This is part of a series of interviews with people who are transforming the way business is done. This discussion with John Montgomery, is the second in a series. He delves deeply into the value of B Corps, for all of us.
The Conscience That’s Built Into the BCorp.
I don’t expect you to remember the first episode of my three-part interview with John Montgomery. I’ll simply reintroduce him. He is one of the top corporate lawyers in the country, and he is committed to transforming Capitalism. He has both the legal mind and philosophical depth to do it. He is creating positive global impacts as a lawmaker, bringing conscience and care to corporate behavior, and guiding a new generation of leaders who will change the way business is done.
John has woven his background in law, business, and philosophy into creating new legislation. He was one of the chief architects of the California benefit corporation, which became law in 2012. And he has continued to be highly influential as an international advocate for the benefit corporation, B Corp, as it’s affectionately known.
Leslie: Let’s look at the upside now, the B Corp. How does it benefit companies, stakeholders, people, and the environment? And especially how does it prevent sociopathic corporate behavior?
John: Well let’s first get a little bit of nomenclature out of the way first. There’s a creature of statute, which is the benefit corporation. There are 35 states, and Puerto Rico and the District of Columbia, that have more or less adopted the Model Benefit corporation Legislation.
Now the leading third party social and environmental assessment tool is the B Lab certified B Corporation assessment. Any business – a partnership, a sole proprietorship, a multinational, a limited liability company or cooperative or corporation – can take the certified B Corporation assessment. A business that passes the assessment is able to call itself a certified B Corp.
It’s very common for people to conflate the benefit corporation with a certified B Corp because everybody seems to call each of these two distinct things a B Corp. So, I just wanted to set the stage with the terminology.
Leslie: It’s good to understand more about the B Corp, and the nomenclature. Here’s what I’m wondering. How does being a B Corp or a Benefit Corp benefit the company itself, along with its stakeholders, employees, and customers? What is the benefit for them as companies?
John: Well, let me get to the benefits a little bit later. Let me first be a legal nerd. I’m going to try to make you and your audience expert in the Benefit corporation itself. I want to try to simplify the differences between a Benefit corporation and the C corporation that we all know and love. So essentially, a Delaware corporation has, as we just discussed, one legitimate purpose as a single purpose entity: to maximize stockholder welfare. The directors have fiduciary duties to only one stakeholder, the stockholders.
Instead of a single purpose and single stakeholder model, the Benefit corporation uses a multiple stakeholder and multiple purpose model. Here are the four key differences between a regular corporation and a benefit corporation so that your audience will be experts.
1.) The benefit corporation has a dual purpose: you optimize profit for shareholders as usual, and you’ve got a general public purpose which is defined in the Model Legislation as “the creation of a material positive impact on society and the environment.”
2.) The second difference is that the fiduciary duties of the directors in a Benefit corporation flow to all of the corporation stakeholders, including society and the environment, employees, customers, vendors and suppliers, communities in which you do business, et cetera. So, it’s also a multiple stakeholder business model
3.) The third difference is that there’s a measure of accountability. So, under Benefit corporation Law, you have to measure how well you’re providing or creating a material positive impact on society and the environment against a third-party standard that’s independent of your company such as the one conducted by B Lab. So, there’s a measure of accountability.
4.) The fourth thing is that there’s a measure of transparency: you have to report to the public, and to your shareholders, usually annually, about how well you’re providing or creating that material positive impact on society and the environment. So, you’ve got additional public purpose, a multiple stakeholder model, accountability and transparency.
Leslie: Now I’m better educated. Thanks, John.
John: When we designed the benefit corporation legislation, we wanted to keep it simple; we didn’t want to throw the baby out with the bath water. We wanted it to be easy to understand, use, and adopt. So, if you think about the existing corporate law as a Microsoft operating system, the benefit corporation is a tiny little application layer code that sits on top of that operating system. It doesn’t throw out all the existing corporate codes and common law, it just makes those four little tweaks to existing law. So, our bill for example, in California, was only a few pages long. It is a pretty short statute because we tried to keep it simple.
