Why Thousands of Companies Are Turning Their Backs on a Business Doctrine That’s Been Accepted for Decades

At the B Lab Champions Retreat in Los Angeles in September, nearly 700 attendees representing the B’s–the tip of a global movement numbering 60,000 companies–are gathered to honor great performers. And to declare victory.

The B’s are B Corporations, companies that have been certified by B Lab, a nonprofit dedicated to the concept that business must be a force for good, rather than profit alone, and allies working toward that goal. That concept had clearly become mainstream when, in August, the Business Roundtable, which represents the nation’s leading corporations, rejected “shareholder primacy” as the sole purpose of business in favor of stakeholder considerations. By doing so, the business titans at the very least acknowledged that business must have a purpose beyond making money–that companies must serve their customers, their employees, and their communities as well as their investors.

That is B Lab’s mission. The B stands for “benefit,” as in the social purpose businesses serve–or should. “Good is the new cool,” explains Afdhel Aziz, a serial social entrepreneur and inspirational speaker. He’s so sure of it, in fact, that he’s adopted that phrase as his brand. It’s even embroidered on his hat. That helped distinguish him from the many B Corps attendees who are wearing the “B” brand literally stitched onto their sleeves.

Denise Taschereau found her purpose in selling socially responsible promotional items when she realized that many great brands were giving away “terrible products,” she says. Fairware, the company she co-founded, sells “ethically sourced, sustainable promotional products.”

Hers is a Certified B Corporation, or B Corp, a very much for-profit company, but one legally committed to generating positive social as well as financial results. She and her co-founder, Sarah White, are building on their insight that companies are changing, says Taschereau, from “marketing to drive sales to marketing to drive change.”

Another attendee, Dan Bodner, envisioned his future as a B Corp while on his drive to work from Oakland, California, to San Francisco. He watched homeless people gathered in pop-up communities spilling onto the streets. As a CEO of an IT outsourcing company, he found success. But as CEO of his startup, Habitat Transitional Shelters, he has found a deeper purpose: building low-cost, moveable, temporary housing for homeless people. “This is what I’m excited about,” he says. “This is where my passion is right now.”

Habitat Transitional Shelters plans to produce basic housing with metal framing, locking doors, operable windows, and standard insulation for less than $8,000 per unit. That figures to be an inviting price for municipalities struggling to find shelter for the people the economy has left behind.

These entrepreneurs are in some sense rebelling against the traditional business model. And no one explained or defended this model better than the brilliant economist Milton Friedman. Author of the 1962 classic Capitalism and Freedom, Friedman called the very idea of corporate social responsibility (CSR) a “fundamentally subversive doctrine,” likening it to a form of taxation.

Friedman was partially right but wrong in the end, as experience and history have shown. It is possible to operate in a for-profit structure, with the advantages Friedman identifies, and also work as a public-purpose company. That underlines the fast-growing movement of businesses built on that dual-purpose premise known as a benefit corporation.

Since Friedman’s writing, for-profit corporations ranging from Starbucks to Koch Industries to Goldman Sachs have used CSR strategies to increase shareholder value while producing public-purpose goods. As far back as 2013, more than 90 percent of consumers polled by Carol Cone, the nation’s leading purpose-driven brand-marketing expert, rejected the Friedman model in favor of a broad CSR approach. Her research found that “the clear majority expects companies to do more than play a limited role in communities or simply donate time and money.”

In the harsh light of 2019, Friedman’s argument is not merely outdated; it misses the point even in retrospect. Investors are demanding that corporations take on social responsibilities involving everything from guns to climate change to education to the environment and more. The Friedman doctrine is simplistic at best, and the cornerstone of market fundamentalism at worst.

Most of the most successful companies–from micro-enterprises to multinational corporations–thrive because they aspire to a greater purpose than profit alone. Best-selling business writer and adviser Jim Collins learned through research on the performance of more than 14,000 companies that the most profitable ones over the long haul succeeded because they focused on maximizing purpose rather than profit. The money followed.

We are now past the “proof of concept.”

The next stage of development toward a progressive society and economy is an emerging but still hazy vision of a “benefit” economy, in which companies that combine financial incentives and societal good do business routinely with other companies doing the same. It is an effort to build a “public purpose” economy through commerce.

The model is coming to life both as an emergent practice led by people who never accepted the separation of financial and social results and as an organized effort to expand the practice by creating a legal and practical structure called the B Corp.

