In the first post of our blog series “The Dimensions of Doing Good”, we introduced the challenge of setting a new responsibility standard in business, singling out the B Corp Certification as one of the earliest pioneers in doing so. In this post, we will discuss the birth of the Benefit Corporation as a legal entity, and how Certified B Corps are rising to meet the challenge of serving all stakeholders, not just fiscal shareholders.
For-Profit or Not-For-Profit
At its core, US corporate legal structure is simple: a business is either for-profit or not-for-profit. But even in this simple model, companies that strive to do good for the world around them can fall prey to shareholder pressure and Wall Street expectations.
For-profits were victim to pressure to abandon social and environmental goals for the sake of maximizing ROI for shareholders. Dodge v Ford, for example, challenged Henry Ford’s desire to “spread the benefits of the industrialized society with as many people as possible” when he was accused of spending shareholder dividends for community benefit. The ruling determined that “[it] is the obligation of directors to attempt, within the law, to maximize the long-run interests of the corporation’s stockholders.” In a similar theme, renowned economist Milton Friedman famously purported that the only responsibility of business is to its shareholders.
Non-profits, on the other hand, were often forced to take a singular focus on their mission, often at the expense of other community and societal stakeholders. They may be further limited in the impact they have due to their inability to raise capital and grow. This system of “stockholder capitalism” did not allow those businesses with People-Planet-Profit-minded missions to carry them out.
In response to these dilemmas faced by the for-profit and not-for-profit model and the inherent shortcomings of the corporate system in 20th century America, the Benefit Corporation was born. BLab Certification – the Birth of B Corp Recognizing that the outdated corporate legal framework did not serve for-profit companies with triple bottom line missions, the non-profit organization B Lab sought to create a set of standards to help analyze sustainability-minded corporations, and in doing so, advocate for a new corporate structure that could prosper financially while putting purpose at the center of their business.
B Lab continues to promote this mission with its B Corp certification (separate from the legal status of Benefit Corporation), granting the title to those purpose-driven corporations who meet rigorous performance and legal requirements, while also leading the initiative to legally recognize corporate entities that choose to practice in a socially responsible manner. Alphabet Soup (B Corp v. S Corp v. C Corp) Thanks to the efforts of B Lab, many states have adopted a corporate legal structure (a la S Corp and C Corp) called the Benefit Corporation, or B Corp.
A company that declares its structure as a B Corp is legally required to focus on all stakeholders in its business and not just its shareholders, establishing an obligation to “create a material positive impact on society and the environment and to meet higher standards of accountability and transparency”. The ideals, practices and values of the Benefit Corporation are not a fad, nor do they reflect the sentiment of a minority. The Benefit Corporation White Paper expresses figures such as the following:
- 86% of consumers would switch from their current brand to a brand that is socially responsible when price and quality are equal
- 69% of employees consider the social and environmental track record of the company they decide to work for
- 88% of MBA grads are willing to take a pay cut to work at a company with ethical business practices over one that does not
Today this new corporate entity, the Benefit Corporation, is legally recognized in 12 states and 14 more have Benefit Corporation legislation in the works. The true legacy of B Corps is not in the inherent good that they are doing for the environment, nor is it in the positive returns of social mindedness. By setting the standards for accountability, transparency, and advocating for the legal recognition of a new corporate entity, B Corps are taking initiative as the pioneers of a new sector of the economy and the catalyst of change in American society from one of Shareholder Capitalism to Stakeholder Capitalism. The true legacy of the B Corp is the path that it has set and a legal framework to follow so that the next generation of entrepreneurs and investors are spared the cost of trial and error and may continue to build businesses that seek to create value for all stakeholders – shareholders, customers, employees, suppliers, the community, and the environment.