22 Jul Why Big Business ( And Lawyers) Needs To Champion The B Corp Movement
We recently participated in the first Legal ThinkTank for B Corps in Australia chaired by Mele-Ane Havas of Small Giants and B Lab CEO Alicia Darvall and featuring B Lab Founder Bart Houlahan who offered insights into US establishment of the B Corp legal structure.
B Corporations are businesses that meet the certification requirements set by the not-for-profit B Lab in New York. The certification process assess the social and environmental performance of companies with a focus on accountability and transparency towards stakeholders. It is based on the philosophy that businesses cannot operate in a vacuum but need to play their part as a member of a larger ecosystem. Right now over 1000 companies worldwide are certified B Corporations.
From a legal perspective, B Corps are about formally recognising the interests of community stakeholders – employees, customers, community and the natural environment – in addition to shareholders. In the US, the government has supported the movement, by introducing legislative reform in order to give companies more freedom to determine their corporate priorities. The benefit corporation legislation is evidence that a global trend is emerging where businesses take greater social and environmental responsibility.
This global trend has largely been driven by consumer demand. Research shows that over 55% of consumers will pay more for products and services that advance social or environmental issues with this figure growing by 10% from the previous year*. The trend is being spearheaded mainly by a younger generation who see stakeholders as the foundations of the economic health of a company, not a CSR program spinning out of the marketing department. According to the Harvard Business Review, 50% of the global workforce seek work that is personally fulfilling and connected to a larger purpose**. This is a radical shift away from the “business as usual” or “grow at any cost” mentality of previous decades.
In the words of former Havas Worldwide CEO, David Jones, author of Who Cares Wins “doing good is just good business” or more bluntly by Patagonia Founder Yves Chouinard “…You do the right thing for the environment and you’ll be even more profitable and if you don’t you’re going down.”
WHAT ARE THE LEGAL RISKS OF BECOMING A B CORP IN AUSTRALIA?
So for a company director in Australia wanting to be a “profit for purpose” company, what are the options, the risks and the opportunities of becoming a certified B Corporation?
B Corp certification requires applicants to demonstrate their commitment to social and environmental responsibility in the company’s instruments of corporate governance. Today, Australian companies are permitted to include in their constitutions a requirement for directors to take stakeholders into consideration when making a decision. We ourselves have done this.
There are some unanswered questions that sit uneasily with those of us in the realm of corporate law. A critical question is whose interests will prevail in the event of competing interests between shareholders and stakeholders and could a director be held to be in breach of their duties if they fail to strike the right balance?
This balancing act would not be too different from what is currently required from directors in Australia. Unlike the US, Australian directors not have a statutory obligation to maximise profit. The director must simply act in the best interest of “the company as a whole” balancing any competing interests in accordance with “reasonable business judgement”.
On the question of director liability, it is doubtful that non shareholder stakeholders would in fact have standing to sue the directors or its members as the constitution binds only the company and its members (shareholders). This does raise questions regarding the effectiveness of constitutional recognition of stakeholders’ rights, however such companies are likely to have many members that are equally invested in the B Corp philosophy, which will self-regulate the sector to some extent. As the B Corporation certification gains popularity in Australia, the simplest answer may be legislative reform to resolve potential uncertainty.
In our view, the inherent risks of attaining B Corporation certification in Australia from a governance perspective, are low for companies with few shareholders eg SMEs and start ups, provided that advice and good policies & procedures are followed.
The issue may be different for larger more complex organisations who have more of a range of stakeholders and larger pools of shareholders. In a lot of cases the shareholders of publicly listed companies are the stakeholders, so in some regards the two are already inextricably linked and decisions regarding their interests are one in the same. However inevitably there will be clashes and compromises will need to be made. This is where the US provides guidance.
PATHWAY FOR BIG BUSINESS TO BECOME B CORPS IN AUSTRALIA
The US has provided a clear model of resolving all these uncertainties at law, for example quarantining the director’s personal liability for failing to consider the “general public benefit”. The US example in fact, provides a path forward for Australian big business to embrace the B Corporation movement as a once in a generation opportunity to become 21st century globally competitive businesses.
For example, had Qantas been a B Corp and considered its stakeholders interests (employees, customers and community) prior to sacking 5000 of its employees this year as a means to curtail its losses, perhaps a different more creative solution could have been reached?
For example, could they have come back to their core purpose and asked their employees and customers to help them, appealing to national pride to support one of Australia’s iconic brands? Loyal employees and customers may have in fact rallied behind the company as brand ambassadors if their voices had even been considered. Profits could have turned around without the cost, distress and social impact that the redundancies have caused.
In our view there are a few stepping stones required to give confidence to larger businesses to become B Corps in Australia. Arguably, in this new economy they will have little choice but to adapt as their younger workforce and consumers make values based choices in the future.
The B Corp Thinktank will continue its discussions in the forthcoming months, with proposals (if any) for legal reform in this area. We intend to continue working with the B Lab Thinktank with the aim of creating a legal pathway for more companies to become B Corps in Australia in whatever form that may be.
In the meantime, companies wanting to undertake B Corp certification can be confident in their ability to so under existing Australian law. In fact, the assessment process is a great way to strengthen corporate governance generally.
If you’d like some help or would like to know more about the legal frameworks required – we can take you through the process and/or connect you to the B Lab team.
B Lab: firstname.lastname@example.org
*Doing Well By Doing Good, Nielson Report 17 June 2014
**Jeanne C. Meister and Karie Willyerd, Mentoring Millennials’ May 2010, Harvard Business Review