Corporate Reputation

The rise of the B Corps

Perhaps ironically, capitalism has reached a stage where one of the biggest risks to a company’s reputation is not making too little money, but being seen to make too much. A ticking reputational time bomb caused by profits seemingly benefiting only a few well-placed executives and shareholders is not something that free-market economics guru Milton Friedman foresaw when he won the 1976 Nobel Prize for his thinking about monetary policy. However, his statement that ‘only money matters’, is seen by many as having fostered a widespread belief that the main social responsibility of business is to create profits.

Jay Coen Gilbert, who co-founded and later sold AND 1, a $250 million US basketball shoes and clothing firm, sees this mantra as not just simply wrong, but highly dangerous. His answer, in 2006, was to help create the B Corporation, a new kind of company professionally certified to use the power of business to solve social and environmental problems.

B Corps are defined as for-profit businesses Essentially defined as businesses openly working for a purpose as well as a profit, B Corporations now include outdoor clothing retailer Patagonia and glasses supplier Warby Parker in the US and frozen food chain COOK, digital medical records social enterprise Patients Know Best and Pukka Herbs, the organic tea and supplement company, in Britain.

Fast Company magazine has deemed the creation of B Corporations as one of 20 moments that moved the world forward in the last 20 years, while Fortune Magazine, has stated that being like a B Corp is one of five key business trends to master.

‘At AND 1, we wanted to run a business we would be proud of,’ recalls Coen Gilbert. ‘People might think that you make cool t-shirts and shoes but being cool is very different from being meaningful. With B Corps, we’re effectively making a meaningful platform cool. It’s been a journey, but it became clear that we could envision a platform set up exclusively and powerfully to create meaning and purpose and have a positive impact on the world.’

The B Corp movement launched in the UK in September 2015, with 62 founding B Corps. Today, there are 149 certified B Corps, including mother and baby retailer JoJo Maman Bebe and, most recently, Innocent Drinks, which described it as joining a powerful movement that wants to shift the ‘image of business from greed to good’. A further 22 companies are awaiting certification.

Building a community of certified B corporations makes it easier to tell the difference between good companies and good marketing

One of the first was Futerra, a ‘change agency’ formed with a mission of ‘making sustainable development so desirable it becomes normal’.

‘That mission fills our team, and our work, with purpose, pride and passion,’ says co-founder Ed Gillespie. ‘We believe a better world is possible, and we want to help make it happen.’ Futerra operates Futerra Labs, a programme providing creative and strategic support and advice to those innovative start-ups who ‘dare to imagine’. Past projects include working with Bio-Bean to convert London’s waste coffee grounds into biodiesel and biomass pellets, Snact, which turns discarded fruit into ‘jerky’ and Zero Carbon Food, which grows pesticide free food in a disused London Underground tunnel.

Another UK B Corporation is social change agency Forster Communications, whose stated purpose is to ‘harness the power of communications to protect and improve lives’. ‘We feel that the B Corp movement plays to our pioneering spirit and gives us the opportunity to share our ‘Business to Society’ agenda more widely,’ says founder Jilly Forster. ‘We have confidence in the rigorous B Corp impact assessment process and now treat this as our formal independent assessment.’

B Corps set their targets high. At SustainAbility, an agency founded by activists John Elkington and Julia Hailes, UK operations manager Amy Hawke says: ‘B Corps compete not only to be the best in the world but the best for the world. Building a community of certified B corporations makes it easier to tell the difference between good companies and good marketing.’

Charmian Love, co-founder and co-founder of B Lab UK, believes the movement in Britain is now of a meaningful size. ‘We’ve been very focused on making sure that our network of B Corps represents a good range of industries and models in the UK,’ she says. ‘We now have a good range of technology and food companies, as well as investment firms and business-to-business, business-to-consumer and business-to-government companies.

‘There’s a link between B Corps and the growing impact investment movement as B Corps represent one of the sources of potential deal flow for investors who want to partner with profit with purpose businesses. But it isn’t just impact investors who are funding B Corps. Private equity group Balderton invested in Patients Know Best, for example.’
B Corps are still mostly small businesses, but the picture is changing following the acquisition of US B Corporation WhiteWave Foods by France’s Danone, which merged it with Danone North America to form DanoneWave.

DanoneWave, which has annual revenues of $6 billion, subsequently applied to create the world’s largest public benefit corporation – a separate structure indicating that businesses operate in a responsible and sustainable manner. Chief executive Emmanuel Faber has also announced that the group intends to achieve B Corp certification, becoming the first Fortune 500 company to do so. Some divisions have already been certified.

