August 01, 2013

Businesses With a Social Conscience Reach a Tipping Point

Photo courtesy of King Arthur Flour

To my undiscerning palette, a blueberry muffin made with King Arthur Flour doesn’t taste much different than any other muffin.

The 200-year old New England company’s specialty flours cost about the same as their competitors.

But what distinguishes King Arthur from other flours on the supermarket shelf—and reassures bakers they’re buying the absolute best—is the fact that every bag is personally manufactured by the company’s owners.

The entire company is owned by employees—so every person at King Arthur has a real stake in the company’s success—or failure.

But the definition of success encompasses not just units shipped or market share but also the success of the business’s work to be a good citizen, whether it is recycling and composting or reducing energy consumption or paying employees for time they spend volunteering at charities.

King Arthur’s operations, and indeed the company’s very mission, are a departure from typical business behavior.

This new breed of company, known as a benefit corporation, seeks equity or debt investments that expect a return on investment.

But like program-related investments (typically below-market loans) they expand the range of opportunities for individuals and institutions to use their investment capital—not just their philanthropic dollars—to create a positive impact on society and the environment.

Vermont, home to King Arthur and one of 19 states with laws permitting benefit corporations, will be joined today by Delaware, home to more than 1 million businesses, including 50 percent of all publicly traded companies.

With an emphasis on both social impact and profit margins, it isn’t just that benefit corporations like King Arthur are committed to caring for their employees, customers, community, and the natural environment, their corporate charter obligates them to do so.

As the 19th state to enact benefit-corporation legislation, Delaware’s decision is an important acknowledgment of a growing movement of entrepreneurs and investors who believe that businesses can and must do more than simply pursue higher quarterly earnings.

Andrew Kassoy, co-founder of the nonprofit B Lab, which supports the effort to pass legislation in all 50 states, believes that Delaware is a tipping point because it is the state where so many American businesses seek access to venture capital, private equity, and public capital markets.

To be clear, owners of benefit corporations don’t stop seeking profits. Nor do they expect that business can, or should—or even could—replace philanthropy or government.

As social entrepreneurs with a dedication to running profit-making businesses, they believe they should be afforded legal protection to embrace goals that do not involve the bottom line.

Until recently, companies that sought to balance their bottom lines with their social conscience existed in a precarious no man’s land because profit maximization was a company’s only legally recognized objective.

Choices were limited. Companies could elect to be recognized by one of two classifications: either as a C Corporation, as most big businesses are set up, or as an S Corporation, the preferred approach for law firms and many small businesses.

But either choice required that all corporate decisions be made in the financial interest of shareholders. Failure to comply with the decades-old corporate-governance laws opened the door to lawsuits from disgruntled shareholders.

Benefit-corporation legislation dispenses with this narrow conception of the role of business in society, which is at best limiting and at worst destructive. The new law accounts for the broader ways in which Americans engage with—not simply buy from or invest in—companies.

Method Products, a manufacturer of environmentally conscious home-care and personal-care products, will register as a Delaware benefit corporation today, allowing it to look beyond profits to act on its beliefs.

Its corporate mission, which will now become embedded in law, includes not only seeking ways to reduce its carbon footprint at the front end of the business, like shipping products in biodiesel trucks—but also paying suppliers to reduce its carbon emissions.

Investors in Method Products endorse this socially responsible business choice, explicitly banking on the ability of this company to make money and to do good at the same time.

While some 300 benefit corporations are already operating in the U.S., the Delaware law should give a considerable boost to what some have labeled the “fourth sector”—organizations that exist in a space somewhere between a conventional company and a nonprofit.

Sustained by sales, not donations, benefit corporations may well be a lasting model to help solve some of today’s most persistent social problems.

Phillip Henderson is chief executive of the Surdna Foundation.