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Foreword

Andrew Edgecliffe-Johnson, US Business Editor, Financial Times

As a Financial Times journalist in New York, I am expected to know the difference between a C Corp and a S Corp, but even in my day job the finer points of US incorporation structures are not exactly a hot topic (and I won’t tax readers with them here). So I was struck when I ordered some Allbirds shoes and they arrived in eco-friendly packaging that trumpeted the B Corp status held by the San Francisco sneakers startup. Opening the fridge, I realised that the milk carton was similarly branded.

Consumers, employees and even investors once gave little thought to what companies’ charters or certifications encouraged them to do beyond making money for their owners, but that is changing. The rethink of business’s place in society that we have witnessed in recent years has stirred debate about how to bake a public mission into corporate structures.

It is one thing for chief executives to profess an interest in benefiting their people, their communities or the planet; it is another for them to be instructed to do so. But, from California to Paris, we are seeing more companies voluntarily adopt stakeholder-friendly mandates. With a few notable exceptions, investors have not batted an eyelid.

The rise of the public benefit corporation has been a striking phenomenon, but such alternative structures are still exceptions to the rule, and many people in business and investment remain confused about their exact meaning.

In this, our latest Moral Money Forum report, Sarah Murray cuts through the complexities and illuminates a trend that looks likely to become more important to all of us, whether we are assessing our portfolios or simply buying shoes.

When Lemonade launched its initial public offering in 2020, the US home insurance start-up saw its market capitalisation double in the first morning’s trading to $3bn, far above the private market valuation it had secured from early investors such as SoftBank.

With bots signing up customers and managing claims, Lemonade uses artificial intelligence to maximise underwriting efficiency. After paying claims, it gives any leftover money, up to 40 per cent of premiums, to charity.

It is a disrupter in another way, too. Rather than being classed as a C or S Corp, as is usual for large US companies, Lemonade is incorporated as a public benefit corporation (PBC).

State laws in Delaware, where more than two-thirds of Fortune 500 companies are incorporated, dictate that a PBC must balance the financial interests of shareholders with the interests of other stakeholders, such as employees, customers and the environment. It must pursue a specific social or environmental purpose that is identified in its corporate charter.

This was not, of course, the main reason for the frenzied demand: investors were drawn to Lemonade’s innovative business model. That said, the fact that a company with social and environmental sustainability baked into its articles of incorporation attracted such interest is proof of how much has changed since the days when most investors thought sustainability was nice but not necessarily profitable.

Lemonade is not an isolated case. PBC structures were once the preserve of private organisations, entrepreneurial growth companies or sustainable start-ups, but this has started to change. In the past year several private PBCs have gone public and some existing public companies have adopted the new structure.

Veeva Systems, the US cloud-computing group, was the first, with institutions such as BlackRock and State Street among the mainstream investors that supported its conversion. Other US companies followed, including Amalgamated Financial, the first publicly traded financial services company to make the change. Vital Farms and Zymergen, a Californian synthetic biology company, also sought public listings as PBCs.

“The most successful IPO in 2020 financially was a PBC, and that was Lemonade — that’s a market signal,” says Susan Mac Cormac, a corporate lawyer at Morrison & Foerster who teaches at University of California, Berkeley. “It went from one publicly traded company to eight over 12 to 15 months, so it is scaling up very fast.”

The structure offers companies more than simply legal protection for their efforts to take a longer-term, more sustainable approach to business. “You have to show true signals to markets, investors, regulators and consumers that you are going to do something rather than talk,” says Jonathan Webb, founder and chief executive of AppHarvest, an agricultural technology company that began as a PBC and listed this year using a special purpose acquisition company (Spac). “One way is the way you incorporate the company.”

Surprisingly given the country’s political divides, laws introducing alternative structures have passed with bipartisan support across the US, where corporations can incorporate in the state of their choice. At least 30 states now have a public benefit corporation statute or something similar.

“There’s a growing recognition, not just on the left, about the negatives of shareholder primacy,” says Christopher Marquis, the author of Better Business: How the B Corp Movement is Remaking Capitalism, and a management professor at Cornell University, New York.

