Monthly Archives: June 2017

The rise of the B Corporation

Human rights and environmental protection groups have been tracking the negative impacts of for-profit businesses for more than twenty years now.  And from slave labour on Asian fishing fleets to lobbying against climate-protecting regulations, these impacts are not pretty. It is also possible to observe civil society responses to these impacts – from boycotts to social labels to rankings of ‘Corporate Social Responsibility’ reporting. One theme that runs through this work is disagreement over the value of piecemeal responses. For many people, it is the nature of business itself, or of capitalism or markets, which lies at the heart of the problem. We have a whole-system problem that requires a whole-system solution.

The birth of the B Corporation movement

The idea of the B Corporation, or Benefit Corporation, or B Corp, first emerged in the USA to deal with what, to some, is a particularly American problem. Although there is some disagreement, most lawyers agree that American businesses have a legal duty to put the financial interests of their shareholders first.1 This means that it you wanted your business to preserve a piece of ancient forest it owned, or not to outsource work to low-wage factories overseas, or not to sell itself to a hostile bid from an asset-stripping corporate raider, your shareholders could take you to court in order to force you to take the most financially advantageous route. For a few businesses with a strong sense of social mission this was a problem and, short of buying out all the shareholders or moving to a different ownership model, a simple solution did not come easily to hand.

Out of this problem the idea of the Benefit Corporation was born. If a company could go into its governing documents and amend them specifically to say that it did not want to put shareholder interests first but wanted to balance them with the interests of others (or with some sort of ‘community benefit’), then this problem might be solved. Shareholders couldn’t sue and, to some degree, you could build social mission into the business in a way which made it difficult to change later.

Although it was first discussed during the Clinton Administration, the Benefit Corporation movement began to gather real momentum when particular States began changing their laws specifically to permit or encourage this new model. The first was Maryland in 2010; by 2017, 32 states had Benefit Corporation laws.2 Common elements include:

  • The naming of general or specific public benefits, the pursuit of which are in the best interests of the company
  • That directors must consider the effect of decisions on shareholders, employees, suppliers, customers, community and the environment
  • A requirement to publish an annual Benefit Report in accordance with recognised third party standards.

These are still for-profit companies selling shares and paying dividends. But they are not just for profit, since they may have other goals too. The Benefit Corporation model has proved popular, with more than 4,500 US companies now incorporated using these rules. In addition, the idea of a B Corporation movement has now taken hold.3

B Lab opens shop…

For those who are cynical about voluntary corporate initiatives, the question arises whether Benefit Corporations will just behave like all the others in the end, regardless of promises to take others into account. To some extent the transparency requirements for annual social reporting built into the State-level legal amendments help answer this question. But the gold standard to reassure cynical consumers has always been an independent third party audit (as Fairtrade and Organic labels have shown). To fill this gap, campaigners for B Corporations set up the non-profit group B Lab in Pennsylvania in 2006.

Below is a standard B Lab Impact Report which shows how a particular company scores across five areas: Environment, Workers, Customers, Community and Governance.

L
These standards are holistic, are based around already established third party benchmarks where possible, and operate at a company, rather than a product, level. In addition, B Lab licences on-product logos for corporations meeting the standards, and recognises the importance of bringing consumers along as part of the movement.

It might be possible to quibble over the detail, but the main weakness of the approach is that the full B Impact Assessment for each certified company is not necessarily in the public domain.

…and expands into the UK and beyond

Although company law in the UK is slightly different in that it permits companies to consider the interests of other stakeholders, it is pretty clear that, on a day-to-day basis, most companies are operating to the American model of ‘shareholder primacy’.5 This means that, when B Lab launched its UK branch in October 2016, it resonated with businesses here, and now it names more than 100 UK businesses on its certified list. These include the following companies likely to be familiar to EC readers: Charity Bank, The One Brand (best known for One Water), ClimateCare, Lily’s Kitchen, WHEB Asset Management, JoJo Maman Bébé, Pukka Herbs and Divine Chocolate.

