Wednesday, February 9, 2011

B Corporations: Building a Community of Sustainable Businesses

Currently in the United States, about 380 B Corporations are solving social and environmental problems across 52 industries. A Certified B Corporation is a new form of business that adds social and environmental criteria to the financial criteria in measuring the business’ success. These B Corps are there to make a difference, and it makes a lot of business sense. According to the B Lab’s data, 60 million of Americans (23% of US adult population) make purchasing decisions based upon social and environmental values, and $2.7 trillion out of $25.1 trillion of professionally managed investments are so called Socially Responsible Investments. As the values in the United States shift towards impact investing, B Corps are well positioned to attract capital and make an even bigger impact in the economy.

The B Corporation certification is a third-party certification, a product of B Lab, a non-profit that about 3.5 years ago identified a market need for a small business certification. It is not the only certification out there, and it may get confusing to determine which certification is most appropriate. Certified B Corporations are mostly small to medium-size businesses (about half of B Corps have less than 10 employees). None of them are public companies. Most of them are consumer products companies, but there are also organic restaurants, financial firms and even law firms. The managers complete an online impact assessment test that consists of 120-150 questions. If the threshold is met, they can proceed towards certification. It is not easy to meet the threshold. The minimum passing score is 80/200. An average score (based on 4,400 test takers) is 40-50/200. An average business that has not taken any steps towards being more socially and environmentally responsible will only get about 10/200. The assessment is divided into five categories: accountability (corporate governance, transparency), employees (compensations, benefits, work environment, ownership of the company), consumers, community engagement and environment.

To become a Certified B Corporation, a business also needs to make changes to its legal documents. The governing documents (charter, operating agreement) have to be amended to redefine the interests of the corporation to include the consideration of employees, consumers, the community and the environment. Essentially, the goal of the corporation becomes broader than just maximizing the shareholder value. B Lab’s website contains model language that should be inserted into the governing documents depending on the business’ state of incorporation and type of business entity.

Approximately 12 states have already introduced and two states (Maryland and Vermont) have adopted a new legal form of business entity, a Benefit Corporation. According to the definition, in addition to any other legitimate purpose, every benefit corporation must have a purpose of creating general public benefit, which is defined as a material positive impact on society and the environment, as measured by a third-party standard. New York Senate is currently considering a similar bill (S00079). On January 5, 2011, it was refiled and referred to the Judiciary Committee.

We live in exciting times. People around us become more conscious of the environment and the long-term effect of businesses on the quality of our lives. Impact investing is now so popular that it may soon be considered to be a new asset class. State legislation, instead of being restrictive, should be leading and encouraging business owners to be more socially and environmentally responsible. Legal entity forms, such as L3C (see my earlier post) and Benefit Corporation, should become the new norm in all states.

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