B Corps co-founder Jay Coen Gilbert on why a new corporate model is essential to growing truly sustainable businesses
• A response to Marc Gunther's alternative take on how B Corps may undermine sustainability
In an otherwise wonderful article on B Corps and the new Delaware benefit corporation law, Marc Gunther claims the movement may inadvertently be damaging to the cause of sustainable business.
If it were the case that B Corps or benefit corporation laws were letting traditional corporations off the hook, we'd be worried too. Fortunately, we don't believe that is true.
Traditional corporations can continue to pursue, and hopefully increase, their corporate social responsibility and sustainability programmes (with one important constraint, described below). The existence of B Corps and benefit corporation laws doesn't diminish that ability.
Gunther's argument is based on the idea that by creating separate benefit corporation legislation, we give the impression that conventional companies have no choice but to focus narrowly on maximising short-term profits. If that were so, he says "we're in a heap of trouble and unlikely to get out, because 99% of US businesses today are conventional C Corps, and most are likely to remain so."
But the simple fact is that traditional businesses are constrained by the need to put profits rather the health of society first. The reason we need B Corps is that such companies enjoy the freedom to pursue a broader set of objectives. This is not a personal view but the judgment of the corporate attorneys of the Delaware bar and the chief justice of the highest business court in the country, the Delaware Court of Chancery.
It's about ends versus means, said Delaware's Chancellor Leo Strine at a recent World Economic Forum event. He said: "B Corps enjoy the freedom to define the ends they seek, not just the means by which those ends are sought."
Strine has spoken and written on many occasions that shareholder wealth maximisation is the only legitimate corporate purpose recognised by the courts.
If you think sustainable business helps you achieve that end, go for it, and hope that increasingly short-term-minded capital providers will let you do so. However, as an end in itself, no can do.
That Delaware corporations are legally mandated to seek only one end - shareholder wealth maximisation - is only debated by a small minority of academics, led by Lynn Stout, who argue that all corporations can make decisions in the best interests of society. Business leaders understandably care more about what is said by the courts and practising corporate attorneys than by academics.
After several years of study, the Corporation Law Council of the Bar association of the State of Delaware, and the Court of Chancery, which adjudicates all business disputes among Delaware corporations (comprising the majority of publicly-traded companies, two-thirds of the Fortune 500, and nearly all venture-backed companies), determined that a new corporate structure was needed to make it clear that directors would be protected for pursuing corporate strategies which might lead to a trade-off between shareholder value and societal impact.
Some might be more comfortable, or even find it preferable, to operate in a system that prescribes shareholder value maximisation as the single goal of the corporation.
Even if a business leader or investor is focused solely on long-term shareholder value maximisation, a case can be made that the benefit corporation structure will best support that end objective. Mainstream venture investors like Albert Wenger of Union Square Ventures - which has invested in Twitter, Zynga and B Corp Etsy - make this case well.
As Delaware Governor Jack Markell wrote in an op-ed, benefit corporations are better prepared legally to withstand the pressures of short-termism that plague our capital markets. Similar reasons explain why Yale economist Robert Shiller and former President Bill Clinton have pointed to B Corps and benefit corporation legislation as one approach to address at least one of the underlying causes of the financial crisis.
Importantly, an increasing number of business leaders are not satisfied with business as usual. Now they are free to choose a corporate structure that gives them the freedom to choose the ends they seek. More freedom is a good thing. In this case, good for society, and, in the long term, likely good for shareholders too.
Lastly, we agree with Marc Gunther that "the future of business will be shaped by the marketplace, and not by the dictates of corporate law". That's why, as he points out in his article through various examples about B Corps attracting talent, saving money, building trust, and generating press, "the B Corp movement matters."
Rather than "undermine faith in capitalism" or "discourage reformers inside and outside of big companies who are pushing corporate America to do business better," as Gunther fears in a related post on his blog, B Corps can restore faith in capitalism and give reformers new tools not only to push harder, but also to move more quickly toward the creation of value for all stakeholders.
Jay Coen Gilbert is a co-founder of B Lab
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