The B Corporation movement has also won over adherents in 57 other countries, from Mongolia to Lebanon, and nearly 2,000 certified companies from around the world are listed on the B Lab website.

Who is certified?

When I analysed certified B Corps they appeared to be primarily companies, like Patagonia, with an already strong reputation for ethical behaviour.  Quite a few of the others were firms of sustainability consultants and many more were micro-businesses employing a few people and serving a local market. One writer has suggested that companies seeking B corporation certification are mission-led businesses looking to stand out “in the midst of a ‘greenwash’ revolution.”6

If this were all that the B Corporation movement were doing it would be good, but of marginal significance. The story gets interesting, and more complex, when the larger companies get involved. In 2012, Ben & Jerry’s received B Corporation certification. Ben & Jerry’s is a wholly owned subsidiary of Unilever NV, and Unilever itself is on record as considering B Corporation certification for its whole operation.7 In 2011, one Danone subsidiary, Happy Family Brands, an organic food company for babies and toddlers, was certified as a B Corporation. Danone is apparently now using the B Corps Assessment method to track the social performance of ten of its other subsidiaries.8

In 2016, B Lab set up an ‘Advisory Council’ to consider new rules and processes for certifying multinational corporations. On the council, as well as Unilever and Danone, were representatives from companies including Campbell’s Soup, Prudential, Morgan Stanley, Bancolombia, C&A, Deloitte, and Ernst and Young.9

The challenges ahead

The lessons from the rise of the Fairtrade and organic movements are:

(a) that if you want to bring about change quickly and at scale, you need to involve large multinationals, and

(b) if you involve large multinationals they will create pressure to make the standards easier to achieve.

The B Corporation movement has come at a time of a great lack of trust in business generally. It offers a solution that is both systemic (it addresses the core problems of profit-seeking behaviours), and holistic (it is looking at all ‘stakeholders’ from workers to the environment). It has also moved beyond an idea to become established as a movement, with a series of practical tools for businesses to employ.

Having said that, it is clear that some fundamental challenges still lie ahead. Could an oil company or a tobacco company achieve B Corp certification, for example? Or could a subsidiary of an oil company be certified? And what might this do for the reputation of the movement? Kate Sandle from B Lab UK says “our assessment and disclosure questionnaire processes are rigorous and would highlight any potential conflicts with our intention to protect the planet and people. If necessary these are then reviewed by our independent standards advisory council”.13

B Lab has predictably received some criticism for certification (or not) of some other types of companies, for example, private education providers, cannabis sellers, bottled water companies and tax avoiders. It has a section on its website explaining its rationale and framework for evaluating such companies.10 It is encouraging that B Lab is taking a mature and transparent approach to these issues, but like any political movement it will succeed or fail by the decisions it takes in such critical future situations.

…and the benefits

The UK, like many other countries, already has its own social enterprise or solidarity economy movements with different legal models on offer for social entrepreneurs like charities, community interest companies, co-operatives and others. On one level, B Corps are a welcome addition to the new ecosystem of alternative business models that humanity clearly needs at this moment in history. And ecosystems, as we now know, need diversity to thrive.

It is possible that the subtlety of the B Corp approach is not a radical enough change, but then again it may contain the single key innovation required to turn all businesses around. It is instructive to note that, in 2016, a government advisory panel in the UK recommended that the Government “should explore the introduction of ‘benefit company’ status in English law”.12

B Lab certification also appears to raise the bar to a new level for practical measurement and assessment tools in the social enterprise space. It is possible that B Corp’s certification across a wide range of areas could also represent a new stage of consolidation in social labelling, which might then lead to a welcome simplification for consumers.

For those of us who argue that all for-profit corporations need to be phased out if humanity is to have a future, the suggestion that major businesses can convert, without too much disruption, into Benefit Corporations helps provide at least one practical answer as to how all this might be achieved. The focus on conversion is perhaps missing from other social enterprise or not-for-profit business models. The B Corp movement is also very good at articulating the pressing need for business-model innovation given the global problems that face us all. In the words of B Lab’s founders:

We are in the early stages of a global culture shift that is transforming our vision of the purpose of business from a late 20th century view that it is to maximize value for shareholders to a 21st century view that the purpose of business is to maximize value for society. Significantly, this transition is being driven by market-based activism, not by government intervention. Rather than simply debating the role of government in the economy, people are taking action to harness the power of business to solve society’s greatest challenges. Business – what we create, where we work, where we shop, what we buy, who we invest in – has become a source of identity and purpose.“4

A version of this article also appeared Ethical Consumer magazine in June 2017.

