This post was written by guest contributor Leila Janah, the CEO of the nonprofit outsourced services firm Samasource. Leila continues to argue with me over whether or not pure capitalism can solve what ails us. I tend to take a Randian view of the world. Janah argues that capitalism can often lead to evil, and points to the massive Taiwanese firm Foxconn as an example of capitalism going wrong. That’s certainly a crowd pleaser, but I think most of the problems with capitalism stem from government regulation. You can watch my recent video interview with Janah here. In any event, Samasource is a fascinating experiment and is already helping the world become a more pleasant place to be.
Sixty-three percent of the Fortune 500, and more than half of all American businesses, are incorporated in Delaware. The state’s laws protect corporate directors and enable them to focus on the bottom line. Traditionally, that has meant maximizing profits and shareholder value.
But a new trend is emerging to counter Delaware’s influence on American corporate policy, and it’s pretty thrilling for those of us in the social enterprise sector. In April, Maryland became the first state to allow entrepreneurs to form Benefit Corporations. Also known as “triple-bottom line” businesses (so named for their consideration of people, planet, and profit), B Corps now include over 300 companies representing $1.1B in revenue, including Amazon competitor Better World Books and GoodGuide, a site that rates consumer products for safety, environmental impact, and social responsibility. B Corporation, the nonprofit behind the legislation, is growing in influence — in the organization’s hometown of Philadelphia, B Corps now receive tax incentives.
Benefit Corporations aren’t the only newfangled legal structures available to mission-driven entrepreneurs. Several years ago, Vermont created Low-Profit Limited Liability Corporations, or L3Cs (Vermont, bless those hippies, also approved Benefit Corporations in May). Michigan, Utah, Wyoming, Illinois, and New York followed suit.
I can hear some of you scoffing. How can a business optimize across multiple types of return? How can one measure social and environmental impact consistently across the full range of businesses? Is Adam Smith turning in his grave?
The notion of multiple bottom lines emerged in the 1980s, after major environmental catastrophes like Exxon Valdez and the Union Carbide gas leak in Bhopal made it clear that some firms were not counting the true environmental costs of doing business on their balance sheets. Negative environmental externalities went largely unregulated, and activists realized that business leaders were a more likely source of change than government. The first crop of these companies included Ben and Jerry’s, whose founders Ben Cohen and Jerry Greenfield famously donated 7.5% of pre-tax profit to community projects, and Dame Anita Roddick’s The Body Shop, whose “Trade Not Aid” and Greenpeace campaigns built her a reputation for business ethics.
Today, there are at least 25 different approaches to measuring social and environmental impact at the firm level, ranging from Fair Trade labeling systems that focus on living and working conditions for suppliers to Jed Emerson’s popular Social Return on Investment method, and the companies that use them have access to new pools of capital. Led by the Rockefeller Foundation, the Global Impact Investing Network includes 30 socially conscious investors including funds like Jeff Skoll’s Capricorn Investment Group and TIAA-CREF.
This activity around social business, and social capital markets more broadly, is encouraging, but highlights a central problem: in the absence of a single standard for measuring social and environmental returns, regulatory agencies can’t build effective incentives to encourage companies to adopt them. Optimizing for multiple variables is notoriously challenging; even when leaders unambiguously express their commitment to social and environmental goals by, for example, modifying their corporate mission statements, they face major tradeoffs. Prior to the advent of Benefit Corporations, people and planet took a back seat to profits. Ten years ago, Ben & Jerry’s sold to Unilever — according to Will Patten, a former executive there, Cohen and Greenfield wanted to retain control of the company but could have been sued by shareholders for not selling to an entity willing to pay well above the company’s stock price.
Under Maryland’s new law, the Bens and Jerrys of the future are free to compromise profits for the pursuit of vaguely defined “public benefit,” which includes things like preserving the environment and improving human health. The directors of Benefit Corporations are required to file a “Benefit Report” to shareholders each year, and are required to consider the effects of their actions not only on shareholders, but also on employees, customers, and, notably, suppliers.