Given the magnitude of the challenges that we face–think global warming and the grossly unequal sharing of prosperity–it’s not surprising that consumers, employees, and the capital markets are all pressing business to stop being so much of the problem and to start becoming more of the solution.
All of which makes B Corps–some 2,600 companies certified for meeting the highest environmental and social standards–especially attractive as places to buy from, work for, and invest in. Among the biggest and best known are Patagonia, Danone North America, Laureate Education, Natura (parent of The Body Shop), Kickstarter, and Ben & Jerry’s (a subsidiary of Unilever).
“When we each make small changes in our daily lives, our efforts add up to a much larger cumulative action,” declares a digital marketing campaign launched this month by B Lab, the 12-year-old nonprofit organization that administers the B Corps verification process. “Vote Every Day. Vote B Corp.”
Springing off the midterm elections, it’s a clever, compelling pitch. But it also conjures some tough questions: Does a company need to be a B Corp to properly “balance profit and purpose,” as B Lab describes it? Is it even possible that by setting up a distinct designation, it could make it harder to induce non-B Corp companies to have a positive impact?
“I admire so much about B Corps–what they’ve done intellectually and how quickly they’ve established themselves,” says Adam Zurofsky, who oversees energy policy and financial regulation for the state of New York and also teaches corporate law at Fordham University. “But I do worry that having this separate silo could do more harm than good. Shouldn’t this be happening in the mainstream?”
Whether you think that B Corps are essential or not boils down, in many respects, to how much flexibility you believe that any company has to consider the well-being of all of its stakeholders–its employees, customers, suppliers, and the communities in which it operates. Or is it obligated to favor its shareholders by aiming primarily to boost its earnings and stock price?
For those at B Lab, the answer is clear: Companies must ultimately serve their shareholders–even if that has deleterious effects on the planet or society.
To suggest that this is debatable “always leaves me scratching my head,” says B Lab co-founder Jay Coen Gilbert.
A Jarring Inconsistency
He cites an essay written a few years ago by Leo Strine, when he was chief justice of the Delaware Supreme Court–the nation’s most important jurisdiction for business cases. To hold that boards of directors “have leeway to subordinate stockholder welfare to other interests would involve them making a policy determination jarringly inconsistent with the structure of our law,” Strine asserted.
This is why, in order to be a B Corp, a company not only needs to pass an 80-point assessment that B Lab has created, but it also has to adopt a legal framework that explicitly says it will account for all of its stakeholders when making decisions.
Most businesses seeking to become B Corps are small and already have a form (such as that of a limited liability company) under which they can simply revise their governing documents to meet B Lab’s legal requirement. But companies that want to raise capital often need to use the corporate form, and B Lab generally insists that they be chartered as “benefit corporations” to qualify for certification.
Spurred by B Lab, 33 states and the District of Columbia have passed legislation allowing for the formation of benefit corporations, which unequivocally reject shareholder primacy. Roughly 8,000 firms have signed on. (The Accountable Capitalism Act, introduced in August by Senator Elizabeth Warren, would also mandate that very large U.S. companies obtain a new federal charter based on the state-level benefit corporation model.)
“At the end of the day, there’s a choice to be made about what is the purpose of business,” Gilbert says. “And there’s now a viable alternative.”
In the eyes of others, however, it’s an alternative that isn’t fully necessary–and could actually be counterproductive.
“We have to be careful that we’re not inadvertently sending a message that if you’re doing the social thing you should be a B Corp, and everybody else should be left to maximize profit,” says Tamara Belinfanti, a professor at New York Law School and co-founder of the Ethical Shareholder Initiative, which is developing a proxy service to amplify the power of socially conscious investors. (Disclosure: My Drucker Institute colleagues and I are consulting for ESI.)
As the law is read by Belinfanti and others–most prominently the late Lynn Stout, a Cornell University professor and author of The Shareholder Value Myth–corporate directors and executives who aren’t running B Corps or benefit corporations have ample discretion to look out for all of their stakeholders.
“Remarkable freedom to choose”
In fact, “courts give corporate managers remarkable freedom to choose company objectives under the fundamental corporate law doctrine known as the business judgment rule,” Belinfanti and Stout wrote in a law review article published in February.
Even some B Corp executives express that a company doesn’t need a special legal status to do the right things.
“We’re proud to be part of the movement,” says Andrei Cherny the CEO of Aspiration, a financial services provider that became a certified B Corp in 2016. But if Aspiration hadn’t met the legal hurdle, he explains, it would have continued to do all the same things it has always done: letting customers pay what they wish, offering a mutual fund that invests only in companies that advance sustainable practices, and pledging 10% of its net income to charity.
Being a B Corp is “less about the legal definition and more a statement about who we are as a company,” Cherny says. “There is nothing magic about the way the business is registered.”
Paul Polman, the CEO of Unilever, agrees. “I don’t believe you have to be a B Corp to behave like one,” he says, stressing that a company’s duty is “not just to the shareholders.”
Not that Unilever, which is widely seen as a leader in applying a long-term-oriented, stakeholder approach to business, doesn’t greatly appreciate what B Corps are all about. It has acquired several over the years—including, besides Ben & Jerry’s, household products producer Seventh Generation and organic tea maker Pukka.
Meanwhile, Polman says that Unilever itself is working toward becoming a B Corp, although he adds that the plan “needs a lot of work still.”
Eventually flying a B Corp flag “would send a strong signal to the market and attract hopefully even more of the right shareholders,” Polman says. “It would equally send a strong signal to the various stakeholders that work with the company.”
In this regard, Unilever is undeniably exceptional.
Indeed, those at B Lab note that for most companies, even if they don’t feel hamstrung by the law, the norms of business dictate that shareholders always come first. It has been like this for the past 30-plus years.
“It’s like the air we breathe,” says Rick Alexander, B Lab’s head of legal policy. “We don’t even notice it.”
Where there is disagreement is over how best to compel the business community to reconstitute its culture.
Despite the impressive growth achieved by B Lab, the reality is that most companies will never become B Corps. Unilever’s intentions notwithstanding, few giant corporations have gotten on board.
Rather than focus on the fringe, then, other activists and organizations–such as the Aspen Institute’s Business and Society Program, the Sustainability Accounting Standards Board, and the Coalition for Inclusive Capitalism—are using a variety of tactics to prompt executives at conventional companies to manage with more than short-term financial results in mind.
For their part, B Corp advocates contend that while such efforts may be useful, they are bound to fall short of genuinely transforming business.
Joey Bergstein, the CEO of Seventh Generation, points out that all sorts of companies “easily attach themselves to a cause” these days and claim to be socially responsible. But it takes a far different kind of commitment, he says, to get through “the rigorous B Corp assessment” and take on a legal classification that may put top management at odds with the firm’s investors.
“These are companies that have gone the extra mile,” Bergstein observes. “That says a lot about their values.”
By contrast, companies outside the B Corp universe “can modify their behavior, but the range and the extent will be limited,” says Suntae Kim, a management professor at Boston College. “Realistically, if there are competing demands, most are going to pay more attention to their shareholders than other stakeholders.”
For those endeavoring to mend capitalism, figuring out which course to pursue really is a matter of strategy: Should we try to refashion the current system? Or do we need a new system to supplant (or at least run parallel) to the existing one?
Or, to put it another way: What’s the most effective way to change the world–to B or not to B?