This rare moment of harmony still leaves plenty of room for disagreement. Some worry that the new structures create legal risks for directors while others view them as a distraction from the focus on shifting mainstream business towards more sustainable practices.

When we asked Moral Money readers whether they thought traditional corporate structures were holding back the shift to a more sustainable, stakeholder-focused form of capitalism, the response was an overwhelming “yes”.

Yet some legal experts argue that nothing in the traditional forms of incorporation prevents companies from pursuing sustainability strategies if they are in the longterm interests of shareholders. This begs a question: is traditional fiduciary duty so open to interpretation that it allows companies to serve all stakeholders — or are alternative corporate entities a necessity to set capitalism on a more sustainable path?

While many people celebrate the growing number of companies choosing to embed sustainability in their articles of incorporation, a new problem is emerging: confusion over the terminology and what the different legal forms entail.

Terms such as B Corp, benefit corporation and public benefit corporation are often used interchangeably, yet they refer to different things. In Delaware, for example, a “public benefit corporation” is a for-profit company, while in California it is a non-profit. “It’s a mess,” says Mac Cormac. “And it will be a mess for some time.”

The most common confusion is over companies that call themselves B Corps. While B Corps must place the same emphasis on delivering social and environmental returns as on generating profit, the B Corp is a certification, not an alternative corporate form.

To become a B Corp, companies must undertake a B Impact Assessment, which is how B Lab, the awarding body, evaluates the effect that their operation has on workers, communities, the environment and customers. B Corp certification is valid for three years, after which companies must reapply.

“More education is needed, because it is confusing to know the difference between the legal structure, which is the benefit corporation, and the certification by the third party,” says Marquis.

Even within the alternative corporate forms, there are different structures and legal requirements. Mac Cormac identifies “three basic flavours”:

• the Delaware PBC, through which shareholders and management agree on the mission in the charter;

• the California social-purpose corporation, which is similar to the Delaware PBC (but is distinct from the state’s previously mentioned twist on the public benefit corporation); and

• the benefit corporation, another state-level piece of legislation, whose statute lists mission factors and requires third-party enforcement and the appointment of a benefit director.

Different flavours of corporate governance existed before the advent of these alternative corporate forms. Some direct companies to consider all stakeholders, as do employee-owned enterprises. Others, including Nordic industrial foundations (foundations that own for-profit companies), tackle short-termism.

In recent years there has been a proliferation of alternative corporate forms — mainly in US states but elsewhere too — which require companies to factor society and the environment into their decisions. Six countries — Italy, France, Colombia, Ecuador, Peru and Rwanda — now have this type of legislation in place, as does British Columbia in Canada.

France has a similar statute that governs the entreprise à mission structure, which was adopted in 2020 by Danone, the multinational food company. In the UK the Better Business Act Campaign, an initiative backed by Ed Miliband, the shadow business secretary, is pushing to amend section 172 of the Companies Act 2006 to ensure all UK companies align the interests of shareholders with those of employees, customers, suppliers, their communities and the environment.

“In all of them, they require a balancing or a consideration of all stakeholders, but they get at it slightly differently,” says Andrew Kassoy, the co-founder and chief executive of B Lab, the non-profit behind B Corp certification. He says B Lab has started to use the umbrella term “stakeholder governance” for the new structures.

While there may be confusion about the different entities, not everyone is dismayed by their abundance. “What is interesting about these different forms is that they allow for new ways to respond in corporate law to societal needs,” says Karen Brenner, the executive director of law and business at New York University Stern School of Business. “Whether or not they’re absolutely necessary remains to be seen, but I like the idea of more diverse answers to challenges and a less homogeneous view of governance.”

If Moral Money readers are united in blaming traditional corporate structures for hampering the shift to stakeholder capitalism, their views on priorities are diverse. These range from altering how productivity and value are measured to eliminating short-term financial targets, giving employees representation on boards and linking pay to long-term sustainability goals.

While some of these fixes require no change in corporate structure, Leo Strine, a former chief justice of the Delaware supreme court, identifies two levers in the PBC that can make a difference.

The first becomes relevant in the event of a company’s sale since, in traditional corporate structures, directors are required to do their best for stockholders by selling to the highest bidder. “The benefit corporation model adopted in Delaware takes away that rule,” he says“. The board can make a business judgment and they have to take into account the other stakeholders. They do not have to take the highest price.”

