The promise of B-corps

By Felix Salmon
May 1, 2012
Seth Stevenson's glowing profile of Patagonia founder Yvon Chouinard, he mentions the way that Chouinard recently converted his company to a B-corp:

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At the end of Seth Stevenson’s glowing profile of Patagonia founder Yvon Chouinard, he mentions the way that Chouinard recently converted his company to a B-corp:

Registering as a “benefit corporation” lets a firm declare—in its articles of incorporation—that the fiduciary duty of its executives includes “consideration of the interests of workers, community and the environment,” and not just the bottom line.

Chouinard marched into state offices on the morning of January 3, 2012, to make Patagonia the very first company to register as a benefit corporation in California. It remains the most prominent company nationwide to have registered thus far. For Chouinard, the value of this is less about the present than the future. He can do whatever he wants at Patagonia right now, with no threat of shareholders revolting if he sacrifices a bit of profit in the name of menschy communitarianism. He owns the place in full, for as long as he’s alive. But he’s cagey about succession, and it’s clear what he fears: He never wants Patagonia to go public, or to lever itself up in search of rapid growth, as it mistakenly did before. He’s convinced that becoming a benefit corporation will help prevent that from ever happening.

I spent a bit of time researching B-corps when I was writing my Wired story on the problem with IPOs, and I think that B-corps are actually much more interesting than Stevenson is giving them credit for. The whole point of a B-corp, as I see it, is that you can go public, or lever yourself up in search of rapid growth, or give your employees lucrative stock options — you can generally behave just like all those money-chomping red-blooded capitalists, while also giving yourself a lot of freedom to do things like save the planet and ignore pesky shareholders agitating for explosive and infinite growth.

B-corps—Maryland was the first to charter them in 2010—can still have public shareholders, dividends, stock offerings, and all the other tools in the modern financial arsenal. But unlike other public companies, whose sole legal duty is to maximize profits for shareholders, executives at B-corps are also required to consider nonfinancial interests when they make decisions. Indeed, the company has to create a material positive impact on society and the environment.

That has the potential to rewire one of the most dangerous things about being a public company today: the requirement to keep growing, no matter what. B-corps can and will be listed on stock exchanges, just like any other public company. And there is no reason that they shouldn’t perform like normal shares. But investors and employees can take pride in the fact that their company is not just concerned with short-term financial gain. Best of all, the pressure to grow at all costs dissipates, and it becomes a lot harder for angry or litigious shareholders to agitate for changes just because they’re unhappy about the stock price.

There will undoubtedly be a discount applied to any B-corp looking to go public — its valuation won’t be as high as if it were a conventional company. But once it has gone public, there’s no reason its share price shouldn’t grow just as fast as any other company. If the discount stays constant, then the return to shareholders is exactly the same as it would have been at a full valuation. And if the “menschy communitarianism” of the company, in Stevenson’s words, actually ends up helping the company’s bottom line, then the discount might well shrink, thereby boosting total shareholder returns.

If Chouinard “never wants Patagonia to go public”, then, registering as a B-corp is not going to help him. But I suspect the idea here is that by registering as a B-corp, Chouinard is creating a company which can go public without losing its soul. And, without resorting to non-voting share classes and the like.

Comments
8 comments so far

“But unlike other public companies, whose sole legal duty is to maximize profits for shareholders”

Felix, why do you keep perpetuating this myth? It’s simply not true. The management of public companies have a fiduciary duty to act in the best interest of the corporation, and that rarely means they must maximize profits. If that was the case, then the CEO of Wal-Mart should have been sued in 2005 after Wal-Mart donated truckloads of water to Katrina victims. After all, it didn’t increase profits, unless you consider the long term benefits of the good will that act bought.

And if you do consider those long term benefits, then you can’t compartmentalize every action of a company, and judge whether it is profitable. You’re leaving every decision up to the management to determine if it is in the best interests of the company, including something like reducing carbon emissions because they believe, rightly or wrongly, that it will lead to climate change, which will negatively impact the health of the company. Management can and should take into account the impact of their business on the community, the environment, and the economy, as all of those ecosystems will impact their ability to sustain profitability. Which means the idea that management must ignore those issues to maximize short term profits is false.

