B Corps and Fixing the Broken System of Shareholder Capitalism

Is shareholder capitalism broken?

Few would argue that it's working well. Business as usual has us on a path to climate catastrophe. The housing/banking industry collapse threw the world into recession. We've seen Fukushima, the BP oil spill, the Massey coal mine deaths. Growing income inequality has become a persistent worry.

The conventional response to all that -- indeed, the one that I share -- is that smarter (though not more) regulation is needed. But a growing number of business people say the problems go deeper. They say a new kind of corporate legal structure is needed to require companies to operate for the good of society, not just for their shareholders. These new corporations -- they're called B Corporations -- are growing in number, and their structure has been enshrined into law in four states -- Vermont, Maryland, New Jersey and Virginia.

Here's what B Lab, the nonprofit behind B Corp, says on its website:

Our vision is simple yet ambitious: to create a new sector of the economy which uses the power of business to solve social and environmental problems. This sector will be comprised of a new type of corporation -- the B Corporation -- that meets rigorous and independent standards of social and environmental performance, accountability, and transparency.

And in its annual report:

After the latest round of economic and environmental crises, it's clear we need systemic solutions to the systemic problem that places the interests of shareholders over the interests of workers, community and the environment.

Interesting, no? A couple of months ago, I heard Jay Coen Gilbert, a founder of B Lab along with Bart Houlahan and Andrew Kassoy, talk about B Corp (it stands for Benefit Corp.) at a GreenBiz conference; afterwards, we caught up by phone to talk some more.

"We can't have a new economy unless we have a new type of corporation," Jay told me. "Corporate law actually works against sustainability." Current law, he argues, require company executives to put shareholder's interests ahead of everyone else's.

Jay is himself a business guy. After graduating from Stanford grad, he joined McKinsey & Co., then spent a couple of years working on child welfare issues for the government of New York City, and in 1993 founded with a shoe and apparel company for basketball players called And1. "We were very much the upstart, street ball brand," he says. The company, which grew sales to $250 million, was sold in 2005, giving Jay the freedom to think about what to do next. He'd been inspired by socially responsible companies like Patagonia, Body Shop and Newsman's Own, each of which, he said, was "very cool and inspiring in its own way, but all of the power and energy was diffused."

How, he wondered, could the power of responsible business be harnessed?

"There was a clear need for a unifying brand that could help project the voice of this very compelling marketplace, from fair trade to clean tech, from microfinance to organic and local," he says.

B Lab is the result, and he explains that the nonprofit is trying to do several things at once.

First, it's a certification effort, aimed at helping consumers identify responsible companies that meet rigorous and independent standards of social and environmental performance. "You can think of it as a LEED for business," Jay says, referring to the system for rating green buildings.

More than 400 companies in 54 industries have been certified as B Corps. Most are small and privately held. Total revenues are under $2 billion. Among the early adopters are Seventh Generation, Method, Numi Organic Tea, New Leaf paper and Sansko. One of the bigger firms to be certified is Cascade Engineering, a $250-million Michigan plastics firm, which is profiled in the current issue of Inc.

These companies get actual benefits, along with the right to use the B Corps brand. Salesforce and Intuit offer them discounts on software. Graduates of the Yale School of Management get favorable treatment of their student loans if they work for B Corps. The city of Philadelphia gives them tax breaks.

Second, B Lab is working with private equity investors to use its performance standards to help them make better-informed decisions about private companies. Its ratings are part of an initiative called the Global Impact Investment Rating System, or GIIRS, which provides data on the social and environmental impact of companies to investors who want to put their money into companies that are doing good. B Lab is beta-testing the GIIRS methodology with fund managers who have about $1.2 billion in assets under management.

And third, B Corps is pushing for new laws. The Benefit Corp legislation passed in four states creates a new corporate form which "redefines fiduciary duty, and holds companies accountable to create a material positive impact on society and the environment as measured by an independent, transparent third-party standard." Fundamentally, the idea here is to shield companies from shareholder litigation when they made decisions that could negatively impact short-term profitability. Corporations operating in any state can, in theory, re-incorporate in these states to, in effect, redefine their purpose.

This is where I part ways with B Lab, but not before saying that what Jay and his colleagues have accomplished in a few short years is nothing short of remarkable. They've catalyzed a movement, developed a sophisticated set of metrics around the corporations and the public good, won over hundreds of entrepreneurs and changed laws in four states. They're onto a big idea, and we can only hope it gets bigger.

The trouble is, the idea of business for the public benefit is not going to get big enough or important enough so long as it remains on the sidelines of shareholder capitalism. The world's big companies -- the Walmarts and GEs and McDonalds -- would find it very hard, if not impossible, to re-incorporate as B Corps. If nothing else, they'd have to concede that there's something fundamentally wrong with shareholder capitalism. They're not going to do that -- because, in my view, there's nothing fundamentally wrong with today's model.

While there are undoubtedly tensions between maximizing short-term profits and building long-term shareholder value, the job of a leader is to navigate those tensions and choose long-term value. Competitive markets also drive businesses to externalize their costs, but that problem is best addressed with regulation -- starting, importantly, with a price on carbon. Corporate governance, too, needs fixing, so that managers are accountable to shareholders in fact as well as in theory.

There's no doubt, in other words, that reforms are needed. But it's my firm belief that companies that make the world a better place -- by serving their customers, enabling their workers to flourish and giving back to their communities -- will, in the long run, will be rewarded in the market and deliver superior returns to the owners. That will drive the change we want to see, at a scale that matters.