B Lab–a nonprofit corporation driving the B corporation idea–is helping entrepreneurs by creating a business category in the law with standards of practice and conduct and a recognizable and respected brand. Both paths are necessary parts of the effort, yet even together they are not sufficient to build a public-purpose economy. At the least, they both need to expand by orders of magnitude, build new channels of collaboration into a sustainable business network, and help establish a new financial network, including mainstream partners and a core group of impact-focused benefit financial institutions. The practitioners must include social entrepreneurs working to grow dual-purpose businesses at a small scale, as well as corporate executives and the subgroup of progressive financiers who want to use their power and influence to foster a benefit economy.

B Lab is building a B Corporation brand not for its own sake, but to give definition and meaning to the benefit economy it wants to cultivate. In a plain two-story office building on a side street in suburban Philadelphia, B Lab is working to “end shareholder primacy”–to release Friedman’s hold on business. “The B economy is bigger than B Corporations,” explains B Lab co-founder Jay Coen Gilbert. “The issue is whether B Corporations are part of an economy that is creating a more inclusive and sustainable business world.”

B Lab’s strategy is to build and organize a network of private companies on the foundation of parity between profit and purpose. It works toward two central goals:

  • to organize a community of B economy leaders and practitioners, and
  • to create the legal basis, state by state and nation by nation, for B corporations that commit irreversibly to the dual roles of business.

In 2006, B Lab set out to “create a better world through business.” The impulse is not unique, but the experiences that shaped it are. Friends for more than 20 years, founders Gilbert, Bart Houlahan, and Andrew Kassoy were not starry-eyed ideologues with big ideas. They had started and run a successful business Friedman’s way and trusted the model, but didn’t like how it turned out. Not at all.

As young, 20-something entrepreneurs, the trio started, grew, and, in 2005, sold a successful global company, And 1, which marketed and sold T-shirts and later basketball sneakers and sports gear worldwide. And 1 succeeded in a highly competitive business that included Nike, Adidas, Puma, and other iconic sports-gear giants. Who would give that up? And why?

Gilbert and his colleagues did not set out to disrupt the Friedman model any more than they wanted to sell their company. And 1 made its name on its “street” shoes, countercultural to corporate brands, around the time grunge rock and hip-hop were disrupting mainstream pop music.

“We were experiencing Fortune 500-type growth,” Gilbert explains in a glass-walled conference room at the B Lab offices. “We were already a $70 million business. And, literally, the next year we were $200 million.” As owners, they gave away 5 percent of their profits, a “couple million bucks” a year, according to Gilbert. Everything was good for And 1, until it wasn’t.

Two events changed everything.

First, Gilbert says, the founders realized that there were 10,000 mostly young women in China making their products–shoes and apparel. When they visited the factories, they learned “some pretty difficult things,” he says, wincing.

“One of my partners went to one of our first factories,” Gilbert says. “He’s walking around, and the factory manager–he’s looking at lines of young women on the factory floor–says, ‘Well, each one of these lines can produce 2,000 [pairs of gym] shorts a day, and so we should be able to meet your orders.’ “

Gilbert’s colleague asked, “What happens if they don’t meet the quota?”

“We beat them,” the factory manager answered matter-of-factly. He wasn’t kidding.

Second, Gilbert says, six or seven years into the company’s fast-growing life, And 1 decided to raise venture capital to expand. But the VC investments created a “mandatory liquidity event” in the future.

Venture capitalists want to maximize profits in as many companies as possible as quickly as possible, often through initial public offerings–which generate substantial profits. VCs’ pur­chases of ownership shares are liquidity events–they turn the illiquid ownership shares into liquid (cash) assets. Mandatory liquidity events mean that the financial owners–the VCs–can force the founders to sell either on a public market or in a private transaction.

“It was a ticking time bomb,” Gilbert says. “I had a basic idea, but I didn’t really understand: Wow! This means that we must sell or refinance and go public in five years. So I didn’t really know.”

The founders sold And 1. “We did the best we could,” Gilbert says, “and the guy we sold to, Jerry Turner, was completely values-not-aligned.”

It was painful. In a sense, B Lab started because of Turner.

Everything changed. Turner, a longtime sporting goods executive, focused on profits and neglected quality and marketing. In Gilbert’s words, “He drove the brand into the ground.” Gilbert says the founders took away a lesson: “There must be something we could do to make those mission-driven businesses, or that mission, stickier through the inevitable changes in the life cycle of a business.”

He and his partners identified two necessary ingredients for lasting social change. First, people need to have the widespread recognition that the system, the Friedman business model, is failing. Second, you need a viable alternative, one that has the ability to scale.

