Every day, more and more businesses want to prove that they are operating within the impact investing ethos to their investors, clients, employees and other key stakeholders. One of the ways businesses do this is through third-party verification of their company’s impact initiatives and analyzing the corresponding results. In other words, they work to achieve recognized impact certifications. The most relevant and popular impact certification that we are seeing in the market in recent years is the Certified B Corporation (“B Corp”).
B Corps are a fairly new phenomenon. The concept only started in 2007 when the first 82 B Corps were certified into existence. Despite this short tenure, the growth has been steady to the present where there are over 3,500 Certified B Corps in more than 70 countries. Although thousands of certifications have been issued, only 16 have been issued to public companies and only 29 to public company subsidiaries. The limited adoption of B Corps at the public company level, however, has been predictable.
Despite the popularity of the B Corp movement, including my own excitement behind the core ethos, I believe the B Corp will have a very difficult time making its way into mainstream public market companies in the near-term. The rationale for the lack of adoption is simple: public company executives, directors and shareholders currently weigh the legal risk of operating as a B corp as being greater than the potential value that the status and certification can provide.
The precise challenge that B Corps face is that once they become a B Corp and state publicly that their corporate mission goes beyond profit-making to another public mission (e.g., climate change, charitable giving, etc.) they then have to balance stockholders´ pecuniary interests and the public benefit they have to deliver when making business decisions. Balancing acts always invite legal scrutiny and second-guessing.
Our research supports our thesis that B Corps will continue to be largely limited to the closely-held world of private businesses. Stated simply, companies in public markets are not seeing the bump in share price for being a B corp that would likely be required to justify opening themselves to new causes of legal action: so-called “Benefit Enforcement Proceedings.”
In this article, I will explain what the B Corp Certification requires of a B Corp company, what limitations and risks it presents and ultimately what this means for investors looking to evaluate impact-focused companies for their own personal investment.
What is a Certified B Corporation?
Certified B Corporations are businesses that have gained the legal authority to balance purpose and profit in their corporate decision-making and spending. They can deploy capital to non-profit making activities so long as their corporate charters permit them to do so. Legal authority for this kind of corporate spending is necessary because under traditional corporate law company boards of directors have legal duties to only take actions that benefit shareholders´ financial interests. As B Corps, these companies are blessed to consider the impact of their decisions on and to further more aggressively the interests of their workers, customers, suppliers, community or the environment around them. Discretion is, however, required. As B Corps, companies generally must always balance the stockholders’ pecuniary interests and the public benefit or public benefits they have chosen to pursue. You can likely see how easy it might be for one to disagree with the results of this balancing on either side of the scale.
Becoming a B Corp is also not simply a matter of legal formality or corporate structuring. B Corps must also adequately pursue their stated public benefits mission. To become a B Corp, companies must undergo a rigorous due diligence process through B Lab, the sponsor of the B Corp Certification and the, in essence, third-party auditor of B Corps.
Per B Lab, the core difference of Benefit Corporations vs. Traditional Corporations is that a benefit corporation has a modified governance structure that promotes the creation of durable value for all stakeholders. The structure commits the corporation to higher levels of purpose, accountability and transparency. Specifically, benefit corporations are committed to creating environmental and social value in addition to generating profit. In regards to accountability, benefit corporation directors must consider the interests of all stakeholders, not just shareholders. Lastly, benefit corporations are required to regularly report on how the company is balancing these various stakeholder interests. As one would imagine, obtaining and maintaining B Corp status is not free and requires a substantial commitment of time, resources and personnel.
We have discussed benefit corporations and the confusion that “all stakeholder” capitalism can cause in the measurement of success in previous articles. But, precisely with respect to B Corps, do the benefits outweigh the potential risks?
Should companies decide to be B Corps?
You sit on the board of directors of a B Corp formed under Delaware law whose main product line is the production and distribution of wholesome video content and digital entertainment as an alternative to sexual, violent or more offensive content. Your B corp charter provides that the company’s corporate mission is to serve as “witness against all forms of violence.” As the company continues through its lifecycle, it eventually becomes time to seek a buyer for the business as original management moves into retirement. A bidding process for the business begins. The company receives two bids: the first, for $41 per share from a buyer that covenants to continue the company’s business in-line with its current wholesome state. The second, a bid for $50 per share from a media conglomerate known for its more secular, ranging content. Can the company’s board select the lower bid of $41 per share since that new buyer will preserve its B corp mission or, in balancing all interests and probabilities, does balancing require that the board accept the $50 per share bid and the risk that its content will deviate from its stated mission? The answer here – and what creates all the uncertainty I discuss in this article – is that nobody actually knows the right answer (at least legally).
