B Corporation, a New Way of Doing Business?

Jul 13, 2009

Sustainability seems to be the buzz word of 2009: sustainable homes, sustainable living, sustainable products, sustainable companies.

But when it comes to corporations, what does it mean to be sustainable?

Do companies have a responsibility to minimize environmental impacts and help solve the climate crisis? And how do you separate those companies that are truly sustainable from those that simply claim to be?

B Corporation, a project of the 501(c) 3 non-profit B Labs, hopes to answer those questions.

While most companies are evaluated by the benchmarks of bottom-line profit and shareholder value, people have increasingly begun to look to business to help solve global problems while at the same time holding a general distrust of the business community.

Becoming a B Corp.-certified company adds additional levels of responsibility, says B Labs co-founder Bart Houlahan, who with his partners Jay Coen Gilbert and Andrew Kassov spent a year talking to people in the market place. Like his partners, Houlahan came from the business world, having helped run the $250 million footwear and apparel brand AND 1.

"As we spoke to people, it became clear that some infrastructure seemed to be missing for companies that wanted to be sustainable," Houlahan says.

"B Corp provides 3 things: standards to define a sustainable company, a legal framework that allows companies to scale and raise capital, and a brand that makes it easy to support and patronize good businesses."

B Corporation is different than other certification processes, of which there are hundreds. For starters, sustainable practices have to be accepted into the DNA of the company.

"To become a B Corp, you have to change the legal framework of the company to include the interests of stakeholders and embed them in the business," Houlahan says. "We actually make you change your articles of incorporation and expand the responsibilities of the company to include consideration of employees, community and environment."

This is far beyond the typical responsibilities of a corporation to maximize profits.

Currently, there are more than 200 B Corporations, representing 31 industries and a billion-dollar marketplace, including Method, Seventh Generation, Shore Bank and Abacus Wealth Partners. That is a small percentage of the 43,000 companies that have taken the B Corporation 24-page survey.

Houlahan says that some of those companies have applied and been rejected and others have used it simply to benchmark their current standings in the various categories without applying. Others took the survey because they were asked to by potential investors, buyers or business partners. The survey data is confidential, but those companies that become B Corporations have their category scores posted online as part of their commitment to transparency.

Founding member King Arthur Flour, an employee-owned company in Vermont, had two reasons for becoming a B Corp. The first was to differentiate itself in the marketplace.

"The hope is that when consumers turn the bottom of the package over and see the B Corp logo, they will know what that is and that our company has met certain environmental and social metrics," says Sarah McGinley-Smith, an employee-owner.

They also see it as a way to gauge how they are doing in terms of sustainability benchmarks, she says.

"We do very well in the employee area largely because we're employee owned, but B Corp is also a tool for us to look at our lower scores and start to move the needle on those." In the case of King Arthur Flour, that meant making improvements in terms of their environmental impact over the last 18 months. "Having B Corp as a tool is reinforcement to people internally as to why we are making these changes."

Pull up King Arthur Flour's B Corp page, and you can see exactly how they are doing; where they excel – employees and leadership; and where they need work – environment, consumers and community.

Looking at all of these areas together is what differentiates B Corp, Houlahan says:

"There are plenty of deeply green or employee-centric certifications out there, but this is the only corporate certification we know of that is looking at the whole company and its impact on consumers, employees, the environment and the community."

But becoming a B Corp really moves beyond that.

"Becoming a B Corporation intentionally interferes with a company's obligation to maximize shareholder profits. That's why we exist," Houlahan says.

To find out how far the additional obligations to non-shareholder stakeholders goes, I asked Houlahan to speculate whether, if Burt's Bees had been a B Corp, its sale to Clorox would have been prevented.

His answer was an emphatic no, but the way he sees it, being a B Corporation does give companies additional options at the point of sale.

"At the moment of liquidity when selling a company, the fiduciary duty of directors is heightened under current corporate law so that they must maximize shareholder value," Houlahan explains. "Our legal framework changes that. Directors and executives have more options at the point of sale; they can consider the sales impact on other stakeholders, it isn't only about maximizing shareholder value."

As a B Corporation, the company can consider a lower offer if they feel it better maintains the integrity of the company vis a vis its stakeholders.

Houlahan also sees B Certification as a way to assure consumers that a company's practices are still sound after acquisition.

"If you talk to Burt's Bees," says Houlahan, "they would tell you that they are unequivocally not only maintaining their old practices but have enhanced them. But the problem is that consumers have no way of knowing or verifying that. B Certification is a way to answer that question for consumers."

To get another perspective on whether B Certification is important, I talked to Paul Herman of HIP Investor, a company that provides indices and research for investors who seek to make money by doing good and consults to corporations looking to realize sustainable, profitable growth by having a positive impact. Herman was in the same analyst cohort 20 years ago at McKinsey as B Labs co-founder Jay Coen Gilbert.

Herman rattles off a number of companies that are moving toward sustainability without a change in their bylaws – Starbucks, GE, Cisco, Alcoa, Wal-Mart – all because they see customer needs shifting.

But he still sees value to the B Certification process.

"It's significant in that it helps differentiate a company to be part of an association that has common interests and goals that may be different from traditional corporate goals," says Herman. "For an investor, it's a helpful indicator that the company is seeking a positive environmental or social outcome, but the company still has to pass a number of other tests; do they have a great management team, a growing market, and the ability to beat the competition. It's one indicator of a company's strategy, but it won't tell you whether the investment will be a home run or not."

Herman also sees it as a way to create a community of like-minded businesses but worries that becoming a B Corp may also place restrictions that stifle ingenuity.

"B Corp is very prescriptive about the practices of the certified companies, but American ingenuity is about innovation."

Herman believes that their scoring system may morph over time, though, to accommodate that. Ultimately, he sees the B Corp certification process as a contribution to helping the world understand that business can be a force for good. And this is exactly the point that B Corporation wants to drive home.

"Were trying to make good easy," Houlahan says, "allowing people to support not just a good product, but a good business."

 

See also:

Hunter Lovins Makes the Business Case for Climate Protection

How Green Is Your City? ISO Certification Helps Answer the Question

New Business Model Cuts Up-Front Costs to Spur Energy Efficiency

New Technologies Zero in on Wasted Energy

Why Cities & CEOs Can't Relax

 

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