The B Corporation: A Business Model for the New Economy
August 2012 Update—Since last we spoke with Andrew Kassoy, co-founder of B-Lab, in June of 2010, the organization has been in a state of rapid evolution. When we spoke with Kassoy B-Lab had certified a total of 275 firms as B-Corporations with revenues totaling $1.25 billion. Since that time the number of certified companies has grown to 574 firms generating $3.35 billion in revenues. Sixty industries are now represented among certified B-Corporations, up from 54.
B-Lab has also enjoyed a number of legislative successes over the past two years. For example, the passage of the AB 361 Benefit Corporation Bill in California, authorizing and regulating the creation of new B-Corporations, has helped B-Lab gain additional partners. Similar laws that enable the formation of B-Corporations have been introduced in several other states. In the past four years Hawaii, Maryland, Louisiana, New Jersey, New York, Vermont, and Virginia have all passed B-Corporation laws, while legislation was introduced in three additional states. These pieces of legislation define B-Corporations, and set standards that firms must employ in order to be recognized as such by state governments.
The release of the Global Impact Investing Rating System (GIIRS) in the fall of 2011 was a major step forward in assessing an entity’s effect on all stakeholders. The implementation of this system answers the impact investing community’s call for a set of standardized measurements that would help guide mission-aligned capital to worthy causes. GIIRS rankings allow for a degree of standardization to take place in the impact investment and mission-aligned capital space. Any firm can now request and pay for a GIIRS assessment, and a score of at least 80 makes a business eligible for qualification as a B-Corporation. —Evan Lozier. Evan is the Capital Institute’s Summer 2012 intern.
June 2010—What do Barkwheats Dog Products, the venture capital firm Ignia Partners, and household products manufacturer Seventh Generation have in common? They are all B Corporations.
To be a Certified B Corporation a company must meet a minimum set of definitive social and environmental performance standards and submit itself to periodic audits. It must also have incorporated into its governance documents a pledge that it will operate in the interests of, and with accountability to, not only its shareholders, but also its employees, the larger community and the environment. In short, as B Lab cofounder Andrew Kassoy maintains, B Corporations have their social and environmental missions encoded in their DNA.
The B Corp model is the brainchild of Kassoy and his fellow B Lab cofounders—Jay Coen Gilbert and Bart Houlahan. Together they are rewriting that long-unchallenged rule of the capital marketplace that has elevated short-term shareholder value maximization over the interests of all others. “We realized that there is a huge marketplace of companies and their consumers and investors who are interested in creating value for all stakeholders, not just shareholders,” says Kassoy.
“We realized that there is a huge marketplace of companies and their consumers and investors who are interested in creating value for all stakeholders, not just shareholders,” says Andrew Kassoy, cofounder of B Lab
How A Company Becomes B Corp Certified
B Lab was founded as a non-profit to certify B Corporations, promote the use of standards, and drive capital markets and public policy to accelerate the development of the new economic sector that is emerging out of the B Corporation model. There are now over 275 Certified B Corporations, representing $1.25 billion in annual revenues across 54 industries. Companies earn points along five general categories: environment, community, employees, consumer, and governance. A perfect score is 200 but to be certified a B Corp a company needs to earn a minimum of 80. For example, a company can earn points for its employee compensation and benefits, the amount of employee ownership, and its general work environment including training and education and job flexibility. Its community score will be based on whether it is locally owned, local sourcing practices, its employee and leadership diversity and its charitable giving and community service. Among the environmental factors considered are its energy, water and materials inputs, the thoughtfulness of its product design, and the amount of waste outputs it creates in the production and post consumer cycle.
The Legal Structure of a B Corp
Enshrining stakeholder consideration in the articles of incorporation is perhaps the most innovative element of the B Corporation model. Thirty-one states have now enacted legislation that permits companies to write stakeholder consideration into their official charters and in those states every B Corporation is required to do so. In those 19 states where no enabling legislation allows for “stakeholder consideration”—for example in California and Delaware--corporations that want to be certified B Corps must write that stakeholder clause into a contract with B Lab.
