Can We Restore Trust in Capitalism with Benefit Governance?

September 29, 2020

Policy Is Needed to Move Our Economy From Stock Value to Shared Value

This article is a personal perspective from two employees at B Lab, the nonprofit behind Certified B Corporations. In this series, we invite individual B Lab employees to share their experiences, inspiration, hopes, and challenges as they work toward a more inclusive and regenerative world. This edition of B Lab Voices is from Holly Ensign Barstow, Director of Stakeholder Governance and Policy, and Andy Fyfe, Manager of B Corp Growth and Activation. 

Capitalism.​ Depending on who you ask, the sentiment associated with this word has become polarized, with many considering capitalism as a source of global ills and others lauding it as the primary reason for our global development and progress. While it might be true that, over the last 50 years, capitalism has lifted billions of people out of poverty, the full truth is that the rules and norms that govern our financial markets aren’t designed to create an equitable prosperity. The rules that govern our economic system have left us and the economy vulnerable, and have created norms that prioritize individual company profit over our society and the needs of a warming planet. We stand at a crossroads and also at an extraordinary moment of opportunity: Trust in capitalism is at a tipping point.

Holly Ensign Barstow, Director of Stakeholder Governance and Policy
Holly Ensign Barstow, Director of Stakeholder Governance and Policy

The backbone of B Corp Certification is a legal commitment to the well-being of our planet and people that gets baked into the DNA of a company. Why is this important? Because law and culture dictate that the sole duty of corporate directors is to maximize shareholder value by all legal means, period.

However, the importance of making this legal commitment goes beyond just fulfilling the requirements of B Corp Certification. Over the past year, we’ve seen many policymakers, CEOs, and other influencers call for a broader purpose for companies and for our financial system as a whole. They argue that companies must embrace “purpose” and that a commitment to purpose is, as Larry Fink wrote in his annual letter to CEOs, “becoming increasingly central to the way that companies understand their role in society.” In fact, in August 2019 the 181 CEOs of the Business Roundtable committed “to lead their companies for the benefit of all stakeholders — customers, employees, suppliers, communities and shareholders.”

These large companies and investors are finally noticing that a root cause of many systemwide challenges that we face as a country is the unyielding focus of shareholder profits for individual companies to the detriment of our society, planet and, thus, our economic system as a whole. We’ve seen examples of this focus highlighted in new headlines, including the opioid crisis, skyrocketing generic drug prices, wage stagnation, the racial wealth gap, the Boeing 737 Max disaster, and our brittle supply chains’ inability to respond to the COVID-19 pandemic. But what did these companies and investors actually change after making a public commitment to their stakeholders and purpose? The answer, according to the experts: Not much.

Andy Fyfe, Manager of B Corp Growth and Activation
Andy Fyfe, Manager of B Corp Growth and Activation

That realization has spurred a shift in B Lab’s position on public policy in a big way — one that we are proud of and feel is so needed right now. B Lab U.S. & Canada co-CEOs Anthea Kelsick and Ben Anderson released this letter on September 28, explaining that companies and investors must be obligated to work together to re-focus corporations on value creation to promote good jobs, healthy communities, the environment, and a more just and inclusive economic system. Waiting for voluntary change simply will not get us where we need to go fast enough to solve the challenges we face. To restore trust and capitalism — and for capitalism to be worthy of our trust — we must pull policy and regulatory levers to ensure that all companies and investors are responsible for the impact of their decisions on all stakeholders and the economic system as whole.

The letter and a related 50-page policy report released by B Lab and developed in partnership with The Shareholder Commons, detail actions by Congress, the Securities and Exchange Commission, the Department of Justice, and the Federal Trade Commission that are necessary to transition the U.S. economy to stakeholder capitalism. Without putting in place specific, important policy and practice changes, the promise of taking a stakeholder focus becomes nebulous and unlikely to achieve its goals. These policy proposals revolve around a core reform: mandating that companies and investors adopt “benefit governance,” one form of what is often called “stakeholder governance,” at individual companies. Benefit governance is a theory of governance that requires both investors and companies to look beyond financial returns and take responsibility for their impact on social and ecological systems on which a more equitable economy depends.

“These reforms are necessary because the law that currently governs investment and corporate fiduciaries actually requires them to chase profits above all else, regardless of how it may hurt workers, their communities, or the economy,” B Lab U.S. & Canada co-CEOs Kelsick and Anderson say in their letter. “Incentives are misaligned across the system. The time has come to require companies and investors to be better stewards of our economy.”

When the most powerful forces in our society — the economic system and financial markets — are designed to always prioritize the few over the many, we will continue to see environmental degradation, wealth inequality, and racial injustice. We won’t change the endgame of this focus on individual company returns until we broaden the view to include stakeholders and how business and investment decisions affect them. Our ideas about benefit and stakeholder governance will not solve everything; a solution will require many systemic changes. But they are an important part of getting to the root cause that perpetuates many of these problems.

