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B Corp

Rethinking the Bottom Line

Better Gets Bigger

Why you should care

A new corporate structure upends everything we think we know about big business — and gives nice guys a chance to finish first.

We have a complicated relationship with big business. Corporations are bulwarks of our economy and often admired. But in popular narratives, bigger is rarely better. Corporate behemoths are cast as the bad guys, the Goliaths who trample the mom-and-pops and humble corner stores. The little guy gets our love and little else.

Delaware’s courts used their influence to declare, over and over, that a corporation’s sacred duty is to maximize profit…

In recent years, the B Corp — short for benefit corporation — has begun to frame a different story. And antiseptic as the phrase “corporate structure” may sound, this one could well upend how we think about corporations and how corporations think about us.

In the past few years, some 20 states, including the District of Columbia, have enacted legislation that allows companies to register as benefit corporations. Some 16 more states are considering it. But the real watershed came this past summer, when Delaware got on the B-Corp bus, too.

That’s not just because Delaware is the legal home to most venture-backed operations, half of public corporations and two-thirds of Fortune 500 companies. It’s also because the state has outsized influence in corporate law matters. Historically, Delaware’s courts have used their influence to declare, over and over, that a corporation’s sacred duty is to maximize profit for its shareholders — everyone else, including workers and customers, be damned. If a corporation deliberately took a hit to profits, no matter how noble the cause, shareholders could sue.

Corporations could be good, or they could grow, but they couldn’t do both.

Woman with eyeglasses smiling sitting on ground

Source: Warby Parker

That bedrock principle of corporate law was a turnoff for companies like Etsy, Warby Parker, Seventh Generation and other social enterprises. It all but mandated a trade-off between issuing the public shares often needed to scale, on the one hand, and staying true to mission, on the other. In other words, corporations could be good, or they could grow, but they couldn’t do both.

Enter the benefit corporation, whose structure would let corporations have their cake and eat it too. Delaware’s legislation, for instance, protects corporations from suits by profit-mad shareholders. Indeed, shareholders with at least 2 percent of shares can sue the corporation for failing to optimize its social mission.

As more companies sign on, the B Corp movement has the potential to subvert an entire century of corporate law.

About 500 companies have become registered benefit corporations, according to nonprofit B-Labs, which helped pioneer and spread the structure. And as more companies sign on, the B Corp movement has the potential to subvert an entire century of corporate law.

All of which makes us wonder: Which sexy B Corp will be first to go public? Some have speculated that Etsy will sell public shares this year. The company is certainly growing fast. Sales on Etsy rose from $525 million in 2011 to $1.35 billion in 2013, it says. And it’s poised for more: In November 2013, it announced a rule that would allow users to sell products manufactured by other firms, which will help users scale.

Etsy declined to comment on whether it is planning an IPO, but “if we end up going public one day, I’m hopeful we’ll be able to do it in ways that keep with our values,” says Matt Stinchcomb, VP of values & impact.

Another possibility: Warby Parker, industry disruptor and scourge of opticians across America. Amped by a huge injection of capital around Christmas, the Certified B Corp is slated for even faster growth than it’s thus far experienced, but its founders are cagey about the prospect of selling or going public.

It probably won’t be Patagonia, the outdoor apparel maker. Patagonia became California’s first benefit corporation two years ago. But its founder, Yvon Chouinard, seems outright anti-IPO — chastened, perhaps, by a period of overexpansion and leverage in the 1980s — and very into personal control besides. (The 75-year-old owns the company in full.)

Woman at table with all her tools

Source: SewnNatural

Jen is a member of the Artisans Gallery Etsy Team. She handcrafts modern organic kids’ gear and decor for SewnNatural.

But here’s something many industry observers forget: Many of the 900 companies trumpeted as “Certified B Corps” are not, in fact, registered benefit corporations. The certification comes from B-Labs, the independent nonprofit and advocate. (It’s also in the certification business, like Fair Trade or LEEDS.) Certification carries some legal requirements — companies can either register as benefit corporations or amend their charters to take into account stakeholder interests — but they don’t have the teeth of state law.  

The charter amendment required for certification, for instance, would probably not give shareholders a right to sue if the corporation fails to uphold its social mission. And it probably would not protect corporations against suits from profit-hungry shareholders.

Etsy is a case in point. It’s a Certified B Corp, and on its last B-Lab audit, it scored very high. But Etsy is not registered as a benefit corporation but as a Delaware C Corp. (It incorporated eight years before Delaware enacted its statute.)

Becoming a registered benefit corporation would be difficult, says Etsy’s Stitchcomb, because it would require 90 percent of its shareholders, who now number in the hundreds, to agree. “It’s a bit of an uphill battle to do it [amend its form] after the fact,” he says. “But we’re really supportive of it, and if it had existed when we incorporated, we definitely would have done it.”

But if Etsy does go public without becoming a registered benefit corporation, how will it stay true to its social mission? What will protect it from profit-hungry investors? Or help shareholders enforce its social mission? 

Unclear. For now, Stichcomb hopes that Etsy’s trove of documents and practices will signal to potential investors what to expect. “If we do one day go public, we hope there is enough evidence and collateral out there that every potential investor would know that this is what Etsy is about,” he says.

That a company’s articulated values would discourage investors who care only about profit, instead of “people” and “the planet,” too—well, it’s a nice idea. Whether it holds in practice is a different story. We suspect that story will start soon.

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Meet The Author Pooja Bhatia

Pooja Bhatia writes about justice, policy and many other things for Ozy…AND makes an exception for oysters.

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