Kassoy reports that the B Corporation legal model has indeed produced unintended but highly welcome consequences: “People started to approach us saying, ‘you are playing around the edges but why not create a new corporate form for companies that create public benefits?'” For example, the Vermont Benefit Corporation Act, recently introduced in the Vermont state legislature, would “allow new and existing for-profit corporations to elect status as a benefit corporation.” Similar legislation has just been introduced in Maryland and is in the pipeline in Colorado, New York, North Carolina, Pennsylvania and Oregon. The purpose of this legislation is to create a self-selecting process that allows companies to pursue the social and environmental goals that ensure long-term profitability. This, in turn, should allow them to attract more “patient” capital, and, if they are public companies, ward off possible hostile takeover attempts and potential shareholder litigation for failing to maximize short term financial results (so long as they are clearly acting consistent with their obligation to create general public benefit and in consideration of their other stakeholders). “One of the reasons for a new corporate form instead of just using old constituency statues is to create clarity that this can’t just be an excuse by directors to avoid takeovers or to entrench their own interests,” says Kassoy. “A company has to be creating general public benefit and proving it through use of a third party standard.” The Holy Grail, notes Kassoy, “will be to use this new corporate form as a platform for states or municipalities or federal governments to offer procurement, investment or tax incentives for benefit companies. So in the dream scenario when you have companies obligated to create public benefit you can measure the externalities those companies are internalizing and say they should be taxed at a lower rate than a C Corporation."
“One of the reasons for a new corporate form instead of just using old constituency statues is to create clarity that this can’t just be an excuse by directors to avoid takeovers or to entrench their own interests. A company has to be creating general public benefit and proving it through use of a third party standard.”
B Corporations are already garnering tax benefits in the city of Philadelphia, which in December announced that it would offer a tax credit of $4000 for the tax years 2012 to 2017 to 25 local B Corps. And, beginning with the class of 2009, The Yale School of Management has begun to extend a loan forgiveness program to graduates who work for B Corporations.
In their start up phase, companies that set out to be stakeholder driven do not always find themselves up against the shareholder vs. stakeholder value maximization dilemma. “At that early stage they are raising capital from friends and family who understand that impact is most important,” says Kassoy. But, he notes, when ventures achieve a size where they need to access third party capital, go public or deal with succession issues their missions are more often than not diluted or lost in the ownership transition shuffle. “In the worse case all the mission goes away and in the best case you don’t know if it has gone away,” says Kassoy. “Often it is hard to determine what is good marketing and what is a good company.”
The B Corp Rating System Enforces Accountability
The transparency of the B Corp rating system is turning out to be a powerful tool for enforcement and accountability. The problem with corporate social responsibility as it exists in the mainstream corporate world today, says Kassoy, is that there are no enforceable standards. “Sustainability reports are good but you can cherry pick what you want to highlight,” he notes. There is no third party holding the company’s feet to the fire, and as a consequence the firm can selectively choose which sustainable initiatives to pursue and which to ignore. “The critical components of the B Corp form are that there is a third party standard defining social and environmental impact and a company has to transparently report based on that,” says Kassoy. “Secondly there is accountability, as opposed to simply giving permission to take stakeholder interests into account.” Indeed, a B Corp is required to consider those interests and gives the shareholders rights of redress if the directors fail to live up to their pledge, just as now shareholders can be construed to have rights to take action if a traditional C Corp doesn’t maximize shareholder value.
Is the vetting process to attain B Corp certification too onerous for some companies to comply with just as, say, getting organic certification has become for some smaller agricultural concerns? Kassoy says that B Lab's reporting requirements are aligned with the realities of the the typical entrepreneur's time and resource constraints. “The rating system we built is really meant to help entrepreneurs to go through quickly without outside sources," he reports. Still to keep them honest, B Corp’s are audited periodically, with 10 percent being audited every year. Not surprisingly, these audits have resulted in modest revisions both up and down in companies’ B Impact Ratings. But Kassoy reports that there have been no serious cases of mis-statements or failures to maintain the minimum certification level.
Is there a way for an aspiring or already certified B Corp to game the system? Kassoy thinks not. “We have done a fair amount of work on the rating system. You can’t just do well environmentally but produce machine guns using slave labor! You just won’t get a high enough score! We put some care into making sure that is the case. We are waiting for the day when we get an employee-owned, by traditionally underserved population company making wholly environmentally sustainable cigarettes! We will have to deal with it when that day comes.” He also notes that B Lab never prejudges a company that wants to be screened. “That is the age-old argument of whether or not to negatively screen,” he says. “We go the route of looking at the overall impact, and we retain the right to choose not to certify a company if they are entirely out of synch with the common values of the community of B Corporations.” That, says Kassoy, gives investors the option to overlay their own screens over the B Lab score using their own select criteria: “Rather than go down the slippery slope of the 3 founders of B lab making political judgments that fragment the market we chose the opt in direction. If a tobacco company wants to step up their game and take the risk of total transparency and accountability they can do it. I am not saying people should invest in them or that they will attain B Corp certification, but that they have subjected themselves to the accountability that others have.”
