Balancing profits and purpose in a marketplace where investors, consumers and talent demand it

By: Benjamin Ruano

Social good, it’s in your (business’s) DNA

Social and environmental missions are driving entrepreneurship activity in the United States—in fact, nationally, 12% of entrepreneurs are currently leading and, in many cases, trying to start a social enterprise.1 These entrepreneurs often place social objectives above profits; however economic benefits for investors also flow strongly from creating new social value.  For instance, in marketplaces with increasingly discerning consumers, the ubiquity of often dubious certification marks—such as “all natural,” “made in U.S.A.,” or “fair trade”—has diluted the persuasiveness such marks once enjoyed.  Consumers and swaths of investors, alike, are becoming increasingly conscious of not merely the socially or environmentally additive nature of a company’s products or services, but also of the moral compass and constitution of the entity itself

Even our largest institutions feel this cultural shift. When the CEO of Walmart says that “business exists to serve society,” and the CEO of Blackrock, the world’s largest asset manager, says the “interests of business must align with the interests of society in order to generate long-term value,” they are reflecting a shift in the debate about the role of business in society.2 The essence of this trend is in the aesthetic and emotive differences between having a good product and having a good company

It is with the aforesaid in mind that social entrepreneurs should strongly consider Benefit Corporations (“B-Corp.” or “B-Corporations,” for short) as a great way to capitalize on socially-conscious consumers and impact investors, stand-out among the cacophonous competition, and differentiate their company to future employees.  Ultimately, meeting the legal and certification requirements for a B-Corp. bakes sustainability and the pursuit of social good into the very DNA of your company as it grows, brings in outside capital, or plans succession.3

Rocking the boat

With a handful of well-worn vehicles available to house your next great business idea—e.g., C-Corporations, LLCs, sole partnerships—why rock the boat?  For starters, rocking the boat is the archetypal role entrepreneurs play in business and the capital markets.  Moreover, your company would not stand alone: there are 2,263 B-Corporations in 50 countries representing 130 industries—all of which share one unifying goal.  Notwithstanding, many prudent entrepreneurs may still feel apprehensive about the downstream effects of such a fundamental decision.

“How will it impact our ability to raise capital and command higher valuations?”

Impact investors generally wish to invest in companies that achieve a certain social or environmental impact, and are structured to maintain their mission after the next financing, sale, or IPO.  Conveniently, the legal requirements for B-Corporations in States that have passed legislation allowing for their creation4 already gear your organization to meet these objectives.  Additionally, numerous investors and financial services firms are currently scouring the marketplace for B-Corporations as part of the due diligence, portfolio management, and portfolio mandates of existing funds or funds raising capital (e.g., Mission Markets, Good Capital, RSF Social Finance, Investors’ Circle, New Resource Bank, and TBL Capital).  Moreover, many Certified B-Corporations already have had sophisticated investors vet and approve the overarching B-Corp. legal framework (e.g., Method, Seventh Generation, IceStone). 

B-Corporations also often command higher valuations since they can more easily foster resilient goodwill with customers and are trusted by their employees and suppliers.  The independent third-party certification, and the transparent legal and performance standards further maintain that trust and minimize the loss of brand equity post-sale.6

Will the legal framework create additional liability for our Board of Directors and Officers?     

By custom, the operating principle of business and of the capital markets is to increase profits, even if it functions to the detriment of society.  The general corporate laws of the various States have often adhered to the same principle. For instance, in Ebay Domestic Holdings Inc., v. Craig the Delaware Chancery Court—a paragon of business-savvy state courts—found that “promoting, protecting or pursuing [considerations other than financial value maximization] must lead at some point to value for stockholders.”  This principle of value maximization is arguably embedded in a Board of Directors’ fiduciary duty to act in the “best interest” of the corporation. B Lab—the nonprofit organization overseeing the certification of B-Corporations—and their lawyers opine that adopting the B-Corp. legal framework serves to expand the definition of the “best interests” of the corporation and should reduce the liability for Directors and Officers by creating legal protection (called “safe harbor”) for them to take into consideration the interests of multiple stakeholders when making decisions, particularly when considering financing and liquidity scenarios.  Adopting the B-Corp. legal framework will, however, give shareholders additional rights to hold Directors and Officers accountable for taking into consideration these same interests when making decisions—and that, of course, is the whole point of a B-Corporation.7

What will current and potential employees think?

Recently, Harvard Business Review found that millennials, which represent roughly 50% of the global workforce, want work that connects them to a larger purpose.  Perhaps this is why companies with higher levels of employee engagement posted total shareholder returns 22% higher than the broader stock market.8  On the other hand, companies with low engagement had a total shareholder return that was 28% lower than the market average. According to Aon Hewitt, brand alignment—which is the harnessing of the whole company to deliver the brand and company promises—was one of the top 3 drivers of employee engagement.  Never doubt that a small group of dedicated people can change the world … while also outperforming the broader market.

Conclusion

Benefit Corporations represent a watershed moment for business.  Companies that exclude from their operating principles social and environmental considerations now risk losing market share and undermining shareholder value.  Those companies that instead balance profit and purpose, however, stand to gain in myriad ways from contributing solutions to some of our most pressing problems.  As Patagonia founder Yvon Chounard has written: “[Benefit Corporations] enable companies like Patagonia to stay mission-driven through succession, capital raises, and even changes in ownership, by institutionalizing the values, culture, processes, and high standards put in place by founding entrepreneurs.”9