January 2010
While on a recent flight to the annual meeting of the Social Venture Network, an association of socially-conscious business leaders, I had a chance conversation with the woman sitting next to me. Explaining that I was writing a book about ‘good companies,’ she innocently asked "Isn’t that an oxymoron?"
Clearly she was influenced by the news from Wall Street. I told her that a new breed of positive impact companies and social enterprises are quietly emerging around the world to reshape business. These companies range from social ventures like One World Health, created to deliver inexpensive drugs to the poor, to financial innovators like Kiva which uses the internet to match individual investors in rich countries with micro-entrepreneurs in Africa, Asia and Latin America and ShoreBank which has patiently invested in loans for rebuilding America’s inner cities. Environmental innovators like TerraCycle are creating a revolution by turning waste garbage into gold. There are also some global behemoths like Unilever which operates a free community laundry in the slums of Sao Paulo, Brazil and Interface, a billion dollar company that transformed itself from producing carpets which end up as landfill to stewards of the earth producing recyclable carpeting.
These enterprises absorb the very best from the public, private and voluntary sectors to protect the environment, build community and work for the common good. Every company impacts the world; many impact the world in ways they hardly imagine. For every Wall Street ‘Bad Samaritan” there are many little enterprises like Benetech, producer of reading machines for the blind and Indigenous Designs a Santa Rosa, California based fair trade manufacturer of stylish clothing produced high in the Andes. This prototypic good company promotes social justice by paying premium wages to the women cooperatives, using natural dyes and reinvesting in their communities.
Why aren’t there more good companies? The fact is that companies seeking to promote social aims are subject to legal constraints restricting their ability to access financial markets. Some flexibility under current corporate law permits pursuit of broader social aims, but in practice investors are put off when a for-profit company has a social mission. To respond to the limitations of current legal forms, new structures are emerging that could facilitate a seamless web between corporate action and the public interest.
Reforming the Corporation
Allen White, a cofounder and former CEO of the UN's Global Reporting Initiative says "we need to return to the original conception of a corporation as an entity authorized by the government to harness private interests-innovation, competitiveness and wealth creation—to serve the public interest." He questions the excessive role of shareholder interests in defining directors’ fiduciary duties. "The notion of the company as the property of passive, remote, and transient shareholders is anathema to creating a culture of social responsibility. We should encourage ownership structures that align with the concept of the public interest."
Susan MacCormac, partner with the international legal firm Morrison and Foerster, told the Summit on the Future of the Corporation "the prevailing corporate form focuses on maximizing profit for the shareholders at the expense of other stakeholders—especially employees, the community in which it operates, and the natural environment. Even corporations that strive to integrate corporate social responsibility (CSR) into operations face constraints on their ability to pursue deep social responsibility, primarily as a result of the fiduciary obligations of their boards of directors." The for-profit corporation, as the engine which drives corporations to operate efficiently seems to have run off the cliff.
Among the new corporate models is the B-Corporation, a community of companies that brand themselves as ‘beneficial to society.’ Speaking at the founding meeting of B-Corp in San Francisco, B-Corp co-founder, Jay Coen Gilbert declared to an audience of over 100 companies "We are setting out tonight to transform the economic landscape. We foresee an economic democracy which will harness private interests to serve the public interest earning fair returns for shareholders, but not at the expense of the legitimate interests of other stakeholders and without compromising the ability of future generations to meet their needs."
B-Corporations agree to undergo a rigorous screening on several categories of social and environmental performance. These companies are required to incorporate stakeholder –not just shareholder—governance provisions into their legal charter. And they are required to give something back to the community.
In addition, there is the Minnesota Responsible Business Corporation Act. This voluntary cutting edge, corporate form allows a company to add the letters "SRC" after its corporate name indicating that it is a "Socially Responsible Corporation." The legislation is intended to permit companies to integrate a dual focus on financial success and social responsibility. The SRC must consider the interests of the stockholders, customers and creditors, the public interest and the long term as well as short term interests of its stakeholders. SRC’s would no longer be required by law, as they are now, to maximize short-term profits. Moreover, employees would elect to percent of the members of the board of directors and the company would be required to issue an annual public interest report.
The Low Profit Limited Liability Company ( L3C ) promises a for-profit company with a non-profit soul. This variant of the LLC, (Limited Liability Company), the corporate form recognized in all 50 states, allows profits to be used to finance social activities including low cost housing, urban redevelopment or educational programs and also to pay modest dividends to investors.
These corporate forms parallel British reforms enacted in 2005 creating the Community Interest Company (CIC). "A CIC is a limited liability company that is designed for use by those who want to conduct a business for the community benefit, and not purely for financial advantage." A CIC must pass a “community interest test” to ensure that it operates in the public interest and it must file annual report detailing how it spends its funds. Non-profit charities cannot qualify as CIC’s but they may invest in them or own them.
A crisis can provoke positive change; the Love Canal resulted in the passage of the Environmental Protection Act by the US Congress in 1971. The CERES Principles for responsible banking came about after the Exxon-Valdez oil spill. And toy giant Mattel’s recall of toys forced the company to change its management and environmental practices.
The current spate of financial crises demonstrates that if corporations are to serve public well-being then a change in the existing corporate forms to reflect our changing values should be a top item on our agenda of reform in the new decade.
Robert H. Girling, Ph.D.
Professor in the School of Business and Economics at California State University, Sonoma is a Fulbright Senior Scholar. He received his Ph. D. from Stanford University and has taught and consulted in 15 countries. He is writing a book about Good Companies.
