Why being a force for good is central to the enterprise of the future
Updated: Mar 10
The shift from shareholder to stakeholder capitalism
Seth Godin, a business change evangelist tells a great story that captures a paradox of the 21st century: “A woman visits her psychologist and says, ‘Doctor, doctor my husband thinks he is a chicken!’ The psychologist says, ‘That is terrible. Tell me, how long has he believed this?’ The woman says, ‘Six-months…’ The psychiatrist shouts, ‘SIX MONTHS! Why didn’t you come see me sooner?’ The woman sheepishly replies, ‘Because we wanted the eggs.’”
The consumer society of the 21st Century is much the same. We all know about the side effects of the industrial system: pollution; income inequality; soul-destroying jobs; companies behaving unethically; bosses being paid enormous salaries while there are people living on the street – but for the large part most of us have done little to change capitalism because we want the “eggs”. Like our grandparents and parents, we have accepted the capitalistic system because it has given us a lot of affordable stuff. But as Godin concludes, “just because you're winning doesn't make it a good or the right game.”
But there are signs of a quiet revolution and a better game to play. Even before Covid-19, astute leaders were recognising the need and opportunity to change the shareholder-consumption driven agenda. Emerging is a new more positive era of stakeholder capitalism.
What is a Benefit Corporation?
Sometimes small changes in the code of how things are done can change the world and on April 13, 2010, Governor Martin O’Malley made history in the US State of Maryland when he passed a law creating a new type of for-profit corporation – the Benefit Corporation.
With a stroke of his pen O’Malley constituted the power of commerce to generate not only profits but also to deliver positive benefits for society, employees and the environment.
A Benefit Corporation, in the simplest terms, is legally obligated to create benefits for both society and its shareholders. “It’s going to take time for that to get organised,” said Andrew Greenblatt from B Lab, a certification company, which consulted for the State of Maryland during the drafting of the benefit corporation legislation, “but 20 years from now this will be the standard way of doing business. And if you’re not a benefit corporation people are going to ask why not.”
What is the difference between Benefit Corporations and B Corp?
Benefit corporations and Certified B Corporations are often confused. The benefit corporation is a legal structure for a business much like a limited liability company (LLC / Ltd). Whereas, the B Corp Certification, is a third-party certification administered by the non-profit B Lab, based in part on a company's verified performance on the B Impact Assessment.
The Benefit Corporation creates a legal entity enabling long term mission alignment and value creation. Thus Benefit Corporations are legally empowered to pursue positive stakeholder impact alongside profit.
The legal structure protects the company mission through capital raises and leadership changes, creates more flexibility when evaluating potential sale and liquidity options, and prepares businesses to lead a mission-driven. To date 36 US states have joined the State of Maryland in passing benefit corporation legislation.
The growth and development of the benefit corporation movement is supported by B Lab who offer independent certification to companies aiming to do well, by doing good. The B Corp Certificate provides a recognisable label in much the same way the Fairtrade mark offers consumers an easily identifiable independent guarantee of a better deal for Third-World producers.
“The desire to balance profit and purpose is arguably a return to the model that many American companies once followed,” says James Surowiecki, a journalist with The New Yorker magazine in an article he wrote about this exciting new development in capitalism’s history. “Henry Ford declared that, instead of boosting dividends, he’d rather use the money to build better cars and pay better wages. And Johnson & Johnson’s credo, written in 1943, stated that the company’s ‘first responsibility’ was not to investors but to doctors, nurses, and patients.” Working in tandem the B Lab certification and benefit corporation legislation, is having a profound impact on the future of capitalism.
"Corporations primarily create wealth for one group of people and don't add a lot of other value to society," says Andrew Kassoy from B Lab. "If we want to solve a lot of our big social and environmental problems, we need the private sector to play a role because it dominates our economy and fixing those problems requires scale."
Leaders who wish to make a difference to the bottom line as well as deliver meaningful benefits to their co-workers, customers and society now have powerful statutory and certification frameworks that support this quest.
