What’s a B Corp and why does it matter?

“They raced yachts,” a headless voice tells us in the latest Dodge ad.

The “they” who raced yachts are the company’s namesake brothers, John and Horace, shown in all their Gilded Age grandeur: sporting white ties, lindy hopping with flappers, swinging from the chandeliers. “100 years later, this is how their spirit lives on,” the voice intones, as an anachronistic red Challenger races off the screen.

The Dodge brothers in that commercial might have been celebrating their successful lawsuit against their old boss, Henry Ford.

Minority shareholders in the Ford Motor Company, the Dodge bros opposed Ford’s plans to reduce dividend payments to cover the cost of raising worker wages and reducing the price of the Model T. Their disagreement wasn’t philosophical — this wasn’t a debate over how the heteronomy of individual will impacts the teleology of shareholder capitalism. The brotastic Dodges really just wanted more of that sweet dividend cash to invest in their own car company.

While the brothers’ backstabbing ways are worthy of an HBO series, the reason why anyone cares about Dodge v. Ford Motor Company today is its influential holding: “A business corporation is organized and carried on primarily for the profit of the stockholders.”

Long after the Dodge brothers first shocked polite society with their obscene displays of wealth and unwittingly enshrined shareholder wealth maximization into law, a new set of tycoons have built a new vehicle to overtake the shareholder model and deliver a new form of capitalism for a new century: the benefit corporation.

A different kind of corporation

The Benefit Corporation, or B Corp for short, often gets described as something somewhere between a for-profit company and a non-profit charity. But that is as misleading as it is simplistic.

B Corps are really for-profit companies with social consciences, which have voluntarily adopted rigorous standards of social and environmental performance, accountability and transparency, says Katie Kerr, a spokeswoman for B Lab, the Wayne, Pa.-based nonprofit behind the B Corp idea. After a comprehensive assessment, B Lab certifies companies as B Corps, slapping its Good Housekeeping-esque seal of approval on the business, not unlike a USDA organic certification on your kale from Whole Foods.

This marketing appeal — both to socially-conscious consumers and idealistic investors — is one of B Corp’s major selling points. The other is conviction.

According to the co-founders of B Lab, shareholder capitalism is failing us. Jay Coen Gilbert, Bart Houlahan and Andrew Kassoy believe the currently prevalent system of shareholder wealth maximization is both socially deleterious and outdated. The future lies with stakeholder capitalism in the form of the B Corp: companies should operate for the benefit of not just shareholders, but for their workers, communities, customers, suppliers and environments. 

B Lab wasn’t content with just a certification process — they wanted real legal muscle behind the B Corp concept, something that an antithetical activist judge couldn’t rip up. So they enlisted a team of lawyers from Drinker Biddle in Philadelphia to draft model legislation to make the benefit corporation a new kind of legal entity. Together, Drinker and B Lab passed B Corp laws in twenty-seven states now, and bills have been introduced in a handful more.

Where the option’s available, companies seeking certification now need to adopt the benefit corporation legal form, thereby ensuring their independence from the dictates of Dodge v. Ford and its more recent progeny.

We all need a little help from our friends

To gray haired free-marketers, B Corps sound a lot like a bad cover of an overplayed song called corporate social responsibility (CSR). On the business-world jukebox, haters see B Corps as the decidedly unsatisfactory Britney Spears rendition of “Satisfaction.” But fans hear Joe Cocker’s version of “With a Little Help From My Friends” — the cover that so thoroughly overtakes the original that future generations will be surprised to learn it didn’t come first.

CSR can be a band-aid. B Corp is a way of life.

While not exactly opposed to the CSR label, B Corps “take a more holistic view to impact than what most people would consider CSR,” says B Lab’s Kerr. “CSR can be a band-aid. B Corp is a way of life.”

A flower child of the ’60s, the adolescent concept of CSR was all but beaten to death in 1970 by Milton Friedman’s infamous and influential essay, “The Social Responsibility of Business is to Increase its Profits.” Friedman convinced a generation of economists and executives that society benefits most when it puts shareholder’s purses first.

Writing well before Citizens United said otherwise, Friedman peeled back the common linguistic lie of a corporation possessing human agency: “What does it mean to say that ‘business’ has responsibilities? Only people can have responsibilities.”

In the CSR context, this meant corporate managers were picking their preferred personal causes to champion. Thus, they were “spending someone else’s money for a general social interest.” This, argued Friedman, was essentially shareholder taxation without representation and tantamount to an attack on the American Way of Life™.

Battered and beaten, CSR was relegated to subdivisions of marketing departments, where it’s limped along ever since as mere Panglossian veneer smeared over cost saving initiatives disguised as altruism.

Wall Street embraced the shareholder model, grafting it to corporate DNA through new executive compensation packages designed to yoke bosses’ incentives in line with shareholders.

The first B Corps were certified on June 8, 2007, right before the Great Recession hit.

Especially in the financial industry, taking huge risks to net short term profits became modus operandi, leading to what John Cassidy called “rational irrationality,” or the “rationality that is rational at the individual level but that leads to socially irrational outcomes.” In the end, Wall Street’s worship of shareholder wealth maximization, combined with excessive credit, a housing bubble and poorly understood innovative financial products like credit default swaps, caused the financial Armageddon that claimed IndyMac, Bear Stearns and Lehman in ’07-’08 and ushered in the Great Recession.

