A legal victory for B Corporations

A few weeks ago we discussed the B Corporation phenomenon which certifies firms that formally amend their corporate governing documents to incorporate stakeholder interests beyond those of shareholders.This week brings news of the first legal victory for B Corps with the signing into the Maryland legislation provisions for the legal creation of such "Benefit Corporations". According to the press release from B Lab, the outfit behind the B Corporation initiaitive: "Benefit Corporations must by law create a material positive impact on society; consider how decisions affect employees, community and the environment; and publicly report their social and environmental performance using established third-party standards. The legislation, sponsored by Senators Jamie Raskin and Brian Frosh and Delegate Brian Feldman, passed the Maryland Senate with a vote of 44 – 0 and the Assembly 135 - 5."

The press release also states that "Maryland is the first state to pass Benefit Corporation legislation, but others are quickly following Maryland’s lead.  Vermont Bill S.263, co-sponsored by Senators Hinda Miller and Peter Shumlin, has already passed the Senate and will be considered by the Vermont Assembly over the next 30 days.  Other states considering the legislation include Colorado, New York, North Carolina, Oregon, Pennsylvania, and Washington"

An interesting development for sure, though time will tell whether it has much material impact. Still, any initiative that seeks to get deep into the DNA of companies like this certainly qualifies as an exciting and ambitious experiment aimed at genuinely doing something different. The press release from B Lab puts it this way:

"The new law addresses a long time concern among entrepreneurs who need to raise growth capital but fear losing control of the social or environmental mission of their business. These entrepreneurs and other shareholders of Benefit Corporations now have additional rights to hold directors accountable for failure to create a material positive impact on society or to consider the impact of decisions on employees, community, and the environment. From a company’s point of view, the new law empowers directors of Benefit Corporations to consider employees, community and the environment in addition to shareholder value when they make operating and liquidity decisions. And, it offers them legal protection for those considerations."

Critics will for sure be concerned that this represents a weakening of the economic incentive at the heart of capitalism  ... and one that may compromise economic value creation. But surely the time is ripe for efforts like this to balance value creation for all in a systematic way. So congrats to B Lab for getting this going.  The road ahead will be long, but this could be an important bridge that has just been crossed.

Corporate social entrepreneurship

Today we have another in our occasional series of guest bloggers. This time up its Christine Hemingway, a visiting fellow at the International Centre for Corporate Social Responsibility, Nottingham University. Here she is talking about what she calls corporate social entrepreneurship. 

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In the wake of the global economic crisis caused by financial irregularities and lapses in corporate governance and personal integrity, part of the fall-out has been a big kick up the backside for business ethics. There is renewed vigour which has boosted momentum behind the growing CSR movement and the need for ethical business, with the clarion call: “How can we prevent this from happening again?” So I was really interested to see the idea of the B companies in the last post: a practical approach to positioning the corporation as social enterprise, which involves stakeholder governance, backed by legal certification.

This looks like a great step forward. But there isn’t a magic solution and so we cannot expect a ‘one size fits all’ systemic answer in our attempts to prevent corporate irresponsibility. I’m sure the folks at B-Lab would be quick to agree that it’s the people as well as the systems that are important. It’s people who take their decisions when going about their daily activities at work - some with potentially harmful consequences. And even with the most efficient, slickest of systems, you cannot legislate for the individual actions and decisions made by all the employees who work across the supply chain. And as Crane and Matten pointed out [re the Toyota case]: whilst failings in corporate governance continue to happen, they’re not perpetrated by a band of Machiavellian Dr Evils out to screw the innocent consumer.

Many of the cases of bad management we keep hearing about are perpetrated by people who feel that they ought not to speak up, because ultimately it’s not their responsibility (surely the boss knows best?). Or, by people who think that a small deception is maybe all part of the ‘game’ of business, which is to maximise profitability. I’m talking about the very many people at work for whom business ethics is simply just not on their radar. Even if they have heard of it, it might be a nice idea “but it’s just not applicable here.” Hence we might say that it’s not highly valued by them, because they don’t see it as necessary. So we continue to see these lapses and it’s a continuing cycle.

Yet, there are other employees who do value CSR. Like the sustainability managers that were interviewed and discussed in the Visser and Crane paper on change agents: “devoting their time and energies to addressing social, environmental and ethical issues.” What’s more, in another recent study that I conducted within the confines of a major FTSE100 listed firm, some employees were found also engaging in these issues – acting as Corporate Social Entrepreneurs - and some of these didn’t even have CSR as part of their formal job role. Eh? Let me explain.

As an ex-corporate manager turned business ethics academic, I felt that there was an imbalance between all the research into the bad decisions and not enough on the socially responsible decisions. I felt that if we could learn more about the personal values underlying CSR, then this would be an excellent starting point from which to build a socially responsible corporate culture. My own experience in business tallied also with some of the academic papers I had read about champions of CSR, and whilst social psychologists have been studying the effects of our personal values on our behaviour for decades, it seemed to me that we needed to know much more about the personal values of corporate employees in order to give us greater insights into CSR.

This was going to be tricky, because the psychologists tell us that we all generally share the same values, such as safety; family and friendships. The difference between us, though, is the different emphasis that we place behind these common values, which results in a more nuanced picture of our different priorities. So, what emerged from this research, were four very general ‘types’ of people.