Why Now Is the Time to Address the Problems with Capitalism

On September 14, 2020, Imperative21, a coalition of nonprofit and business organizations that includes B Lab, took over the Nasdaq stock exchange ticker board with stakeholder capitalism messaging in recognition of the 50th anniversary of the publication of Miton Friedman’s essay on shareholder primacy in The New York Times Magazine.
On September 14, 2020, Imperative21, a coalition of nonprofit and business organizations that includes B Lab, took over the Nasdaq stock exchange ticker board with stakeholder capitalism messaging in recognition of the 50th anniversary of the publication of Miton Friedman’s essay on shareholder primacy in The New York Times Magazine.

Beyond the opinions of Fortune 500 executives and large investors, real people are demanding change, too. Based on a January survey of a representative sample of Americans, Data for Progress says that stakeholder governance that expands fiduciary duty is the most popular policy for corporate reform, with 73% of Americans in support or strong support. This is slightly more popular even than employee ownership (70%), and significantly more popular than restating corporate purpose (63%), putting workers on boards (59%), and limiting stock buybacks (55%). Stakeholder governance has support among Americans who describe themselves as “conservative” and “very conservative,” 62% of whom support changes in fiduciary duty. In fact, self-described conservatives prefer concrete changes to fiduciary duty six times more than restating corporate purpose. And, to date the passage of benefit corporation legislation has had nearly 90% approval on all floor votes, with 32 unanimous floor votes, and 17 Republican Governors, including Vice President Mike Pence, have signed the benefit corporation legislation into law. It seems that, even before the COVID-19 pandemic, a broad coalition of Americans could be built to support a new contract between business and society.

A legitimate commitment to stakeholders and purpose actually necessitates a change in the legal DNA of companies through benefit governance. We’ve seen thousands of Certified B Corporations make this change. They have made benefit governance mainstream in the private markets, with companies like Lemonade raising $480 million from high-profile firms like Softbank and Sequoia Capital. We’ve also seen public B Corps pushing the market, as Danone and Amalgamated held shareholder votes to adopt benefit governance.

B Corps have led the way in proving this is a viable model for business. They have proven that the sole duty of the corporation needs to change, but they can’t do it alone. Investors, other companies, and policymakers need to be a part of the change. The time is right.

“B Corporation, this movement — some call it ‘stakeholder capitalism’ or ‘compassionate capitalism’ — has the potential to change American society. Now is the time for us to live up to those commitments.” — Kenneth I. Chenault and Rachel Romer Carlson in The New York Times, March 2020

So far in 2020 alone:

  • B Corp and benefit corporation Lemonade, with a $2B valuation and with $480 million-plus in capital raised, filed its S1 as a benefit corporation. It was the most successful IPO of 2020 to date. B Corp and benefit corporation Vital Farms followed with its IPO, and on the first day of trading went up 60%, with stock selling at $35 from its initial price of $22. Vital Farms raised $205 million, offering 9.3 million shares. As of early September, the company’s market cap was $1.38 billion.
  • Three powerful influencers called out the Business Roundtable (BRT) and large institutional investors like Larry Fink (BlackRock) in a Harvard Business Review article. Former Chief Justice of the Delaware Supreme Court, Leo Strine Jr.; Timothy Youmans, Engagement Director at Hermes Investment Management; and Bob G. Eccles, Visiting Professor of Management Practice at Saïd Business School, University of Oxford, addressed the fact that in the face of the COVID-19 pandemic, the BRT, which almost exactly a year ago pledged to factor stakeholders into its decision-making, and its members have failed to meet this moment.
  • Amalgamated Bank, the first publicly traded company to hold a shareholder vote to adopt benefit corporation governance, received over 90% support from shareholders. This vote included major holders BlackRock and Vanguard, and 27,738,500 shares voted in favor while only 814 voted against adopting a legal commitment to stakeholders in their articles. What’s most monumental is the proxy advisors (firms that advise investors how to vote) recommended in favor of this amendment.
  • Emmanuel Faber, the CEO of Danone, pushed ahead with a plan to convert the entire multi-national Danone entity into a French status that builds a commitment to mission and purpose into its legal DNA with real liability for directors if they fail to achieve these commitments. Danone received unanimous support beyond the two-thirds requirement.
  • $56B Market Cap Veeva Systems announced in September that it was forming a board committee to explore adopting benefit corporation status.
  • B Corp and benefit corporation City First Bank announced in August a merger with Broadway Federal. They have pledged that the resulting public company will adopt benefit corporation status, requiring a vote of their public shareholders.
  • Delaware removed appraisal rights and reduced the shareholder vote from a supermajority vote to a 51% majority vote. Delaware has passed legislation that makes these two important changes to the Public Benefit Corporation statute. Both of these changes sound minor, but they actually have huge implications for the accessibility of this legal status. The first change makes conversion much easier for public companies. The second change means that private companies that have complicated capital structures (lots of investors) don’t have to worry about investors wanting to cash out.

The rules of the game are changing. Now is the time to ensure they are fair, just, and equitable to build a more inclusive economy and regenerative planet.

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