Social entrepreneur says B Corp. designation makes sustainability a fiduciary responsibility
Published: January 21, 2011 / Author: Ed Cohen
The United States is transitioning from “shareholder capitalism” to “stakeholder capitalism,” social entrepreneur Jay Coen Gilbert told an audience at Notre Dame’s Mendoza College of Business on January 21.
Gilbert is a leader of the movement to create so-called “B Corporations” or “Benefit Corporations,” which seek to simultaneously make money and make sustainable contributions to society.
The nonprofit B Lab, which he cofounded in 2006, acts as a certifying organization for businesses that desire to wear the B corporation label. Gilbert said B Lab has now certified nearly 400 B corporations representing more than 60 industries in more than 40 states. One of the more familiar names is Seventh Generation, a leading brand of “green” cleaning products.
An important advance in the B corporation movement came in 2010, when two states – Maryland and Vermont – passed legislation making “Benefit Corporation” a legal designation like C corporation (most major companies) or LLC (Limited Liability Company, a blend of partnership and corporation.) Nine other states are “moving forward” with enabling legislation, Gilbert said.
Under conventional for-profit corporate structures, management bears a fiduciary responsibility to maximize value for shareholders. This often entails pressure to produce high near-term earnings.
In B corporations, which are also for-profit, leadership is required to act in the best long-term interests of all “stakeholders.” In addition to shareholders, these include employees and the residents of the communities in which the company operates.
The charter of a B corporation would protect management from being “sued for breach of fiduciary duty for having a strong charitable program or corporate service program or spending money on solar panels,” Gilbert said.
To earn the B corp. designation from B Lab, a company must achieve a passing score on the lab’s “impact assessment.” Questions include: “Has the company dedicated a staff person or employee working group to oversee the company’s social or environmental performance?” And, “Is there a formal method by which employees can raise complaints/issues without fear of reprisal?”
After his talk Gilbert was asked whether manufacturers or sellers of such products as cigarettes or firearms could qualify to be B corporations. He said no product or industry was prohibited, but such a company might score so low on product questions that it would need an almost perfect score in the other categories to pass.
He also said it was unlikely that an existing large public corporation could become a B corporation because changing the corporation’s charter would require approval of a majority of shareholders. And in most large companies the shares are held by pension funds and similar institutional investors, which are themselves bound by fiduciary duty to maximize returns.
A student in the audience asked Gilbert why an investor would choose to invest in a company that offered a lower rate of return for the same amount of risk. He responded that research by investment bank Goldman Sachs and by researchers at Stanford University has shown that capital markets respond favorably to companies that choose to follow sustainable business practices.
“Sustainability pays,” he said.
Prior to B Lab, Gilbert co-founded and sold AND 1, a basketball footwear and apparel company based in Philadelphia. He is the Henry Crown Fellow of the Aspen Institute; president of the Board of the Philadelphia chapter of KIPP Philadelphia Schools, a growing cluster of high-performing public charter schools; and a board member of Investors’ Circle and Social Venture Network, leading national networks of social entrepreneurs and early-stage social investors.
Gilbert appeared at Notre Dame as part of the business college’s Ten Years Hence speaker series, which explores issues, ideas and trends likely to affect business and society over the next decade.
The Ten Years Hence series is sponsored by the O’Brien-Smith Leadership Program made possible by a generous endowment from William H. O’Brien (ND ’40) and his wife, Dee. The O’Brien-Smith Program endowment provides an opportunity for students and faculty to interact with distinguished leaders from business, government and nonprofit sectors.