The second is that PBC legislation does not simply allow companies to consider the interests of all stakeholders — it requires them to do so. “You can’t seek damages but you can sue to enforce benefit,” Strine explains. “So a socially responsible fund could sue if they thought a company was doing something environmentally irresponsible: that helps the directors.”

A different type of incorporation also helps to preserve a purpose-driven mission beyond the tenure of the chief executive. A good example is Danone, where Emmanuel Faber was ousted as chief executive in March. Many saw the event as a blow to the long-term, sustainability-driven approach championed by the former CEO but Faber took a different view.

The trigger for his removal, he told the Financial Times, was the company’s poor results through the pandemic, which weighed on its share price. “So then an activist came in and the CEO was ousted,” he said. “But [Danone] is still an entreprise à mission. So I think it’s a perfect case, if things unfold properly, to show that it’s a very solid model.”

A similar reason drove Allbirds to incorporate as a PBC in 2015. The San Francisco-based sustainable footwear company has a long-term strategy to address climate change at the heart of its business model. What worried Joey Zwillinger, the co-founder, was the idea that as a C Corp a future management team could use the business judgment rule to dilute or even abandon Allbirds’ climate strategy.

“We named environmental conservation in our charter documents to enshrine it as an obligation,” Zwillinger explains. “If the next management team didn’t uphold that obligation, there’d be legal liability that the company would take on.”

While those that have adopted stakeholder governance see operational benefits and a means to preserve their mission, it remains to be seen whether the structures will resonate with the consumers who are among the stakeholders they profess to prioritise.

The number of brands that use the B Corp logo on their packaging suggests that shoppers are already familiar with the certification. Few consumers, though, pay attention to the structures of the businesses they buy from. “With B Corp [certification] you have B Lab, that’s out there marketing that brand,” says Kassoy. “There’s no one doing that for consumers with legal structures.”

Stakeholder governance models could be more effective in winning business with supply chain partners, Kassoy argues. “For a B2B it creates trust in the supply chain,” he says. “And for companies that are doing business with government, it is a way of creating a leg up in a bidding process by showing that you are accountable to the public interest.”

Many Moral Money readers agree, saying that alternative structures enable them to “see the same values” in their supply chain, and that companies with mission-aligned structures are “much easier to work with”. Others, however, say that what counts are a supplier’s values, regardless of its corporate structure.

Another possibility is that mission-aligned corporate structures will appeal to the growing ranks of ESG-focused investors and asset managers. “This is a way of communicating to investors that you actually mean it and are willing to be held accountable to it,” says Kassoy.

While Moral Money readers are not entirely convinced, twice as many investors who responded to our survey said they would view both B Corp-certified companies and registered benefit corporations differently from traditional companies. The reasons include their “diligence in considering longer-term and stakeholder impacts”, their “wider impact on society and planet”, and the belief that “other structures lack credibility”.

This is not to say that a commitment to a dual fiduciary duty has no downside. Moral Money readers highlight disadvantages, from the possibility of deterring investors unfamiliar with or not ready to invest in these types of entities due to the additional reporting burden they impose.

Zwillinger can relate to both challenges. “We now have a significant amount of accountability that we’ve self-imposed on the company and we need to uphold those obligations,” he says. This is exacerbated by the fact that Allbirds has to work across an extensive network of suppliers to gather the information. “For a small company, this is a big lift.”

During the first financing rounds after incorporating as a PBC in 2015, the company faced questions from investors about what the incorporation meant. “They didn’t understand, so we had to do an education for shareholders,” says Zwillinger.

Mac Cormac points to other challenges. There is, she says, uncertainty over the scope of the dual fiduciary duties of PBC directors and officers due to a lack of Delaware case law.

Nor does she see the shift to an alternative business structure as a guarantee against greenwashing. While reporting requirements mean that a PBC cannot make false claims about its social and environmental impact, Mac Cormac says there is room for a company to use its positive impact in one area to mask poor performance in another, particularly in the absence of rigorous measurement standards. “This is where you need government,” she says.