Only America, Italy and Colombia have passes legislation recognising Benefit Corporations. To close this gap B Lab offers the B Corp Certificate. Certified B Corps are required to meet rigorous standards of social and environmental performance, accountability and transparency. There are currently over 4000 Certified B Corporations in more than 70 countries and over 150 industries.
This is not a marketing gimmick or bandwagon to jump onto. By signing up to become a benefit corporation or certified B Corp, the directors and board agree to greater degrees of transparency and accountability. If they fall short, for example, on social issues such as treating employees or the environment fairly, directors can be taken to court and sued.
Conversely the legislation also protects directors who want to pursue social business practices from unscrupulous investors looking for a quick return. Businesses that switch to benefit corporation status must be serious about the role they want to play in society and the legislation offers them protection from profiteering shareholders.
Milton Friedman must be turning in his grave at the growing community of leaders working towards one unifying quest – To redefine success in business by delivering meaningful benefits for the planet, society and all stakeholders.
“If you look at the history of business, I would say that’s how we started,” said Leslie Keil, a legal partner who advises leaders who want to convert to benefit corporation status. “But somewhere along the way, it became just about the bottom line, what your dividends are to shareholders, and what executives are taking home, rather than building a long-lasting business that enriches the community.”
The old paradigm of profit maximisation for shareholders is being replaced by a new paradigm that optimises profits through providing meaningful benefits to employees, customers, and the world.
This new paradigm of doing well by doing good has stellar backing. Michael Porter, eminent professor of business strategy at the Harvard Business School says, “Companies are beginning to compete to change the world for the better. The drive for profit, often criticised for coming at society’s expense, is driving and enabling solutions to many of the world’s most challenging problems.”
We are currently witnessing a massive paradigm shift in thought leadership in terms of what makes companies competitive as well as contributors to society.
Organisations cannot be successful If the world is falling apart around them. They must be part of the solution. This change is now progressing at full speed. Each year since 2015, Fortune Magazine has published what it calls the ‘Change the World List’ – 51 mega corporations making a considerable impact on major global problems and delivering meaningful benefits to stakeholders and society as part of their core competitive strategy.
Importantly the Change The World List identifies that doing well by doing good, “is not meant to be a ranking of the overall ‘goodness’ of companies or of their ‘social responsibility.’’’ Rather Fortune Magazine explains, “big corporations are complex operations that affect the world in myriad ways. The goal is simply to shine a spotlight on instances where companies are doing good as part of their profit-making strategy, and to shed new light on the power of capitalism to improve the human condition.”
Which brings us to corporate social responsibility and ESG. “Corporate leadership is not just about attracting investors; it’s also about doing what’s right for business. Current trends go beyond previous models of corporate social responsibility precisely because more companies see that a focus on social and environmental impact affects the bottom line,” says Judith Rodin, the president of the Rockefeller Foundation and author of The Power of Impact Investing. Giving away a percentage of profit to charity does not go far enough and while it may be better than doing nothing, it continues to perpetuate an out-of-date shareholder model through the façade of good corporate citizenship.
Increasingly companies that are on quests to find solutions for society’s greatest problems are going to end up making a lot of money. Assets managed under socially responsible principles surpassed $35trn in 2020, up from $30.6trn in 2018 and $22.8trn in 2016, after doubling to more than $6 trillion between 2012 and 2014.” This is exponential growth. Rodin’s study for the Rockefeller Foundation reveals that “almost half of all high-net-worth investors want to align more of their investments with their values.” This figure rises among the Millennial Generation, who will inherit more than $30 trillion over the next few decades and 92 percent believe that a business’s purpose extends beyond profit.
Leaders now have a choice: continue to perpetuate the old capitalist paradigm or join a marvellous adventurous quest and become part of a new paradigm for creating sustainable competitive advantage, economic value and wealth that delivers meaningful benefits across society and the world.
Let us allow former champion of shareholder capitalism Jack Welch to have the last word: “On the face of it, shareholder value is the dumbest idea in the world. Shareholder value is a result, not a strategy.”