B-Corporations and Stakeholder Capitalism

During lecture last week Professor Zak mentioned the idea of the B-Corporation in the U.S. and how it would be akin to the Public Interest Company in the U.K. Both concepts were also mentioned in the article, "Social Innovation: Let's hear those ideas," from our weekly readings. Structuring as a B-Corp or PIC would seem to give a means for a company to formalize its social impact beyond some statement about "corporate social responsibility." This is especially important since, as noted in Aneel Karnani's article "Romanticizing the Poor," "CSR is little more than a cosmetic treatment."

So what exactly is a "Benefit Corporation" or B-Corp? As it stands right now, it is not a nationally-recognized legal corporate structure, rather it is a type of certification that a company can receive. The certification is issued by B-Lab of Berwyn, Pennsylvania. It is good for a period of two years and the companies pay a fee to hold the certification. After the two year period is over and at random during that period, the company is subject to audits by B-Lab in order to ensure they are complying with the B-Impact Ratings System.

Companies are rated by B-Lab on how well they take into account the interests of all their stakeholders, rather than just their shareholders. They are evaluated on things such as how they treat their employees, the level of transparency in their year-end reports, their impact on the environment and their communities. It appears to give companies a structure to formally account for creating value in other ways than just returns on investment for shareholders. The companies are required to alter their corporate charters to consider these returns to stakeholders in addition to returns to shareholders while making decisions. In other words, a B-Corp includes the external benefits it creates to society in its bottom line or its triple bottom line, as the concept is often termed.

Though the certification has not been legally recognized on a national level, several states have adopted the system and Philadelphia has provided tax incentives for B-Corps and their investors. Understandably, B-Lab seems to be spearheading these efforts for recognition of the B-Corp structure.

While pushing for national, legal recognition makes sense, what is interesting about the development of B-Corps is that it wasn't something handed down to the business world by the government. Its a movement that has come from the business community on its own and represents a shift in the idea of what capitalism means. This article does a nice job of explaining the history, but as one lawyer working with B-Lab puts it, "I think government can't solve all our problems and the private sector is a much bigger player in the economy anyway. So the idea is, if we can get businesses to behave in a different way, we can actually harness the power of the free market to make social changes, which would be more efficient than having change come down in the way of government mandates."

So what happens when government does start to legislate this movement? It seems desirable for the government to create incentives for investment in B-Corps, but how can that be done while keeping investors' expectations realistic? Does the answer lie in some type of subsidized investment strategy, similar to the social impact bond? Where does the balance lie? And in light of our readings last week regarding the difficulties in measuring social impact while more companies move towards being certified as B-Corps, how can B-Lab ensure their ratings system is accurate and fair?

Let me know what you think.

Thanks.

-Kyle