Analysts at investment bank Credit Suisse believe that Danone’s commitment to the B Corp movement might shelter the French company from recent hedge fund pressure. Nevertheless, Danone’s action is being watched closely by Unilever, its UK rival whose chief executive Paul Polman has become a flagbearer for the purpose-led business movement. Unilever has said that it is considering becoming B Corp certified, a move that Polman believes would send a powerful message that the purpose of business is not simply profit, but is about having a positive impact on society and the environment.

Unilever’s commitment to a long-term view came under threat last year when Kraft Heinz, the aggressive US food group, mulled a takeover offer. However, the putative bid was abandoned, and Unilever continued with its strategy, acquiring British organic herbal tea firm Pukka and Brazilian organic food business Mae Terra to bring its B Corp portfolio to four, alongside quirky ice cream maker Ben & Jerry’s.

Unilever and Danone are also working with B Lab to make the B Corp status workable for multinational companies with numerous lines of businesses, products, subsidiaries, and workers in different countries with different wage scales and structures. B Lab has also created a multinational and public markets advisory council to identify the standards and requirements necessary for very large businesses to achieve B Corp certification.

Love meanwhile sees purchases of B Corps as demonstrating the verve and energy they can bring to acquirers. ‘B Corps have become hot acquisition targets, especially in the consumer goods space.’ she says. ‘If you can’t beat them, buy them. And when you buy them, protect your investment by maintaining their B Corp certification so that their evangelical consumers stick around because they still trust the brand they came to know and love.’

B Corporations are also making large acquisitions of their own, with Natura Cosmeticos, Brazil’s leading cosmetics, fragrances and toiletries maker and the world’s first publicly traded B Corp, buying The Body Shop from L’Oreal for £880 million.

There is activity in the B Corp initial public offerings market too, with Laureate Education, an American B Corporation focusing on higher education, raising $480 million in a stock market flotation backed by private equity giant KKR. In academia, universities are embracing the B Corp movement, with Oxford’s Said Business School academic Colin Mayer making the business case for the market power of a business’s firm commitment to profit and purpose.

The school is also working with Mars on a research project focused on understanding new management practices and models based on the principles of mutuality. The financial industry has also begun to embrace B Corps, with Bancolombia, the largest commercial bank in Colombia, announcing a partnership with B Lab last year to help the thousands of businesses it works across South America to become like a B Corp.

In a pilot, more than 600 Bancolombia small business customers used the B Corp impact assessment to manage and improve their social and environmental impact. The company has now announced plans to roll this program out to thousands of its customers. Despite this, B Corporations have attracted some criticism, with an article on the Bloomberg news wire last year declaring: ‘Public-market B Corps are rare because investors hate them.’

Publicly-quoted B Corporations are indeed rare, with only four traded on major exchanges: two in the US (online marketplace Etsy and Laureate Education), one in Brazil (Natura) and one in Australia (Silver Chef). A fifth public-market B Corp, Rally Software, was bought by America’s CA Technologies for $480 million in 2015. Some other public companies, including Campbell’s Soup, own B Corps.

Rick Alexander, B Lab’s head of legal policy, believes that this is simply a function of B Corps’ short existence and the time lag between start-ups and flotation. ‘Silicon Valley and big-name investors have put more than $1 billion into B Corps and benefit corporations,’ he says. ‘They’re investing in them because they believe these businesses will earn venture capital-level returns and because satisfying B Lab’s rigorous standards of environmental, social and governance performance is part of these companies’ formulas for success.’
Alexander cites venture capital fundraising in the US by B Corporation education company Altschool and Lemonade, a peer-to-peer personal insurance start-up that attracted a strategic investment from German insurance giant Allianz.

Other B Corp investors include venture capital firms Benchmark Capital, Founders Fund, Andreessen Horowitz, Prelude Ventures and Sequoia Capital. Alexander believes more B Corps will inevitably move into the public markets and refutes suggestions that investors resist B Corp certification because it requires businesses to become benefit corporations, with a legal obligation to serve not only shareholders but also stakeholders such as workers and consumers.

Confusingly, B Corps must eventually meet the same legal standards as benefit corporations, but benefit corporations need not meet the same verified performance standards as B Corps. ‘To date, there has been no investor resistance to this concept in the public markets,’ insists Alexander.

Equally, people may start to identify B Corporation businesses as places to have confidence in investing in and as a supplier of choice or employer of choice

‘While benefit corporations are still new, they are viable and attractive to investors in both the public and private markets. ‘The equity markets are quickly coming to understand the value of authentic commitment to all stakeholders. While many in the public markets continue to value short-term share prices over long-term value, more investors are beginning to understand the advantages of investing in companies that account for their impact on all stakeholders.’

Other criticism arrived in 2015 when The Guardian asked whether becoming a B Corp is only for the sustainable elite. The newspaper cited the experience of US organic winemaker Fetzer Vineyards, founded in 1968 with a mission of challenging the status quo in California’s vineyards by seeking out wine-making practices that are better for the planet.