References – Websites viewed 19/5/17

1 The Shareholder Value Myth. Lynn Stout 2012 2 http://benefitcorp.net/policymakers/state-by-state-status 3 www.bcorporation.net/what-are-b-corps/about-b-lab 4 Impact governance and management: Fulfilling the promise of capitalism to achieve a shared and durable prosperity by: Andrew Kassoy, Bart Houlahan, Jay Coen Gilbet. Brookings Institute July 2016 5 The Kay Review of UK Equity Markets and Long-Term Decision Making. Interim Report February 2012 6 https://hbr.org/2016/06/why-companies-are-becoming-b-corporations 7 www.theguardian.com/sustainable-business/2015/jan/23/benefit-corporations-bcorps-business-social-responsibility 8 www.bcorporation.net/blog/danone-joins-multinational-advisory-council 9 www.bcorporation.net/become-a-b-corp/how-to-become-a-b-corp/multinationals-and-public-companies 10 www.bcorporation.net/controversialissues  12 www.gov.uk/government/publications/advisory-panel-to-mission-led-business-review-final-report 13. Phone conversation with Ethical Consumer 24/5/17

 

Glossary

Benefit Corporation = A US company incorporated under separate rules requiring attention to non-financial issues.

B Corporation = A company (usually a benefit corporation) certified by B Labs.

B Corp = A short way of saying B Corporation.

A legal duty to damage humans and their communities?

The reason why it is important to phase out for profit corporations is the perceived belief that, within them, directors have a legal duty to maximise profits for shareholders above all else. This rule is sometimes known as ‘shareholder primacy’ or the duty to ‘maximise shareholder value’.

One corporate lawyer, gone over to the other side, elaborates:

Corporate law thus casts ethical and social concerns as irrelevant, or as stumbling blocks to the corporation’s fundamental mandate. That’s the effect the law has inside the corporation. Outside the corporation the effect is more devastating. It is the law that leads corporations to actively disregard harm to all interests other than those of shareholders. When toxic chemicals are spilled, forests destroyed, employees left in poverty, or communities devastated through plant shutdowns, corporations view these as unimportant side effects outside their area of concern. But when the company’s stock price dips, that’s a disaster.1 (Hinkley C)

Strangely enough, the duty to maximise shareholder value does not explicitly appear in company incorporation documents which normally simply instruct directors to “exercise their powers and discharge their duties with a view to the interests of the corporation and of the shareholders.” It is the law, particularly in the USA, that has built up around these vague statements through previous decisions of the courts which have led to the creation of this perceived duty.

The classic case occurred in America in 1919 when the Dodge brothers, who owned 10% of Ford, sued Henry Ford, the majority shareholder and director. Henry Ford had wanted to reduce prices and increase wages instead of paying dividends. The Michigan court ruled in favour of the brothers saying: “it is not within the lawful powers of a board of directors to shape and conduct the affairs of a corporation for the merely incidental benefit of shareholders and for the primary purpose of benefiting others.”2

Since then there have been thousands of cases around the world including some with contradictory or more nuanced conclusions, but the majority opinion still appears to be that a duty exists to maximise shareholder value.

(a) The position in the USA

In 2012, the distinguished professor of corporate and business law at Cornell Law School published a book called “The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations, and the Public.”3 In it, she pointed to some of the court decisions at variance with Dodge v Ford and argued that: it is activist hedge funds and modern executive compensation practices — not corporate law — that drive so many of today’s public companies to myopically focus on short-term earnings; cut back on investment and innovation; mistreat their employees, customers and communities; and indulge in reckless, irresponsible and environmentally destructive behaviors.