(Note: If you are interested in reading an overly pedantic and just a teensy bit pretentious exposition justifying the foregoing paragraph’s pronouncements, click here.)

This is the ugly, myopic, irrational economic ecosystem that B Corps are stepping into. And catch this: the first B Corps were certified on June 8, 2007, right as the global financial markets entered into the first throes of panic.

The B Corp represents the only legal innovation in the past decade that addresses and improves the fundamental cracks in our economic system. By allowing managers to lash themselves to the interests of employees, the community and the environment as equity’s equals, the B Corp can resist the siren call of short-term profits. 

As pragmatic former businessmen, the B Lab founders are happy discuss incremental changes, practical solutions, and making improvements at the margins. But their real ambitions, they say, are nothing short of revolutionary.

The evolution of capitalism

B Lab’s goal is “to ultimately redefine what success means in business,” said Kerr. Gilbert has spoken passionately about “the evolution of capitalism” away from the “outdated” shareholder model, one that is “at best limiting, and at worst destructive,” sounding more like Zarathustra teaching the Übermensch than the former C-suite executive he is. You almost forget he’s talking about corporate law and standards setting.

[youtube https://www.youtube.com/watch?v=mGnz-w9p5FU?rel=0]

The idea of B Corps was born out of the ashes of AND1, the basketball apparel company that Gilbert and Houlahan captained before selling in 2005.

AND1, most famous for their eponymous mixtapes of street ball highlights, operated like a B Corp before the concept existed: suppliers had to pay their workers living wages, employees enjoyed free day care and the company gave away 10 percent of its profits to local charities.

B Lab is pushing a new model of capitalism. Prophetic or hubristic?

But soon after selling the company, Gilbert and Houlahan watched in horror as the new owners stripped the company of its socially-responsible elements in the name of Maximizing Shareholder Returns.

Gilbert et al., created B Corps to give company founders the flexibility to pursue missions other than shareholder profits and the ability to ensure those other missions remained a part of the company’s soul after they relinquished control. But at some point, the anger at seeing their baby turn into a profit-chasing slut metastasized into something far more ambitious than just the desire to see the company’s free yoga classes going strong.

“Government and the nonprofit sector are necessary but insufficient to address society’s greatest challenges. Business, the most powerful man-made force on the planet, must create value for society, not just shareholders,” proclaims the B Lab website. “Systemic challenges require systemic solutions and the B Corp movement offers a concrete, market-based and scalable solution.”

That’s powerful rhetoric, but the question remains whether it’s a prophetic or hubristic.

Legal challenges

The lawyers are more circumspect, of course, as people who think about lawsuits all day are wont to be. Lizzie Babson, an associate at Drinker Biddle, noted that the only opposition to the concept comes from other lawyers: “they know the law and they think they know what’s best.”

“The B Corp movement was really driven by entrepreneurs,” said Babson, noting that most lawyer tend to fear the unknown.

There are currently 1,118 certified B Corps.

Worse than overly cautious lawyers, though, are the know-it-all attorneys.

In California, a group of leery-eyed lawyers successfully lobbied the Governator to veto B Corp legislation, arguing that the legislation didn’t explain management’s duties to shareholders clearly enough. In the end, that only delayed the bill’s passage, instead of stopping it. 

But outside of bar association subcommittees and business law professors looking for handy topics for law review articles, you won’t find many who oppose the basic idea of allowing a company’s owners to decide whether profit maximization should be the corporate be all end all. 

That said, not even Babson, who personally helped shepherd B Corp legislation through a number of state legislatures, believes that the B Corp is right corporate form for everyone: some people don’t have a mission beyond making money. 

Still, if B Corps remain just a small part of the larger economic world, they’ll have a positive impact. “It’s a big ripple effect,” Babson said. 

Turning ripples into waves

Whether the B Lab ripples can grow into waves large enough to overtake “society’s greatest challenges” remains to be seen.

“Metrics matter,” B Lab spokeswoman Kerr said during our interview. So let’s look at the numbers.

• There are currently 1,118 certified B Corps.
• Socially Responsible Investment (SRI) has grown to $3.74 trillion as of 2012, making it 11 percent of global assets under management, according to a 2012 report.
• 27 states have B Corp laws and another 14 have introduced legislation.

But SRI is really just a measure of un-evil investment — SRI means no sweatshop labor, but doesn’t necessarily mean fair wages. And compared to the 27.7 million companies operating in America, a thousand B Corps are but a drop in the ocean.

Still, the idea is young.

The limited liability company was invented in 1977 in Wyoming, and it took five years for a second state (Florida) to adopt LLC legislation, and another six years after that for a third. Today, every state has LLCs, which are the default choice of entity for small companies and large subsidiaries of global conglomerates alike. Already, massive companies like Patagonia, Warby Parker, Etsy and Tom’s Shoes are B Corps, and more join the ranks every day.

More encouragingly, banks, venture capitalists and investment groups have joined in. The scalability of B Corps, both individually and as a sector of the economy, depends on the availability of equity and credit.

If this idea, born on the Main Line and midwifed by a team of Philadelphia Lawyers, ever hopes to reform Wall Street, today’s mere ripples will need to grow into tsunamis.

Whether that tsunami will be fueled by overlapping, leveraged waves of investment or another economic earthquake remains to be seen.