The cost of administering the EPA regulations is spurred in part by farming corporations that do not adopt sustainable practices. Farmland LP mitigates that cost.
Sound too good to be true? For you critical thinkers out there… I’ll humor you for a moment.
Yes, the B Corporation does have its flaws. We aren’t sure how states will interpret the duties of the leaders of these corporations – will they be more like nonprofits? Or more like for-profits? We also don’t know how public benefit will be defined by courts – or if it will be defined by courts.
If you want to check out an analysis that sifts through the complexity of B Corporations’ legal cousin, the benefit corporation, check out this law review article and let me know your thoughts.
If you’d rather just help B Corporations change the world for the better – and shape the movement yourself – visit B Lab’s B Corporation Directory to find a B Corp that is making the world better near you.
Becoming a B: What Is The Difference Between a B Corporation and a Benefit Corporation?