The company is said to be one of the state’s most sustainable large wine companies in California, managing 960 acres of organic grape-growing farmland, supporting its operations on 100 per cent renewable energy and being the first certified zero waste winery. Fetzer’s Bonterra brand is one of the best-selling organic wines in the US. Despite this, the wine-maker only attained the minimum score when it became a B Corporation in 2015.

To become certified as a B Corp, companies must complete an assessment of their impact in five categories: environment, workers, customers, community and governance. Applicants are then scored on a scale between one and 200, with a score of 80 required to receive certification.

Fetzer just scraped through with 80 and still had more to do, being granted two years to switch its legal structure to one that requires it to consider its social and environmental impact. Thereafter, like all B Corps, Fetzer must recertify every two years to maintain its standing. B Lab defended itself from the assertion that this behaviour is like that of an exclusive club saying that the minimum score of 80 is intentionally challenging and that most first-time applicants will fail, with 53 being the median score for a typical business.

Once companies clear the social and environmental review by B Lab, they are typically given one or two years to take whatever legal steps are necessary to require their directors and officers to consider all stakeholders, and not just shareholders, when making decisions.

Directors and officers can then be held legally accountable to this broader mission. Alexander admits that public companies wishing to become B Corporations face special challenges, having to overcome the traditional corporate law of the Anglo- American system that usually requires companies to owe their primary allegiance to shareholders. He has held meetings with institutional shareholders such as Black Rock, Fidelity and T Rowe Price, stressing that being a benefit corporation will over time build more value for all stakeholders, including shareholders.

The certification process also intentionally requires companies to look ahead from what they are currently doing that merits B Corp certification, towards further actions that they might take several years in the future. Through this spirit of continual improvement, the not-for-profit claims to changing the way that capitalism operates. For Fetzer, this means being committed to putting more back into the world than it takes out.

‘We want to get to a point where every time someone buys a bottle of our wine, the world becomes a better place,’ Josh Prigge, Fetzer’s director of regenerative development, told The Guardian. Coen Gilbert agrees that universal and uniform measurement is eventually essential to counter accusations of ‘purpose-washing’ and make sure that companies with shiny new mission and purpose statements do what they say.

To this end, the International Integrated Reporting Council is playing a role in encouraging more businesses to report their environmental and social impact alongside their financial performance. In addition, the major accountancy firms are getting involved, with PWC promoting Total Impact Measurement and Management, a flexible framework that enables business to develop a better understanding of how to create sustainable value for their shareholders whilst generating value for the wider communities they affect.

EY, the accountancy group formerly known as Ernst & Young, has set up the EY Beacon Institute, a community of business leaders, Board members and academics to help organisations create long-term value and navigate disruptive forces. ‘For companies in this era of low trust and high hopes for business, B Corps are beacons – a crucial evolution towards inclusive capitalism,’ says Valerie Keller, the institute’s global leader. The data is clear. Customers and employees expect business to stand for more than selling stuff and making money. ‘They reward those brands that do with higher trust, loyalty and engagement. which of course correlate to long-term profitability.’

Matthew Bishop, the former US editor of The Economist who authored Philanthrocapitalism: How The Rich Can Save The World, and co-founded the Social Progress Index, agrees. ‘B Corporations are an exciting development, catching a new wave of purpose-driven entrepreneurs,’ he says. ‘I would love to see this become the default corporate form for start-ups, though that is some way off. The big question in the short run is whether big established companies embrace the B Corp movement, as that would really make it mainstream. It will be fascinating to see what Danone and Unilever do in this respect.’

John O’Brien, a purpose strategist at PR group Porter Novelli, meanwhile defines what B Corps are doing as creating a ‘movement of the like-minded to mutually support awareness of better ways of doing business’.

‘Some see it as a differentiator,’ he says. ‘Equally, people may start to identify B Corporation businesses as places to have confidence in investing in and as a supplier of choice or employer of choice.

‘B Corps certification becoming the single mainstream measure of ethical business is probably unlikely.’ But it does suggest an important component methodology, applicable and useful for many, if not all businesses, in the shift towards more ethically-based, purposeful businesses.

Keller has higher hopes. ‘The B Corp movement is the vanguard, evolving capitalism to an economic model that works for all,’ she states. ‘They are re-writing the rules of the game to have more winners, going beyond shareholder-takes-all to truly benefit all humans touched by the business.

‘Imagine a world where one day companies no longer stand out from the crowd by becoming B Corps; where it’s just the normal way of doing business.’

That’s not a scenario Milton Friedman would have endorsed. In the current post-financial crisis search for purpose and meaning, however, B Corps look like a useful addition to the corporate lexicon.