The ACTIVE Corporate Social Entrepreneurs (CSEs); highly principled moral leaders, who enlarge their own role to encompass a socially responsible agenda at work. They demonstrate both awareness of ethical issues and involvement in them and the courage to speak out at work. They are characterised by ‘collectivistic’ values, e.g., helpfulness; caring for others’ welfare; of equality and treating people fairly. They are also characterised by the independence and risk-taking commonly associated with entrepreneurship.

A second group, the CONCEALED Corporate Social Entrepreneurs – in common with the ACTIVES - express their passionate belief in their personal, moral obligation to society. However, the difference between these two types of CSE is their perception of a supportive corporate culture and the ensuing limits regarding the extent of their SR activity at work. This results in some activities being confined to outside of work and also produces frustrations and some degree of job dissatisfaction.

In contrast,I also found CONFORMIST and DISASSOCIATED corporate employees, who support the prevailing stereotype of ethics not being on the radar. The key distinction with the previous two groups, however, is that these informants place greatest emphasis on their ‘individualistic’ values regarding their own capability and career ambition and the importance of their families and home life. And whilst the DISASSOCIATED dismiss the strategic relevance of CSR to the firm’s success: a number of CONFORMISTS have formal SR job roles and express the benefits of their SR activity as good for their career (because it was encouraged by the company) and also the personal satisfaction associated with SR activity.

All this helps add a psychological perspective to the study of business ethics in practice. For some it may be reminiscent of the eminent psychologist, Abraham Maslow. He is well-known to students of business and management as the guru who invented the ‘Hierarchy of Needs’, but he also wrote about our personal values. This, in a roundabout way brings us back to the ‘B’ companies. In their context, the ‘B’ stands for ‘Benefit’. Yet it echoes Maslow’s ideas regarding what he called people with ‘B-Cognitions’ (the B stood for ‘being’ as opposed to ‘having’), i.e. motivation regarding the welfare of others in order to become, as one book reviewer put it, “the best version of yourself” (see ‘The Farther Reaches of Human Nature’ 1975). So, too, these B companies striving to be the best by ‘doing the right thing’ and achieving true sustainability, in the fully inclusive sense. Consequently, we’re reminded that it’s personal responsibility that has to underpin the governance systems in order to develop CSR.

Photo by punk_drizzle. Reproduced under Creative Commons license

Institutionalizing CSR through B Corporations

Spied over at CSRwire today was this interesting little video from CNN on the B Corporation phenomenon. For those who haven't run into this before (and we have to admit that included us until recently), B Corporations are, in the words of their inventors, "a new type of corporation which uses the power of business to solve social and environmental problems."

Hmmm, doesn't sound very new to us. Sounds suspiciously like CSR, or maybe social enterprise, or social business as Muhammad Yunus likes to call it. Well yes, in a way B Corporations are pretty much like these existing forms, except there are a couple of new twists. And it's these new features which account for some of the interest - both good and bad - that B Corps are beginning to stir up.

The first big difference is that B-Corporations are certified. As a company. To a single set of standards. Not a ranking. Not a product or site certification. A full company certification. Yes, you heard it right. This is a certification that once and for all seeks to distinguish the good companies from the bad. Or as the B Corporation website puts it, to "distinguish good companies from good marketing" 

Second, and this is where things start to get really interesting, B Corps are required to "amend [their] corporate governing documents to incorporate the interests of employees, community and the environment." Shareholder primacy out. Stakeholder governance in:

"The B Corporation legal framework specifically expands the responsibilities of the corporation to include these stakeholder interests.  By redefining the legal purpose of the company this framework makes it easier for good businesses to make decisions that support their social or environmental missions.  The framework also allows them to attract mission-aligned capital and maintain mission as they grow, scale, and even plan succession.  We believe that by creating B Corporations within existing corporate law we are providing a market-driven solution today for good businesses."

This is a novel idea. Working within the legal framework of corporate law to redefine the purpose of a company on an individual basis. So, the logic goes, even if the company draws in outside investment in order to grow, the founding ideals can be institutionalised and protected. Well that's the plan. As far as we know, the legal status hasn't been tested yet in the courts, but with an amended charter, signed off by the board, and approved by shareholders/members/partners, it looks pretty compelling.

B Lab, the nonprofit behind the initiative is lobbying for fuller legal recognition of B Corporations and has pushed for legislative changes in a number of US states, with votes on the proposals coming up sometime this year in several jurisdictions. The purpose is to establish some legal recognition for an enterprise that stands somewhere between a company and a nonprofit. Yes, a social enterprise, if you will.

From our point of view, the initiative is a much needed one - especially in a country like the US which, as with many others, doesn't yet have formal recognition for alternative organizations of this type. B Lab's rating system, though, however good it might be, is bound to have its critics. In our view, it is just too ambitious to try and rank a whole company in this way. A more focused approach that simply started with whether the product or service had a net social benefit would have been better. However, the legal twist is an exciting development for the CSR movement which too often gets bogged down in the shareholder-stakeholder battle. No surprise then that more than 285 US companies acrosss 30 or so industries have already joined the initiative and changed their articles of incorporation or partnership/membership agreement. We'll be watching closely to see how the courts respond. And if you want to hear more about the companies involved, here's another short video from the Little Films group on B Corporations.