Our Economic System Isn’t Working: The Global Crisis Drives a Renewed Market Focus on Stakeholder Capitalism

July 20, 2020

Benefit Corporation IPO and Approvals Signal Stakeholder Focus Is a Growing, Resilient Alternative

The COVID-19 pandemic has made for an economic roller coaster, as recent stock market rebounds are tempered by rising virus rates in the U.S. and hesitancy among many consumers and workers to return to “business as usual.” The profit-focused system that drives U.S. and global economic markets, however, faces new questioning due to COVID-19, which revealed our economic system’s brittle nature and inherent faults. By putting profit margins and shareholders above all other stakeholders — workers, customers, community, environment—our dominant model of capitalism benefits the few and burdens society and planet.

The market also rose amid racial justice protests, with one analyst noting that “The U.S. riots, disturbing as they are, are also being discounted in the greater economic picture” — a reflection of the fact that more than 60% of U.S. shareholders are white. The “trickle-down effect” here means that white shareholders drive corporate decisions regarding leadership and business practices.

The very governance structures of businesses are perpetuating systemic racism, and must be addressed if lasting change is to take hold in our global economy. As Miguel Padro of the Aspen Institute says, “The structural racism in corporate governance reverberates far deeper than the top tiers of corporations. It impacts workers hardest… From there, impacts cascade throughout society, leaving working people across the board and working people of color, in particular, in staggering precarity. We cannot ignore what the last few months have laid bare.”

Structural Change Through Stakeholder Governance

These systemic cracks are renewing calls for institutional investors like BlackRock and the Business Roundtable to act on their earlier statements and creating calls for economic change from businesses already working to build an economic system that benefits all and is more resilient because of its inclusive nature. These companies are considering the effect of their everyday practices on all stakeholders, while balancing the need for profit with the needs of people and planet.

Businesses looking to lock in stakeholder governance can turn to a legal status known as the benefit corporation — now recognized in 36 states, plus Puerto Rico and the District of Columbia, and in British Columbia, Italy, Canada, Ecuador and Colombia — that, once approved by shareholders, holds true through leadership changes and capital raises. (For-profit companies also can choose to become Certified B Corporations by achieving a minimum score on the B Impact Assessment administered by B Lab, the nonprofit that oversees this business community.)

The benefit corporation model is gaining new momentum during this time of global uncertainty and social upheaval, as signaled by several recent events involving businesses that have adopted or are pursuing the governance model for a variety of reasons.

Stakeholder Governance Model Gains Market Approval

Lemonade, an insurance tech startup with a goal to “transform insurance from a necessary evil into a social good,” recently made headlines for its July 2 debut on the New York Stock Exchange, becoming the second public benefit corporation and B Corp to do so. Investors gave Lemonade a warm welcome, as the value of its shares more than doubled during its first week on the stock market.

Lemonade CEO Daniel Schreiber says the company’s status as a benefit corporation since its founding in 2016 has shaped its work from the start.

“Our very business model has social impact baked in: A portion of our underwriting profits go to nonprofits of our customers’ choosing — what we call the Lemonade Giveback,” he says. “So we’re taking care of our customers while our customers take care of their communities, and as Lemonade grows, so does the potential of Giveback.

“We became the second public benefit corporation to go public, and it looks like investors are open to the idea that doing good and doing well are mutually compatible, and perhaps even mutually reinforcing,” Schreiber says. (The first benefit corporation IPO was by Laureate in 2017; Vital Farms, another benefit corporation and B Corp, recently filed for an IPO.)

Stakeholder Governance Model Gains Shareholder Approval

With annual global sales of more than $28 billion, multinational food company Danone holds sway as a market and industry leader with a growing focus on the connection between the health of people and planet.

At its June 26 annual shareholder meeting, Danone gained approval from 99% of shareholders to adopt the Entreprise à Mission model, a corporate status created in 2019 by French legislation. The decision to pursue the change was driven in part by the COVID-19 pandemic and its ripple effects on economic, health, and food systems around the globe, CEO Emmanuel Faber said during a recent Fortune podcast.

The pandemic also accelerated Danone’s goal of becoming the world’s largest B Corp, which Faber says the Paris-based company now hopes to achieve by 2025.

“We want Danone to become a B Corp because we believe that in the world in which we live, and certainly in the world we are entering right now, there will be increased attention paid to the ethos of companies and of brands by consumers, governments, employees, civic society, and many more,” he says.

Across the Atlantic Ocean, another influential B Corp earned shareholder approval to make the legal commitment to stakeholders by becoming a benefit corporation. In late April, 99% of shareholders approved benefit corporation governance for Amalgamated Bank, requiring board members to consider the effects of their decision on stakeholders and making it the second benefit corporation on the Nasdaq index. Shareholders also endorsed an employee stock purchase plan that aims to enhance worker recruitment, retention and connection.

Amalgamated Bank was founded in 1923 with the goal of providing banking access — once reserved for corporations and wealthy individuals — to hardworking people and their families. Since then, the bank has continued to build social responsibility into its business model, becoming a B Corp in 2017, achieving its IPO on Nasdaq in 2018, amassing more than $5 billion in assets, and growing to serve customers and clients sharing its purpose-driven mission.

Read more about how stakeholder governance can help address the needed changes in our economic system:

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