Doing Good to Do Well Gets a Legal Boost in California
Thanks to a recent California decision to make the B corporation mission -- to boost social good and generate profits -- legally binding, the trend, which has been building for a while, should have even more market legitimacy.
Legal Recognition for a Social Conscience
In early January, California joined Vermont, Maryland, New York, New Jersey, Virginia, and Hawaii in legally allowing companies to specify they are pursuing social good as well as shareholder value in their charters. Benefit corporation bills have been introduced in Colorado, North Carolina, Pennsylvania and Michigan.
Well-known outdoor apparel brand Patagonia was one of the first California companies to seek the B corporation status after the law went into effect.
Traditional corporate law focuses solely on maximizing shareholder value, forcing many entities to seek nonprofit status or else face the possibility of shareholder lawsuits. B corporations are defined as "a new type of corporation which uses the power of business to solve social and environmental problems," according to the nonprofit company B Lab, which certifies benefit corporations under a process similar to those used to designate Fair Trade goods or qualify LEED construction.
About 100 companies, mostly privately held, possess legal B corporation status right now, although 517 companies have been certified as B corporations by B Lab. You've probably heard of some of them, and even use their products. Method and Seventh Generation are two of the best-known B corporations.
The currently lackluster American economy is a constant reminder that many corporations did the wrong thing in their pursuit of short-term profits over all else. We're all still experiencing the ill effects of the financial crisis fallout.
For example, restaurant Busboys and Poets, a D.C.-based benefit corporation, is doing well enough to expand its locations. Not only is it a hybrid corporation that joins commerce and compassion (and pays tribute to poet Langston Hughes), but it's a hybrid concept altogether, merging a delicious menu including vegetarian and vegan options with fair trade shops, books, poetry readings, community engagement, and political activism.
According to a recent Washington Post feature, Busboys and Poets restaurants use local organic beef, cage-free eggs, biodegradable cutlery for takeout, environmentally responsible cleaning products, and wind power. In addition, its employees are treated exceptionally well in an industry that often skimps on worker benefits; the lowest wage is $10.25 per hour, and they receive paid sick leave and health care for full-time workers.
Clearly, the elements Busboys and Poets has incorporated into its business put the "benefit" in the concept of a B corporation. And guess what? It still generates a profit.
The Beneficial Spirit
Some publicly traded companies may not have B corporation status, but they share the spirit of social good that permeates benefit corporations.
Take Google (GOOG), which has a philanthropic arm called Google.org, whose projects are specifically for "addressing a social challenge and serving the public good," with a focus on climate change, clean energy, and global health.
Whole Foods Market (WFM) has always made it clear it cares about community and environment as well as near-term profits. For example, the grocer donates food to food banks and shelters, and several times every year, it holds "5% Days," when 5% of the day's total sales are donated to local nonprofits or educational organizations.
Both of these companies are very successful and highly profitable. Some of their initiatives may not sound like they're driven by "maximizing shareholder value," but over the long haul, they most certainly are.
The increasing acceptance and awareness of benefit corporations helps underline the fact that despite conventional wisdom, for-profit entities' beneficial, benevolent actions don't necessarily hamper profits, but can actually enhance them. That kind of win-win situation is a benefit to all, and offers a shot of hope for the American economy's future.
Motley Fool analyst Alyce Lomax owns shares of Whole Foods Market and manages a socially responsible portfolio for Fool.com. The Motley Fool owns shares of Whole Foods and Google. Motley Fool newsletter services have recommended buying shares of Google and Whole Foods.