Creating a class of ‘do good’ companies

September 20, 2013
(Courtesy of Joel Richardson)
(Courtesy of Joel Richardson)

Last month, baby food company Plum Organics made a big change that many parents buying its squeezable pouches of pea puree or teething crackers may never notice. It registered in Delaware as a benefit corporation, a new class of companies whose board and management are legally mandated to consider the social and environmental impact of their decisions, rather than simply the effect on shareholders.

Why make the switch? Advocates of benefit corporations, which must release annual reports disclosing their overall social and environmental performance, say the structure offers legal cover for companies that want to make being a good corporate citizen as much of a priority as generating returns for investors.

Yet Neil Grimmer, the co-founder and president of Plum, which was acquired by Campbell Soup Company in June, says any potential legal advantages are even "less relevant" to his decision than the symbolic leadership benefits and communication perks. "When you measure these things, you track them," he says. "We've found it incredibly useful as an organizing tool."

Whatever their reason may be for becoming a benefit corporation, more and more company leaders are adopting the new legal structure.

This summer, Delaware became the 19th state to pass a law allowing for benefit corporations, and by far the most significant. The business-friendly state, which is reportedly home to more corporations than people, could be a "game-changer" in encouraging the remaining 31 states without such a statute to add one, says Mark Loewenstein, a law professor at the University of Colorado, Boulder. (Washington, D.C. passed legislation allowing benefit corporations earlier this year; Maryland was the first state to do so in 2010 and Virginia followed in 2011.)

But for now, the movement is likely to have its limits, appealing to privately held companies rather than publicly traded ones. And while few would take issue with businesses holding themselves to a broader mandate, the structure has already sparked questions from some legal experts about the accountability of the new entities and the unintended consequences they may have.

To understand these new do-good businesses, it's important to distinguish between benefit corporations and "B Corps," companies that receive a certification given out by the nonprofit B Labs for meeting a list of standards.

B Labs scores them on their social and environmental performance, accountability and transparency. The nonprofit says it hopes the marker will become like the LEED certification for green buildings, a signal that helps brands show others they're doing well by doing good. Patagonia, Etsy and online eyewear retailer Warby Parker have all become certified B Corps in recent years, and Plum Organics has held that certification since 2008.

The two terms are confusing, but distinct. Companies can be structured as benefit corporations without having the B Corp marker, and there are many certified B Corps that have not legally changed their corporate charter.

Shoe maker Dansko, for instance, has been certified as a B Corp since 2007 but is not becoming a benefit corporation, at least for now. That's in part because, as an entirely employee-owned company, Dansko doesn't have to worry about having legal protection from unwanted acquisitions or a status that helps attract outside investors interested in a mission-driven company--two reasons other businesses might consider making the switch. Those are "not likely to happen in the foreseeable future," says CEO and co-founder Mandy Cabot.

The B Corp certification, on the other hand, "absolutely has marketing value" as far as Cabot is concerned. It alerts consumers to Dansko's sustainability practices, gives her a network of like-minded companies with which to share ideas and exchange discounts, and triggers ideas via the certification process for her organization to adopt. For example, Dankso now gives employees paid time off to vote. It also changed its labeling on shoe inserts so consumers would know they're made of recycled plastic.

"I’m a big believer of third-party validation of your practices," Cabot says. The certification by B Lab, which her company goes through every two years, "gave us research and benchmarking we could have never done ourselves" as well as "a compass we could pass down through successive generations of leadership."

But when it comes to the new legal entity (rather than the certification), some corporate governance experts have questioned why such companies don't just become nonprofits instead.

"Using a nonprofit incorporation could do the same thing," says Charles Elson, the director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. "The structure creates zero accountability to investors. Managers [can do] almost anything they like under the rubric of meeting the concern of some stakeholders."

Meanwhile, other legal or sustainable business experts question whether there may be unintended consequences. Lynn Stout, a law professor at Cornell University and the author of "The Shareholder Value Myth," says that the concept of shareholder profit maximization is misunderstood, and that there is no legal duty "that courts will actually enforce" for the average company to put profits before all else.

"I think it's great that investors who have a conscience have an option to make sure the company’s being socially responsible," Stout says. But she worries that the way benefit corporations are being discussed "reinforces this destructive misunderstanding of what [traditional] corporations can do."

Still other legal experts have different questions about accountability. A benefit corporation may treat its local community members as stakeholders, but it can't really be held liable to those claims. "If your specific public benefit is to improve employment prospects in a particular community and you don’t achieve that in any way," says UC Boulder's Loewenstein, "you're unaccountable to the unemployed folks in that community."

Even William H. Clark, a partner with the law firm Drinker Biddle and Reath who helped draft the legislation authorizing the new entities, concedes that "you very rarely if ever see lawsuits" challenging directors. "Courts don’t like to get into second guessing directors as they’re running the business." Still, Clark, who admits he was an "incredible skeptic" when he first heard about the idea, posits that benefit corporations do provide legal shelter when it comes to evaluating mergers and acquisitions, where courts otherwise deem maximizing shareholder value a top concern.

Advocates of the new form have answers to the other questions raised as well. Jay Coen Gilbert, one of the founders of B Labs, supports the new legislation and says that while directors of benefit corporations ultimately may only be liable to investors, those shareholders at least now have the right to hold management accountable for falling down on the job of doing good. The question, of course, is whether the shareholders will--though the threat of public embarrassment could help in that regard.

In addition, Gilbert says, the nonprofit world is "insufficient" for tackling the kinds of social and environmental problems benefit corporations want to solve, and he sees no indication yet that the emergence of benefit corporations will have a "chilling effect" on corporate sustainability efforts at existing companies.

As of now, there are no publicly traded benefit corporations, and Clark says the conversion of an existing major public company is "virtually impossible" in states like Delaware, which require a 90 percent approval by shareholders to change a public company's charter.

Still, even if it's unlikely that Campbell--Plum Organic's parent company--will ever become a benefit corporation itself, Plum's new status as one confers an advantage. CEO Neil Grimmer hopes that codifying its legal responsibilities into Plum's by-laws, as well as having the B Corp certification, will help communicate to employees, consumers and its corporate parent that Plum's business practices are not about to change despite being acquired.

"It helped to shore up that understanding," Grimmer says.

And luckily, he adds, Campbell gets that this "is not about trading off profitability. When you authentically do good in the world, that engages consumers who then vote with their dollars."

Jena McGregor is a columnist for On Leadership.

Read also:

How the cult of shareholder value wrecked American business

How a local attorney became an advocate for the national "benefit corporation" movement

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Jena McGregor writes a daily column analyzing leadership in the news for the Washington Post’s On Leadership section.
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Jena McGregor · September 20, 2013