TWO FUNDAMENTALS OF BUSINESS
As I entered my first business courses in college, we quickly learned the two fundamentals of business (and two tenants of U.S. Corporate Law):
- Business exists to maximize profit
- Business exists to maximize shareholder (investor) value
With these two fundamentals (heavily popularized in the 1970s) in mind, big business got into the habit of slashing costs to reduce their expenses and, consequently, increase profits. Doesn’t sound like a bad idea, right? In theory, these profits would either be reinvested in the business for long-gain or distributed evenly to shareholders. But as the saying goes, "The road to hell is paved with good intentions," and today, growing concern has been expressed over this.
The eventual consequences? Benefits to society and the environment have been often sacrificed. Some examples:
- Unduly enriched capital gain of CEOs and shareholders in close circles
- Customers short-changed on value
- Cheaper materials and processes used at the expense of the environment
- Hard-earned intellectual property was off-shored for cheaper labor. (Terrific news for emerging and developing international economies, despite being at the great expense of ours.)
- The fabric of our communities began to change in ways that the American Dream is like a fairytale.
A Benefit Corporation is a legal corporate entity in 27 states + Washington DC while 14 other states are working on it. This means that a business can exist for reasons other than maximizing profit, like considering social and environmental benefits to society. In New York State, there’s 6 public benefits to choose from, like acting to improve human health or the environment. Let’s say you own the amazing outdoor Brand Patagonia (which is a Benefit Corp) and have built tremendous success around your environmental roots, and you eventually want to sell your business, the new owners must adhere to the positive impact on society you have stipulated in your corporate documents. In addition to acting on your stated mission, you must file an annual benefit report and ensure third party certification from organizations like B-Lab or Global Reporting Initiative.
B-Corp Certification (AKA B-Lab Certification) is the primary 3rd party certification tool. The process could take from 6-weeks to 6-months or more, and many businesses don’t pass their first time but come out with benchmarks to work towards. A score of 80 is necessary to qualify. Once you achieve that, you can let the world know your business beats the market when it comes to social and environmental best practices down. (Hopefully you’re making money, too. If not, you should definitely call us!) There is an annual certification fee, based on company revenues.
Being legally incorporated Benefit Corporation in your State serves exactly this purpose: to align, protect and advocate capital, business mission and believers in actions that promote social and environmental good that benefits us all.
Here’s a simple example to explain, using Seventh Generation, a producer of green cleaning products. What I love about Seventh Generation is exactly what keeps me coming back as a customer:
- All products are USDA bio-based certified
- Employees spend 1% ever year giving back to the community
- LEED-Gold offices
- And, what really keeps me in the game is that their price points are competitive. So of course, I’m going to support the sustainable option whenever possible.
If Seventh Generation was not a Benefit Corporation and, for example, was spending extra money on R&D to produce sustainable packaging that reduced their net income by 1-2% (which could mean $100,000s for this $300mm company) , Seventh Generation’s investors could hypothetically convene to stop such spending. After all, the increase in costs to produce sustainable packaging that is good for our environment translates to less money in their pocket, but leads to less waste in our landfills, polluting our environment, more blue skies and, yes, blue birds, too. Given the rate our global population is growing, we have to start somewhere.
Peace, love, happiness & tree hugs,