Delaware – the leading corporate law authority in the US – has never weighed in on a case such as this. The situation above is hypothetical. Debated by Widener law students shortly after Delaware implemented its B Corp statute, the intent of this hypothetical was to show the uncertainty that exists around this legal concept. If you were a director of a public company, would you want this uncertainty?
Do the Risks of being a B Corp outweigh the Rewards?
One theme is clearly holding B Corps back from obtaining acceptance in the larger, public company world: stakeholder capitalism legal risk is opaque, untested, and open to interpretation.
It is also too easy to bring suit. Under Delaware´s B Corp statute, for example, lawsuits can include any individual, derivative or any other type of action by plaintiffs who individually or collectively own 2% or more of the corporation’s outstanding shares or, in the case of a public company, the lesser of such percentage or shares of the corporation with a market value of at least $2,000,000. Those are, frankly, low bars to entry. Two million dollars of shares, especially given the option to participate collectively, is too easy to come by. Maybe this works in the private company space where individuals enter into a business together with a common purpose. But in public markets where ownership of companies changes hands rapidly with new participants consistently entering a company´s cap table, all of the various interests represented seem to make operating as a B Corp infeasible.
There have been several legal reviews that have clearly stated that the creation of a benefit corporation is not only unnecessary in the modern legal world, but that they present inherent risks to corporations and their directors. Benefit Corporations as a Distraction:
“Benefit corporation legislation has rapidly disseminated in the United States. Its advocates claim it is a necessary corporate form to address the unique needs of for-profit social enterprises, despite many scholarly and legal practitioners who doubt the need for or wisdom of adopting this organizational form. Others suggest that the legislation is flawed and deficiencies should be addressed. After reviewing the present status of benefit corporation legislation, this article contributes to the discourse arguing that (1) benefit corporations are unnecessary under the law; (2) benefit corporation legislation does not enhance corporate law; (3) benefit corporation laws create unnecessary new legal risks for both traditional and benefit corporations, and their respective directors; and (4) third party certification in entity formation law is inappropriate.”
Of principal concern is the vagueness of directors’ duties when profit and public mission must be balanced at all times. As corporate directors potentially become liable to a greater pool of claimants, the potential risk naturally increases. The requirement to continuously record and report as to how directors manage the interest of all stakeholders, in defense of the decisions they must inevitably make, adds another layer of complexity into the directorship role. As expectations from market regulators haven’t been rolled out as to what this reporting must demonstrate, public company directors have been naturally cautious to adopt the certifications at hand or the benefit corporation legal structure.
In short, there are two key areas that will need to improve significantly for B Corp Certification to penetrate the public company sector in a more meaningful way:
- Legal precedent must be established as to how companies who elect a stakeholder-focused governance model are expected to balance these varying priorities. A complete understanding of the legal obligations to each potential stakeholder must be gained.
- Accountability and transparency reporting must be mandated, enacted, and monitored by the appropriate regulatory authority, most likely the Securities and Exchange Commission in the instance of the United States public markets.
The B Corp seems untested, what is actually happening in practice?
Now to be clear, there are several notable companies that maintain B-corp status. Household names such as Patagonia, Ben & Jerry’s, Eileen Fisher and King Arthur Flour dominate the list along with over 3,000 other private companies. This number of companies is not immaterial. Is the assessment of risk by their directors completely different from every other company? Things change when a company wants to go public on U.S. stock exchanges.
One of the most famous cases of B Corps not being able to sustain the rigor of public markets was the case of Etsy. Etsy CEO, Josh Silverman, had announced that his company was giving up its B Corp status in order to maintain its corporate structure upon enactment of their IPO. Silverman stated that Etsy had relied on the third-party certification, B Corp, since 2012 as one of the ways it demonstrated its public commitment to running a sustainable, socially responsible business. But, he noted that in order to maintain that certification, Etsy would be required to change its corporate structure from a C Corporation to a benefit corporation, which it would not do because his company saw converting as a complicated, and untested process for existing public companies.