However, it would appear that some different US corporate law professors line up on the other side, even if they agree that the duty itself is pernicious. Professor Yosifon at Santa Clara University and Professor Benbridge at UCLA, for example, both appeared in the New York Times in 2015 and 2016 respectively, arguing that a duty under US law still exists to maximise shareholder value.4

Matters are further complicated by the fact that each State will have a slightly different legal framework. It is therefore fair to say that, at best, the position is unclear. It is this lack of clarity which has acted as a spur to the B Corporation movement particularly to seek to change the incorporation documents to specifically deny shareholder primacy (For more information on B Corps see this article).

(b) The position in the UK

On the surface, the position appears different in the UK. The Companies Act 2006 passed by Tony Blair’s Labour government at s 172(i) stated:

” A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to –

(a) the likely consequences of any decision in the long term,

(b) the interests of the company’s employees,

(c) the need to foster the company’s business relationships with suppliers, customers and others,

(d) the impact of the company’s operations on the community and the environment,

(e) the desirability of the company maintaining a reputation for high standards of business conduct, and

(f) the need to act fairly as between members of the company.”

However, a formal UK government review of business decision making in 2012 reported on a study undertaken on behalf of the Association of Chartered Certified Accountants by Professor Collison. He reported that the corporate executives in his study seemed to interpret the law as imposing a requirement to maximise the share price in the short term. The review went on to say: “It seems unlikely that Professor Collison’s respondents did not know what the law was: these responses may therefore illustrate their state of mind rather than their understanding of the law. The TUC commented that “what directors’ duties require of directors in reality is almost irrelevant if this is how directors interpret their duties”, and went on to suggest that s172 should be reformulated so that the directors were required to promote the long-term success of the company.”5

(c) The position elsewhere

It is likely that what can generously be described as a ‘lack of clarity’ around the duty to maximise shareholder value exists around the world in a similar way but with some variations. It is well known, for example, that German corporations above a certain size require worker representation on their boards, which is designed to have some mitigating effect for some stakeholder groups. However, in a 2003 book called “The Company”, the authors (rather prematurely perhaps) describe the idea that companies should be responsible to a wider group of stakeholders than just shareholders “is in gradual retreat in its strongholds of Japan and continental Europe.”6

A duty to damage other interests?

Where externalising costs onto other stakeholders does benefit shareholder value then it is hard not to interpret a duty to maximise value as carrying with it a concurrent duty to damage humans and their communities. Not all decisions that benefit shareholder value will necessarily create such damage, but where it does, a duty to cause damage could be said to exist.

Big investors typically have deep pockets. This means that the potentially high costs of legal action, or the threat of legal action, to protect financial interests may not be a significant barrier. The lack of legal certainty in this area must create a temptation for financially-driven shareholders to consider this type of action extremely regularly.

We cannot know this because boardroom minutes will not normally find their way into the public domain. But looking at the actual damage which corporations routinely create, it is not difficult to infer that such discussions are common. This goes to the heart of why corporations have become dangerous to external interests and why, in their current form, a phase-out of for-profit corporations will become a logical campaign goal for human communities everywhere.

1How Corporate Law Inhibits Social Responsibility A Corporate Attorney Proposes a ‘Code for Corporate Citizenship’ in State Law by Robert C. Hinkley January 19, 2002 http://www.commondreams.org/views02/0119-04.htm

2https://pages.law.illinois.edu/aviram/Dodge.pdf

3 Lynn Stout: The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations, and the Public.” Berrell-Koehler 2012

4 www.nytimes.com/roomfordebate/2015/04/16/what-are-corporations-obligations-to-shareholders/its-law-but-it-shouldnt-be. http://www.nytimes.com/roomfordebate/2015/04/16/what-are-corporations-obligations-to-shareholders/a-duty-to-shareholder-value

5 THE KAY REVIEW OF UK EQUITY MARKETS AND LONG-TERM DECISION MAKING Interim Report FEBRUARY 2012

6 The Company: A Short History of a Revolutionary Idea by Adrian Wooldridge and John Micklethwait 2003 Wiedenfeld & Nicolson