As many executives have found, one of the biggest barriers to long-term corporate sustainability is, oddly enough, one of its biggest potential beneficiaries: shareholders.
This is because the traditional goal of a business – the maximisation of financial gain – tends to prize short-term profit at the cost of long-term corporate (and societal) survival and growth. When those conflicts occur, shareholders can make a legal case that anything that reduces short-term profits is, arguably, corporate mismanagement.
Ultimately, then, corporate executives face a difficult quandary: How can they balance their short term responsibility to shareholders with their long term responsibilities to their companies, their communities, their workers and the environment?
Making it official
B Lab thinks that it may have a solution. The non-profit group already works around the world to promote the B Corps corporate stewardship standard, a certification program in which companies are evaluated based on their commitment to "social and environmental performance, accountability and sustainability". Now, B Lab has developed benefit corporations, a new type of US corporate organisation that enables companies to give legal backing to their sustainability commitments.
First launched in 2010, benefit corporations are designed with an eye toward long term profitability and sustainability. Katie Kerr, B Lab's director of communications, explains that, instead of focusing narrowly on shareholder value, benefit corporations work to support all stakeholders, including "entrepreneurs, worker and everyone else who is affected by a business".
This notion of broader responsibility is actually written into the benefit corporation definition, and companies that apply for – and receive – benefit corporation status are legally required to adhere to it.
In addition to generating profits, benefit corporations must have a "materially positive impact on society and the environment; consider the impact of their decisions not only on shareholders, but also on workers, community, and the environment" and must publish a publicly available annual report that assesses their "overall social and environmental performance against a third-party standard".
So far, 375 firms have benefit status, and they run the gamut from outdoor clothing company Patagonia to green engineering firm The Green Engineer to investment firm RSF Social Finance. Many benefit corporations are small businesses, but some, like Campbell's Plum Organics division, are wholly owned subsidiaries of larger corporations.
Benefits of 'benefit' status
While it may seem onerous to take on the benefit-corporation responsibility, it can actually help a company realise its business goals while protecting its ideals. This was the case for Vermont flour companyKing Arthur Flour, which received benefit corporation status in 2012.
The 222-year-old private company is 100% employee-owned, under an employee stock ownership plan. This distinction gives King Arthur workers a voice in company governance and results in significantly higher pay than the industry standard, says Terri Rosenstock, King Arthur's public relations manager. The company regards this policy as a key part of its mission, but its values wouldn't be legally protected in the case of a corporate buyout.
"If someone wanted to buy us, we would only be able to look at numbers, at our strict profitability," Rosenstock explains. "Now, we are legally able to factor in other considerations, like our values, our products, our employees and the effect that we have on our community."
Before it applied for benefit corporation status, King Arthur was already B Corp certified, which means that, to a great extent, the move to become a benefit corporation has had a minimal effect on its corporate governance. But, Rosenstock claims: "Our designation as a Vermont benefit corporation has given us more security."
That said, while benefit corporation status protects these companies from some legal attacks over the profitability of their decisions, it opens them up to other types of lawsuits. If stakeholders in a benefit corporation believe that the company is failing to live up to its social mission, they are allowed to bring a benefit enforcement proceeding, or BEP, against the company.
Depending on the individual state, its benefit incorporation laws and its legal interpretation of those laws, both the mechanism for levying a BEP and the available legal remedies could vary greatly. In general, though, BEPs can only be levied by people within a benefit corporation, or by third parties of the company's choosing. This frees the benefit corporation from having to deal with outside critics who may question its social mission or sustainability performance. Arguably, though, this could also reduce valid public scrutiny.
Does this really change anything?
It takes only a cursory glance at the list of existing benefit corporations to see that these companies often follow a certain type. As a general rule, they already tend to be concerned with sustainability and often already have a larger social mission. And many, like King Arthur Flour, are already certified B Corps when they apply for benefit corporation status.
This was the case with New York's Greyston Bakery, which saw minimal change to its corporate culture when it became a benefit corporation in 2012, CEO Mike Brady says. This isn't to say that the switch to a benefit corporation has come without challenges. Brady notes that the benefit corporation certification came with a handful of short-term costs: "Among other things, we have to spend resources to document our activities and create our Annual Benefit Report, check that our suppliers adhere to our Supplier Code of Conduct, and research various environmentally responsible programs like clean energy," he explains. "While it is difficult to see if these marginal costs have any immediate short term benefit, we are convinced that they will have a long-term ROI."
Unlike B Corps certification, which is increasingly becoming a selling point among informed consumers, benefit corporation status doesn't seem to carry a large promotional benefit.
King Arthur Flour's Rosenstock, for example, says that the company hasn't widely advertised its move to a benefit corporation structure. "We haven't done much promotion around our designation as a Vermont benefit corporation, although we've shared our stories through our own social media channels, including our blog."
Greyston's Brady expects benefit corporation status will pay off, in the long term, with increased transparency and the growth of a benefit corporation community. The yearly reporting "makes it easier for people to see what we are doing and to compare us with other companies in the market," he explains.
Creating a benefit ecosystem
Conversely, it also helps him find out about the activities of some of his corporate partners. "It has had a network effect of enabling collaboration between like-minded businesses," he notes. "When I'm looking for suppliers, I seek out benefit corporations and B Corps."
At this point, 19 states and the District of Columbia have benefit corporation laws on the books, and fifteen other states have bills pending. Perhaps most importantly, Delaware – the state in which most of corporate America makes its home – recently passed a law enabling the creation of benefit corporations.
Brady believes that the growth of the benefit corporation standard will, ultimately, have a broad-reaching effect on America's corporate culture. "As the number of B Corps and benefit corporations expand, I think it will help CEOs struggling to get support for sustainability initiatives."
In other words, while companies like King Arthur and Greyston Bakery are using the benefit corporation standard to protect their individual business values, they may also be helping to change America's overall corporate environment.
Bruce Watson is a New York-based writer who reports on finance, food and culture. He tweets @Bruce1971.
(c) 2013 Guardian Newspapers Limited.
Original headline: Benefit corporations: can a legal designation boost sustainability?
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