That said, the strict third party vetting standards and accountability suggests that Exxon Mobil will probably not be seeking B Corporation certification as a marketing device, says Kassoy. “They would subject themselves to far more transparency than they might want,” he says. “But,” he is quick to add, “If they are willing to try to meet that high bar they are free to do so.”
Keeping the Bias out of the Rating System
How does B Lab ensure that no bias creeps into its ratings system? Kassoy notes that the rating systems that got a bad rap in the latest financial crisis were credit rating agencies. “Most of what Moody’s and S&P do is rate credit risk and what they failed to do was take into account systemic risks. They also had conflicts of interest because they get paid entirely by the issuing company.” B Lab is structured differently, first of all as a non-profit. Furthermore, it does not provide credit risk ratings but rather is measuring positive impact over time. It also operates with a separate and independent standards council that writes the standards, formulates the company surveys, and creates the weightings and the audit standards. Unlike a traditional ratings service, the B Impact Rating System is totally transparent, including both questions and weightings. B Lab hires MBA students who conduct the audits, write the audit reports and report directly to the standards advisory council. “So the people who are out trying to get companies to apply for B Corp certification have no influence over the rating system,” says Kassoy. B Lab earns revenues through certification licensing fees. Fees are based on company revenues, beginning at $500 a year for companies with under $2 million in sales to $25,000 for companies over $100 million in annual sales.
Recruiting Future B Corps
How does B Lab go about recruiting future B Corps? “It takes a long relationship process especially with larger companies and we have a team that does the business development recruiting,” says Kassoy. “Some are obvious but there are tons of companies that don’t have a high profile but are doing great work.” Some are local, place-based organizations or manufacturing and services-based unfamiliar to the general consumer. More and more the B Corps themselves have become recruiters. “When a CEO’s company becomes a B Corp and starts to see what it does for her, she starts talking to her peers because she wants them to become part of her community,” says Kassoy.
The Benefits of B Corp Certification
Geoffrey Hollender, CEO of Seventh Generation, sought B Corp certification not because he needed the PR for his company, but to better communicate his values, says Kassoy. Smaller companies may seek B Corp certification in order to differentiate themselves through a collective brand identify. “In a pretty noisy market many small companies can’t spend enough money to market themselves so by having that certification it differentiates them from their competitors.” Others become B Corps because B Lab has facilitated the creation of a growing number of direct financial benefits, including very attractive product and service discounts with other B Corps and B Lab partners. “A number of companies are making money by being B corps net of licensing fees,” Kassoy maintains.
Yet other companies become B Corps to raise capital. A number of the almost 30 financial services companies that are B corps have invested in other B Corps or extended financing to them. Two of them—RSF Capital Management and E3 Bank now require that their corporate borrowers use the B Impact rating system. New Resource Bank also uses the rating system as part of its assessment of potential lenders. B Lab recently signed an agreement with Investors’ Circle, the angel network for triple bottom line businesses, that also requires all companies that present at their conferences to submit themselves to the B Impact Rating System. B Lab is also working with groups in Singapore, in the United Kingdom, and in Toronto that are developing local social stock exchanges.
B Lab Builds Partnerships
B Lab has also teamed up with the Rockefeller Foundation and the Global Impact Investing Network on a new initiative called the Global Impact Investing Rating System (GIIRS) that will rate both companies and funds on their social and environmental impact. GIIRS is a wholly owned subsidiary of B Lab and is, essentially, the next version of the B Impact Rating System, meant to broaden use of B Lab’s standards and ratings beyond just certification of B Corps to use by investors and policy makers. “We are now talking to a group of fund managers to be GIIRS Pioneer Fund Managers—with the goal of building a marketplace of GIIRS rated funds.” The New York-based Mission Markets group, which plans an electronic platform for trading impact investing funds and companies, has signed a letter of intent with B Lab that would require companies listed to obtain a GIIRS Rating.
One of the biggest challenges for B Lab going forward will be to create the standard set of measurement tools for adoption by the mission-aligned capital market. “It is the one that everyone is waiting for,” says Kassoy. “We are building as many partnerships as possible to make it a reality.”