B Corps and the Uncertain Future of Shareholder Capitalism

Economic inequality is at an all-time high, and the climate crisis threatens the existence of all life on earth, and corporations are at the epicentre of these problems. Due to their singular focus on shareholder wealth maximization, corporations have been accused of neglecting the needs of society and the environment. But with the recent rise in activism and increased awareness about the effects of the climate crisis, corporations have been forced to rethink their purpose. They can no longer pursue profits and enrich their shareholders; instead they have to adopt stakeholder capitalism whereby they consider not just the owners but also employees, customers, suppliers, and local communities. By becoming a certified B Corporation, businesses can indicate that they meet the highest standards of social and environmental performance, public transparency, and legal accountability to balance profit and purpose. So how does a business become a B Corporation? How did the idea of shareholder capitalism take shape? Is stakeholder capitalism a panacea for all ills?

End of an Era

Milton Friedman is an American economist who was one of the twentieth century’s most prominent advocates of free markets. In his landmark New York Times essay published in 1970, Friedman argued that the best way a corporation can serve society is by making as much money as possible for its shareholders. Milton, who was awarded the Nobel Prize for economics in 1976, stated that it was up to other actors such as the government to manage society’s needs, and if business leaders wanted to contribute to society, they could pursue philanthropy in their own time. He further went on to say that expecting corporate executives to simultaneously account for other social responsibilities is equivalent to “spending someone else’s money for a general social interest”. Friedman’s idea picked up steam when American economists Michael Jensen and Eugene Fama suggested that CEOs be paid in stocks in a bid to keep the boards and executives accountable. But shareholder capitalism has not lived up to its expectation, as evidenced by the corporations that pollute the environment, numerous corporate scandals, lobbying and anti-competitive practices. Share buybacks which are at the core of shareholder capitalism, have come at the cost of research and development. In 2018, companies in the S&P 500 spent a record $806 billion (USD) on share buybacks, and more than 90% of profits of public companies are paid out in the form of share buybacks and dividends. In a watershed moment, the Business Roundtable, a group consisting of top US corporate leaders, recently reworded its statement on the purpose of companies stating that companies should no longer focus only on shareholder returns but also on other stakeholders such as employees, environment etc. paving the way for stakeholder capitalism. 

What are B Corps?

Stanford University grads- Andrew Kassoy, Bart Houlahan, and Jay Coen Gilbert created B Labs in 2006. B Lab is a nonprofit certifying body that administers a process for companies to assess themselves based on the following areas- 

• Workers 
• Governance 
• Community 
• Environment
• Customers 

To become a certified B Corp, companies must score a minimum of 80 points out of a maximum of 200 across those specific areas. B Lab’s auditors will verify the company’s claims and certify it if the minimum score is met. Certified companies need to pay an annual certification fee based on their sales and are required to recertify every three years. The certification can be quite challenging given that it requires a varying degree of policy and legal changes. Some of the changes include providing workers time off to volunteer, increasing the amount of paid parental leave the company offers and replacing the company’s sole duty to shareholders with wording that makes it accountable to multiple stakeholders. The B Impact Assessment is a detailed questionnaire that was made freely available for companies thinking of certifying or are just curious about how they compared on each measurement. The recent rise in popularity of B Corps is evidenced by the 70,000 companies that used the assessment as a tool to measure and manage their impact. 

Poster Child

The B Corp community currently consists of 3300 companies, with the most prominent categories of companies being business products & services (38%), which includes consultancies, followed by consumer products & services (26%), which includes food and clothing companies. The third-largest category is financial services (9%) which is quite surprising given that the sector is often derided for its lack of ethics. By far, the most popular B Corp is Patagonia, which routinely comes up during discussions about B Corps. The American clothing company founded in 1973 has become a B Corps poster child. Patagonia perfectly fits the description of a B Crop. It has offered onsite childcare for 35 years, hires activists, has been using organic cotton since the mid-1990s, and the company’s mission states that “Patagonia is in business to save our home planet.” Other well-known B Corps include Ben & Jerry’s, the Vermont, US-based ice-cream company, Brazilian cosmetics giant-Natura, and the UK-based Guardian Media Group. Since certifications started in 2007, 76% of the companies remain certified, meaning the rest fail to keep up the certification or decide not to.

What are the perks of being a B Corp?

1. Private investment firms like Bain Capital use the B Impact Assessment to score the companies they invest in. 
2. The rise of impact investing and the trend of investors favouring companies that demonstrate ethical principles can be beneficial to B Corps. 
3. B Corps can distinguish themselves from other companies that indulge in greenwashing, and given that B Corps are legally obliged to maintain or improve their sustainability standards, proves their commitment. 
4. Being a B Corp could also lead to a better quality of employees applying for jobs as employees increasingly care about who they’re working for. 

As If the House Was On Fire

B Corps are essentially converting companies that are already environmentally conscious and serve multiple stakeholders, whereas the most notorious polluters in industries such as fossil fuels and FMCGs continue to harm society. The missing link in further popularizing the B Corps movement are consumers. As long as consumers place the price of products/services above all other considerations, corporations will have no incentive to change for the better. While B Corps and stakeholder capitalism is a step in the right direction, there’s a lot more that needs to be done and fast. We need something radically different to replace our current model of capitalism, and it is high time we act as if the house was on fire. 

For more extensive analysis and Market Intelligence reports feel free to approach us or visit our website: Venture Capital Market Intelligence Reports | VCBay.

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