The B (S?) Corporation

(c) Nola Wilken

Now that so-called “B Corporations” are popping up around the country, it’s a good time to review what they are, how (and if) they differ from “regular” corporations, and whether they have lived up to their mission, which is to benefit not only shareholders, but the entire community.

The B in the name stands for “benefit”, with the idea that these types of entities are better than non-B corporations because they are structurally required to consider what is best not only for their shareholders, but for others involved with the business, such as employees, vendors, the community, and the environment. Currently, 28 states  have laws on the books which permit the formation of a B Corporation, requiring that their organizational documents comply with governance principles that are, in theory, designed to benefit other stakeholders, in addition to the corporation’s shareholders.

The B Corporation designation is not a tax concept, and is ignored for all taxation purposes.  However, a few states have seen fit to offer tax credits and other incentives to B Corporations.

B corporations formed under state law can also seek certification from the one and only self-appointed bodyB Lab – a non-profit organization formed exclusively for this purpose.  How does it work?  Well, B Lab does not permit their standard-setting process to be transparent.  In order to get certification, the B Corporation not only has to pay an annual sliding scale fee, but then has to submit to the process of trying to prove that the corporation meets B Lab’s objectives.  Without competition, or community input, it is unknown whether the B Lab certification means much, except as a marketing tool.

For anyone who is curious about B Lab, they would be well advised to by-pass its annoying website, and go straight to a review of B Lab’s 990 Forms.  There, you will find a some interesting information, including the relationships that B Lab has with other entities, such as a controlling (67%) ownership in a for profit entity called B Lab IP LLC, which produced $2.5 million in net income for B Lab in 2013, bringing B Lab’s total revenues to over $7 million.

B Lab’s board and the Advisory Council appear to be dominated by wealthy individuals, and/or those involved in managing venture capital funds, private equity funds, and private foundations.  These are the same funds that package B corporations into their portfolios to help them raise investment funds from the conscientious wealthy investor class.  It is very troublesome to me that the overseers of B Lab benefit financially (albeit indirectly) from B Lab’s primacy.   The lack of truly independent governance and any standards transparency renders B Lab illegitimate as a 3rd party regulator, in my opinion.

B Lab’s website touts the primary benefits of obtaining certification as brand differentiation, generating press, saving money, and being able to attract investors. Also included in this laundry list are tag lines like “protect your mission”  and “lead a movement”.  Why would a 3rd party regulator offer financial incentives to the very companies it is regulating?  It seems unethical.

Apparently, I’m not the only one who thinks so.  Professor Rae Andre’ of the Northeastern University College of Business,  in her research paper entitled Assessing the Accountability of the Benefit Corporation:  Will This New Gray Sector Organization Enhance Corporate Social Responsibility?, concludes “…the emergence of the benefit corporation demonstrates how some companies are determined to control the process by which businesses are held accountable, making them accountable to each other rather than to society.”  She goes on to state: “The research suggests that benefit corporations follow accountability practices that serve particular private interests, and because of this, the probability that they will be responsive to the citizenry as a whole, to society, is low.”

Of the over 1,000 B certified companies listed on B Lab’s website, I easily spotted quite a few that are controlled by private equity and venture capital firms.  Once the exit strategy for the investment has been triggered, many of these companies will be sold to large publicly traded corporations where they will be taken apart and absorbed, or simply shut down.  Employees will lose their jobs, and once vibrant workplaces will go dark.  Companies that cannot be sold because they are unprofitable are sometimes pawned off on inexperienced employees, or simply quietly liquidated.  I wouldn’t call that “beneficial.”

Some legal scholars have begun to weigh in on the troubling legal aspects of B Corporations.  One of these is the myth that under traditional corporate governance laws, corporate managers are not permitted to act in the best interests of the community at large or other stakeholders, and can in fact serve only one god:  the shareholders.  According to the legal experts, this is simply not true.  In fact, many states have adopted “constituency statutes” that expressly permit managers of plain old corporations to consider the interests of other stakeholders.  Apparently, there has never been a single court case in which business directors were held liable for considering non-shareholder interests nor any case that imposed a general duty to maximize profits and short-term shareholder value.  Professor Lynn Stout of Cornell Law School has debunked this myth in her book, The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations, and the Public.

While there are probably many B Certified Corporations that are well-run, are privately or employee-owned, and walk their talk, there is no reason, other than brazen “profit motive” to become B Certified by B Lab.  And that, as Professor André points out, is the height of hypocrisy.  It is also a waste of time, effort, and money that could instead be spent on actually benefiting a company’s stakeholders.

If you are inclined to consider alternative business structures, you could take a look at the Multi-Stakeholder Cooperative business model.  This structure is a modification of the old cooperative model, whose humble origins stem from small farmers banding together to market and distribute their products.  In fact, the landmark Tax Court case which established many of the income tax principles related to cooperatives hails from right here in the Pacific Northwest – Linnton Plywood v. United States.

If you really want to operate your business ethically and mindfully, and to consider the interests of all stakeholders, there is nothing to stop you.  And, no certification is required.

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2 thoughts on “The B (S?) Corporation

  1. Very informative post. Quick question: If B LAB has only a 67% interest in B LAB IP LLC, is it possible that there are individuals or for-profit entities who own the rest and are deriving income from it?

    1. Yes, that is correct. Other individuals or for profit entities own the rest, based on my reading of the 990. Another interesting point is the amount of money B Lab spends on lobbying and on executive salaries. The lobbying for B corporation legislation in the U.S. and around the world is what keeps the money flowing, as more and more governments adopt B corp legislation. I think a case can be made that B Lab is not truly deserving of tax exempt status. I will follow up with another post on this subject after conducting more research.

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