Part of what it means to invest sustainably is working to rise above strict financial metrics when determining the value of a particular company or investment. It means, for example, asking questions like, “Is it really so exciting that last quarter’s results for this company were stratospheric, given that its greenhouse gas emissions are by far the sector’s highest?”
But there are very real impediments to thinking this way — many of which are written right into existing legal codes. Institutional investors often wonder whether they’re breaching their fiduciary responsibility when they consider a given investment’s impact on society and not just its financial returns.
Executives of publicly owned corporations risk being smacked with investor lawsuits for failing to maximize shareholder value when they zoom out from shareholders’ immediate fiscal interests and instead act on the wider interests of stakeholders like employees, communities or the environment.
New legislation aims to dismantle these barriers to thinking sustainably. In April 2010, Maryland became the first state to pass legislation that gives businesses the option to incorporate themselves as “benefit corporations,” which means that they are legally bound to uphold the social commitments written in their corporate charters. They are subject to annual third-party reviews and high transparency standards to ensure that they’re living up to their “benefit corporation” label. In return, b corps can’t be sued for failing to maximize shareholder value.
Since Maryland’s passage of the law, two other states have followed suit (New Jersey and Vermont– and soon to join their ranks is Virginia, where the law passed unanimously in both houses and is currently waiting for the governor’s signature), and seven other states have introduced similar legislation (California, Colorado, Hawaii, Michigan, New York, North Carolina, and Pennsylvania). Many of those familiar with the legislation say that the fact that it contains no tax incentives for benefit corporations – or any budget-related aspects at all – has helped it move quickly through state legislatures of various concentrations of red and blue.
The idea sprang out of B Lab, a Berwyn, Pennsylvania-based nonprofit that certifies socially responsible companies. With the help of corporate lawyer William Clark from Drinker Biddle in Philadelphia, B Lab drafted model b corp legislation. Andrew Kassoy, co-founder of B Lab, shared the idea with Maryland Senator Jamie Raskin at a cocktail party. Two weeks later, Sen. Raskin had introduced the legislation in his state.
Says Kassoy: “There is this assumption that has turned into doctrine in the corporate world: If you’re thinking about anything other than short-term profits, then you are decreasing the value of the business. But to me, that’s a total red herring. I think 2008 and 2009 proved pretty clearly that maximization of shareholder value as the only strategy is a bankrupt strategy.”
As the legislation spreads from state to state, and isolated examples of benefit corporations potentially swell into a larger trend, could these subtle changes in corporate law affect a radical rethinking of businesses concepts like “profits,” “returns,” “corporate mission,” and “accountability?”
Once a handful of benefit corporations demonstrate what it looks like for corporate executives to watch their carbon footprints and their impact on their immediate communities as closely as they watch their bottom lines – even as their businesses scale up, attract capital and are acquired – might stakeholders start demanding that other businesses think this way too?
It may feel like a stretch to extend the implications of a new law out so far, but B Lab isn’t afraid to make the leap. “A new economy requires a new kind of corporation,” B Lab writes on its website. And it seems a new kind of corporation required not only a new profit motive, but also a new, zoomed-out definition of the term itself.
In Part 2 of this post, read about B Lab co-founder Andrew Kassoy’s thoughts on what this new type of business will mean for socially responsible investors.