Leslie: I like that, a simple B Corp law. Let’s talk more about the distinct advantages B Corp companies have.
John: First of all, a lot of economic research has shown that businesses that adopt a multiple stakeholder model provides a greater rate of return to investors than conventional corporations. The multiple stakeholder business model provides a significant advantage over the conventional approach. Firms of Endearment suggests that these businesses outperform their conventional peers by three times over a 10 year period.
Professor Robert Eccles at Harvard Business School has shown that businesses that adopt principles of sustainability, such as those embedded in the benefit corporation, provide about five percentage points greater return on investment per annum than their conventional peers.
Today’s workers want meaning and are largely not engaged at work. Gallup will confirm that: 70% of American employees are not engaged at work. 30% of that number are actively looking for a job at any one time. And another 20% are either passive-aggressively undermining their work or actively sabotaging the organization.
My son’s generation typifies this desire for meaning. A dream job doesn’t involve getting on the Google bus and going to work every day for a business that exists solely to maximize stockholder welfare. Today’s workers and rising leaders want to pursue meaningful work and a sense of purpose. Companies like Lyft try to make their businesses sound meaningful. But remember, in the board room where nobody is looking, that company has one legitimate purpose: to maximize profits for stockholders.
The benefit corporation is very attractive to employees who want to engage in purposeful work because it exists to create a material positive impact on society and the environment, in addition to making profits.
A lot of business people are ethical, and want to do the right thing for society and the environment. They see business as a force for good. So, someone like Yvon Chouinard of Patagonia had been running Patagonia like a benefit corporation for years when he came upon the form. When California adopted benefit corporation legislation, he was right there with us in Sacramento on January 3, 2012, giving a talk on the steps of the Secretary of State’s offices. Patagonia became one of California’s first benefit corporations.
For business leaders who are operating in the new paradigm of just, sustainable, regenerative business, the benefit corporation reflects their values. I have spent a lot of time in conversation with conventional business leaders who are skeptical. I’ve been able to address their fears of making less money. In fact, it’s actually counter intuitive. Doing business this way is likely to be more profitable.
Leslie: Wonderful. So, with all this in mind, I see you as being on a mission, not just to reform corporate structures, but to transform them. And I see the potential for authentic and positive change. A world of it. Do you believe that’s possible?
John: Well, they’ve changed in the past and I believe that they can change again. One proven way to do it is to throw a better party. After World War II, Europe was devastated; the far east was devastated, and we had to rebuild the global economic system. There was a clear choice between the party that the Soviet Union was throwing with centrally planned state economies, and the party that the Mont Pelerin Society – neoliberal economist Milton Friedman and his buddies – were throwing which promoted free market capitalism. They threw the better party, and ultimately the free market system won out.
The reality is we now have a global economic system that is de jure or de facto subject to the doctrine of shareholder primacy.
Generally speaking because of the global public markets, all public companies are under extraordinary pressure to maximize profit and focus on the next quarter’s results. Shareholder primacy is the global standard, especially since we’ve got a global economic system that’s populated by multinationals, conglomerates that are essentially prone to sociopathic behavior.
How do we get the economy to change? I learned the hard way that you don’t get there by naming the truth – by pointing out that the corporation has a design flaw we’ve inherited through 500 years of practice, that makes it prone to anti-social, sociopathic and even criminal behavior.
I know that sounds pretty negative. You have to build a better alternative that yields better results, makes happier customers, and does no harm to society and the environment. Essentially, we’ve got to throw a better party and get people really excited about it.
Leslie: Right. And how are you going to make this happen? Getting more companies to become B Corps?
John: I’ve lately turned my efforts away from doing the legal work to create more benefit corporations. I’m now working to change the hearts and minds of the one tenth of 1% who are in power. I help them see that we’re essentially one human family sharing one common planetary home, and we should operate our businesses in a way that takes care of our family and takes care of our home. At the core, it’s pretty simple.
Leslie: We’ll be posting Part Three of this interview soon, expanding on how to transform corporate values. Thanks, John.