Posted by KenG_CA | Report as abusive

Too bad this all came around too late for Ben and Jerry’s. My grandfather was on the board when the sale to Unilever happened and it was pretty divided on shareholder sentiment over the move. Ultimately they didn’t feel that they really had enough of a choice in the matter. If they had been a B-corp from sometime in the early 90s things might have gone differently. Even so I remember the failed ‘peanut butter and jelly’ flavor attempt left about a dozen pint’s in his freezer.

Posted by tuckerm | Report as abusive

B-Corps will never catch on in a meaningful way. There is a minimal amount of capital available which does not demand to maximize risk adjusted returns.

Paying above market wages, exceeding environmental or safety standards and even keeping prices below market to offer consumers enhanced value all sounds great… and in fact those things are great for workers, customers, and society at large… except that all of those things reduce profits and minimize the amount that can be reinvested in the business.

Look at the evil Walmart. They are vilified for paying bribes or “facilitating payments” in growing their 27 billion dollar/year Mexican business. They pay low wages… they sell factory farm food… 90% of the non-food products are made in China or some other low wage country with minimal environmental standards or worker rights… I mean there is a lot not to like right…

…so why do fifty million Mexicans shop there every month? Why does the Mexican government allow Walmart to operate there? Why do 220,000 Mexicans want to work there?

Well lets explore that… 50 million Mexicans apparently like the dependable availability of products at low prices. The Mexican Governments (national and local) like that Walmart actually pays taxes unlike most Mexican business. I’m not saying Walmart is a good corporate citizen… Walmart should do more for it’s employees and local communities.

I can guarantee you that 5, 10, 20, or 50 years in the future Walmart by itself will always be larger than the sum total of all B-Corps combined… the math is the math.

Posted by y2kurtus | Report as abusive

UK corporate law has included a statutory obligation since 2006 on each director to act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to—

(a)the likely consequences of any decision in the long term,

(b)the interests of the company’s employees,

(c)the need to foster the company’s business relationships with suppliers, customers and others,

(d)the impact of the company’s operations on the community and the environment,

(e)the desirability of the company maintaining a reputation for high standards of business conduct, and

(f)the need to act fairly as between members of the company.

Any director of any UK company, public or private, is required to comply with this, and it already forms part of the ‘fiduciary duty’. Yet does this statutory obligation stop UK companies from myopia, taking decisions which are not in the employees’ best interests, screwing over suppliers or the environment? No, and the reason for this is that a wealthy company that can afford expensive legal protection (and I say this as an expensive lawyer myself).

Posted by ed_uk | Report as abusive

Logic has its own siren song. We think 1+1=2 for ourselves and then make the deadly mistake that everyone else agrees.

Not so, as y2kurtus supposes.

Mexicans shop at Walmart, because they are wise to saving money. They DO NOT assess the long term socio-financial trajectory of marketing decisions and local political choices impacting the purveyors from which they choose to shop. For them, it’s simple math.

You project the mindset of a Ivy league economist with the wherewithal to choose which politically aligned company they will send their dollars to.

“B-Corps will never catch on in a meaningful way,” you claim, just as everyone said Japanese auto makers would not, just as every Windows computer user said Apple would not, just as every Detroit auto executive hoped petroleum alternative powered vehicles would not, just as everyone said no black man would chair the White House in Washington.

Believing so will put you in the same category with Blackberry smartphones, still great devices for sure, but losing ground steadily. Have you watched their stock price over the last 12 months?

I suspect what you meant to say was that you “hope” B-corps never catch on. Well…you’d better think again because there’s more to meta-accounting than nearsighted bottom lines.

B-Corps have the meta-picture and they will help you and everyone else on this 3rd rock from the sun get richer in every way.

I advise you circle your wagons and get yourself truly educated. You will thank me someday.

Posted by noncellulose | Report as abusive

As of May 17, 2012 there are eight states that have adopted benefit corporation legislation and 94 firms that have incorporated as such. Updated research info at http://craigeverett.com/benefit-corporat ions.html

Posted by CraigEverett | Report as abusive

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