Not Your Parents’ Corporation

B-Corps: New and Improved?

B-Corps: New and Improved?

Suppose you could design the ideal company–one that not only makes money, but is fair to its employees and for kicks, solves social and environmental problems as well. Utopian? Perhaps, but several models that aim for this ideal, called “social enterprises,” have gained traction in recent years. Distinct from companies that adopt the Corporate Social Responsibility ethic (under which conventional corporations endeavor to be “good citizens”), the new social enterprises represent fundamentally new business structures.

My colleagues Michael Renner and Tom Prugh have already written about the Mondragón worker cooperative model in Spain, one example of the economic democracy concept described recently in World Watch magazine. Although more than half a century old, this cooperative structure is attracting new interest in the United States, having been adopted recently by a set of Cleveland businesses and embraced by the United Steelworkers.

But other, new forms of corporate structures are also blossoming in the U.S. and elsewhere. One is known as B Corporations. Started in 2008, “B-Corps” (the B is for Benefit) have charters and other founding documents that expand their legal responsibilities to include commitments to employees, the community, the environment and other stakeholders–not just to shareholders. For B-Corps, gone is a long-standing rationale–”we are bound by a fiduciary responsibility to maximize returns to shareholders”–that has kept many corporations away from social and environmental initiatives. Moreover, B-Corps commit to clear environmental and social standards, and their performance is subject to random audits by an independent nonprofit. Over the two-year term of a B-Corps membership, the chance of being audited is 20 percent. Companies that don’t get a passing grade have 90 days to correct their operations–or have their B-Corps Certification publicly revoked.

Some 220 corporations covering 54 industries are now listed as B-Corps, according to their collective organization (also known as B-Corps). B-Corps expects this new corporate structure to account for 5-7 percent of US GDP within a generation.

Meanwhile, the UK established in 2005 a new species of firm known as Community Interest Companies, one of several kinds of social enterprise in the UK. These are companies designed to undertake activities “for the benefit of the community” rather than for the benefit of owners. A key feature is the “asset lock,” which limits the distribution of profits to shareholders, in effect requiring that a portion of profits be reinvested in the company–and therefore, the community. Some 3300 firms in the UK are listed as CICs, which are part of a healthy social enterprise movement in the UK. The 2009 State of Social Enterprise Survey shows that the sector is experiencing clear growth, even in this recession.

Another new company structure in the United States is the L3C (low-profit, limited liability company), a variation of a limited liability company, or LLC. Like a CIC, it is a for-profit company whose primary purpose is to advance a social goal, rather than to maximize shareholder return. It is especially useful for attracting capital to low-profit, but socially beneficial, enterprises, such as a health clinic that charges most patients but provides services at no charge to the poor.

Like an LLC–the structure often used in law firms and other partnerships–the L3C is structured such that partnership rights are tailored to each partner’s needs, including its expectations for investment earnings. In the case of a newspaper structured as an L3C, for example, partners such as foundations and individuals may invest simply to support an important community institution, expecting minimal financial return. Another tranche of investors might include employees and local businesses with a strong stake in the paper’s success, who receive a moderate return. The highest tranche would include large-scale institutional investors such as pension funds who are looking for the highest returns. In effect, the low-return, socially-minded investors make investing in the firm less risky, which attracts more commercially-minded investors who otherwise would not invest.

There may be any number of weaknesses to these new models, but what is encouraging is the emerging willingness to create business structures that broaden a firm’s mission beyond profit-making. That’s a healthy bottom line.

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