Being a B Corp also does not save companies from suboptimal financial metrics. Lemonade, a public company B Corp in the insurance space, found this out in early 2021. The company exploded into the public markets, rising to $163.93 per share on February 12, 2021. Storms in Texas shortly thereafter resulted in a mountain of insurance claims from Lemonade clients. By mid-May 2021, Lemonade´s share price had fallen to $69.45 per share. What would the price have fallen to if Lemonade were not a B Corp? The most likely conclusion is that it would not have made much of a difference. Fundamentally, stock ownership and investing is a financial exercise.
We also point out Vital Farms, another publicly traded B Corp. Its charter provides that:
“The nature of the business or purposes to be conducted or promoted by the Company is to engage in any lawful act or activity for which corporations, including Public Benefit Corporations, may be organized . . . including without limitation the following public benefits: (i) bringing ethically produced food to the table; (ii) bringing joy to our customers through products and services; (iii) allowing crew members to thrive in an empowering, fun environment; (iv) fostering lasting partnerships with our farmers and suppliers; (v) forging an enduring profitable business; and (vi) being stewards of our animals, land, air and water, and being supportive of our community.
Vagueness always invites litigation.
Companies should stick with proven governance models
The B Corp “[c]ertification has not gained traction, and we do not foresee it doing so. In our view, [companies] can demonstrate to stakeholders their commitment to sustainable and responsible business practices without the imprimatur of the Certification, and many already are doing so successfully.”
Companies wishing to pursue public missions should simply rely on the business judgment rule and make the public mission part of what builds company profitability. Companies always have, under the business judgment rule, the ability to pursue public missions so long as that mission rationally also drives profit. Why not link the two to avoid all the uncertainty around B Corps and the seeming lack of real upside?
We at Legacy Group take this approach to responsible corporate and sustainability stewardship. At our portfolio company, Green Coffee Company, we recently obtained Rainforest Alliance Certification for all of our 11 coffee farms in Colombia. The increased pricing we can charge for our coffee as a result is expected to pay for the costs of the certifications through just a small fraction of sales from one of our coffee harvests. After that, all of our coffee will sell for an expected 6-8% more than it would have sold for without the certifications, while at the same time truly being a sustainable business (not just one that preaches it). Becoming a B Corp here would just complicate things and for little expected value.
What are the ramifications for accredited investors who want to invest in impact-focused businesses?
Turning to investing, where should impact investors turn for opportunity? These are my conclusions:
- Expect that very few existing public companies will seek stakeholder-focused governance models or B Corp Certifications. They will focus on profit, not impact:
Although many public companies have voiced their support for impact movements, expect that this inherent legal risk will remain a limiting factor to both their adoption of profit-plus-purpose business models and their ability to execute upon them. Expect that nearly all public companies maintain the status quo of shareholder-first business models. Expect any “real” impact value generation to be negligible from this grouping of companies.
- Expect the majority of impact-driven value to be derived from companies in the private market space:
As referenced earlier, with the size and demographics of the impact-focused businesses related to the Certified B Corp movement, the average complying company is a small, private enterprise. It is likely that a large number of these companies would have been founded no earlier than this B Corp movement began a bit over a decade ago. In order to participate as an investor, expect that you need to look for investment options in early stage companies. This means that investors should be looking at private placements available to accredited investors.
- Do not look to certifications alone to ringfence the entire set of opportunities in the impact investing space. Expect that there will be many high value opportunities with impact-focused companies who will not certify until potential legal risk is mitigated, especially within pre-IPO companies:
Remember that many of the companies that certify as B Corps do so with the full intention of staying a smaller, private company forever. Many do not have the growth aspirations of achieving an initial public offering or a large corporate buy-out in the future. They simply want to run successful businesses that have a positive influence in the world around them. Certain impact-focused companies, such as our own portfolio companies at Legacy Group, do have aspirations for potential future IPOs, are aiming for large returns for our investors and are looking to do all of this in a socially responsible way. Companies like ours can not disregard any potential fiduciary or legal risk we have to our existing shareholders without carefully planning our actions. Expect that there will be many companies like ours that have to demonstrate the generation of both the financial value and social value that we create everyday, but without the certifications.
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*This publication/newsletter is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer. Any views expressed herein are those of the author(s) and not necessarily those of our clients.