They drew on their experience, pulled together what they had learned about businesses and benefits, and started B Lab.

Today, B Lab reports that more than 50,000 nonprofit and for-profit companies in at least 60 nations are using its assessment tool to measure progress toward the dual goals of performance and purpose. They include international brands, such as Dannon (yogurt), Patagonia (outdoor clothing and gear), and Eileen Fisher (women’s clothing); prominent social enterprises, such as Ben & Jerry’s (ice cream) and Kickstarter (online fundraising); and many other smaller ventures. They also include progressive financial institutions, such as Amalgamated Bank, Virginia Community Capital, and Beneficial State Bank.

Companies can participate in the B Lab world in several ways. The broadest participation comes from using B Lab’s assessment tool. The goal of the B Impact Assessment is to monitor and document progress on social impact. It emphasizes positive factors (working on board diversity, for example) instead of faulting negatives (such as not having a state-of-the-art recycling program). This broadens its appeal. The assessment recognizes differences between business sectors as well as national, cultural, and other differences in context–because financial companies might assess social impact differently than food manufacturers.

Only for-profit companies can earn B Lab certification, authentication that they are doing all they can to provide social benefits as well as good financial performance. In addition to completing and meeting the conditions of the B Impact Assessment, companies seeking B Lab certification must make statements in their charters and bylaws that amount to a legally binding commitment to maintain the B certification. They must also operate transparently and work with other B Corps.

One other thing makes B Lab different: its success at passing benefit corporation statutes in 34 states with broad bipartisan support. The laws offer systemic, state-specific ways to set up and run for-profit businesses without favoring investors over all others. B Corporations meet requirements in their legal documents that commit them to producing positive impacts on society, workers, their communities, and the environment. By embedding benefit obligations, they are telling investors, lenders, employees, customers, and others that their responsibility is not solely to produce profits for investors.

It seems inevitable that there will be a federal B corporation law soon, which, although technically not necessary, would be both pragmatic and positive. It presents an affirmative opportunity for businesses to promote both profit and public good while providing an encouraging foundation for the benefit economy.

The ultimate goal of B Lab is a B economy–a system for making, using, buying, and selling things that balances profit and purpose. The concept is still forming, and B Lab seems comfortable letting practitioners and practice define it.

B Lab’s Anthea Kelsick acknowledges that B economics is a new concept in need of clarity. “Here’s my stab at how we might define the benefit economy,” she says: “A collaboration of leaders and change makers across all sectors of society, including our B Corps and beyond, to build a more global movement of people, including business, as a force for good. The economy works for everyone, and it’s made up of people who work for, buy from, invest in, learn from, teach, and support those who are trying to create shared prosperity for all through business.”

The result of the patient, perhaps glacial, transformation could be a different type of society, an inclusive prosperity based on one economy, not two–if we can get there. That society will be more inclusive, more just, more environmentally sustainable, and more beneficial for more people in more places. “I hope one day it’s not the [benefit] economy, it’s just the economy,” Kelsick says. “But it’s up to us to decide how that definition shifts over time.”

Adapted from Organized Money: How Progressives Can Leverage the Financial System to Work for Them, Not Against Them, by Keith Mestrich and Mark A. Pinsky (The New Press).

Make the Benefit Economy Work for You

“The B economy is bigger than B Corps,” says B Lab co-founder Jay Coen Gilbert. “The issue is whether B Corps are part of an economy that is creating a more inclusive and sustainable business world.” Here are five ways every business can help build the benefit economy.

Know Your Values: At the core of every business is a set of values and principles and a vision of the world it wants to help achieve. Taking the time to articulate and express them might be, to employees and customers, the best investment you’ll ever make in your company.

Commit Your Assets: Many companies make positive impacts. Enduring social enterprises build their business models around them: no impact, no business. Maybe you’ve heard that chickens contribute to a bacon and egg breakfast but pigs commit?

Measure Your Progress: What gets measured gets done, so figure out what your company’s social impact metrics are and make sure all of your team members know how their jobs are vital to achieving them.

Invest in Progress: No company gets it all right. Everyone is learning new ways of making impact core to their work–and some other company is doing it better than you. Learn how to get better when the world around you is constant. Because you’ll need to get better when it is changing.

Partner With Your Competitors: You might maximize profits on your own, but you cannot maximize impact alone. Do business with other companies that are building the B economy. Social entrepreneurs are as innovative at creating positive impact as they are about business success. At the end of the day, the B economy requires a market-scale, full-service network of benefit companies working together.

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