The Week in Ethics: Benefit Corporations, A Path Away from Crises

How many crises would be averted – root causes eliminated or problems contained – if companies operated with a lens that included their impact on society as well as shareholder value?

Lessons learned from the crises of BP,  Toyota, Massey EnergyGoldman Sachs,  and the 2008 global economic meltdown — among many others — have demonstrated the human break down when companies focus on profits, losing sight of the impact of what they do (or fail to do) on people, communities, and society.

Slowly but perceptibly, other ways of doing business are posing alternatives to business as usual. Conscious Capitalism, shared value, social entrepreneurship, and the B Corporation or benefit corporation  are among the models.

In seven states (Vermont, Maryland, New Jersey, Virginia, Hawaii, New York, and California) over nearly two years, companies who have registered to become benefit corporations have broadened their lens beyond profit maximization. They can now structure their business to include social and environmental concerns  in their mission. The legal structure of benefit corporations provides a shield against shareholder lawsuits that say such activities dilute stock value. Several other states are considering legislation to adopt this corporate structure.

Patagonia  founder Yvon Chouinard was the first to register his company as a benefit corporation in California when its law went into effect January 2012. He indicated Patagonia was trying to build for the next 100 years: “Benefit corporation legislation creates the legal framework to enable mission-driven companies like Patagonia to stay mission-driven through succession, capital raises, and even changes in ownership,” he said, “by institutionalizing the values, culture, processes, and high standards put in place by founding entrepreneurs.”

Mission-driven companies like Patagonia are profitable and far less likely to show up on the damaged-reputation list of those felled by crises. For those filing as benefit corporations, the requirement that companies’ corporate purpose create a material positive impact on society and the environment further reduces the risk of crisis. It broadens the criteria that go into making good and sustainable business decisions.

An additional risk mitigation factor involves requiring benefit corporations to redefine fiduciary responsibility to consider the interests of workers, community and the environment. This will necessitate discussing in board and executive meetings the impact of proposed actions beyond the silo of a company’s own interest. Accountability and transparency are reinforced by benefit corporations being required to use an independent, third-party standard in reporting social and environmental performance.

Critics of benefit corporations argue this is just a legal fad. The argument goes that corporate directors already have the ability to justify actions like saving the whales or other causes they feel are in a company’s best interests. They point out that under current law, companies can demonstrate socially responsible behavior.

However, there is a difference between the option to demonstrate socially responsible behavior (perhaps under the auspices of a department like CSR) and having it permeate the DNA of your organization. By building it into your corporate purpose, your business strategy, the impact you want your company to have on society and the environment, it isn’t ancillary; it becomes how business is approached.

The benefit corporation is an example of a new way of doing business where the shareholder investor and the stakeholder of society both get what they need without either being jeopardized.

The existing business paradigm isn’t working, said Chouinard in January after he registered Patagonia as a benefit corporation. “This is the future.”

In the aftermath’s of 2011’s Occupy protests, benefit corporations invite the possibility that comes with thinking differently.

Gael O’Brien         January 31, 2012

The Week in Ethics

Gael O’Brien is also a columnist for Business Ethics Magazine; her January 2012 column was “After Paterno, Penn State’s Struggle to Rebuild Trust.”

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Explore posts in the same categories: Conscious Capitalism, Governance, Leadership, Reputation, Social Responsibility

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