Profiting from social responsibility

Marketplace Staff May 7, 2007

Profiting from social responsibility

Marketplace Staff May 7, 2007

KAI RYSSDAL: Over the weekend, Berkshire Hathaway stockholders told activist investors to take a hike. They crushed a proposal calling for Warren Buffet’s holding company to sell off its shares in PetroChina. Berkshire’s the biggest foreign investor in PetroChina, which is accused of supporting the genocide in Darfur by doing business in Sudan.

It’s all an issue that comes under the broad heading of socially responsible investing. And that flies in the face of a more traditional view of capitalism — that companies exist to make money for shareholders. Period. Alex Goldmark reports now on one group trying to change that definition.

ALEX GOLDMARK: When Jay Coen Gilbert and his partners started a basketball clothing company, they wanted to make sure they were good to their investors. But they also wanted to be good to their community, their employees and the environment.

JAY COEN GILBERT: But certainly as our business grew, as we had new investors coming in — and particularly when business got tough — it became a lot harder to justify to your CFO, you know, to your board or even to your staff why you’re doing your third-party audits of your factories. And why you’re still giving away 5 percent of your profits to charity.

Third-party audits cost extra money, but ensure workers aren’t exploited. Charity can cost extra, too. And so it can be tough to stick to your values when times get rough in traditional corporations.

COEN GILBERT: Traditional corporations, whether they’re “C-corps,” or “S-corps,” LLCs, whatever — are all governed by one single rule. Which is that they have to maximize the return to shareholders. Even if it’s to the exclusion or detriment of other stakeholders, you know — employees, community, environment.

Now that Gilbert has sold his traditional corporation, he’s working with his old partners — and over a hundred other entrepreneurs — to develop a new standard for companies they’re calling a “B-Corporation.”

The B is for social benefit. It’s still a traditional company, but with a modified charter that legally binds it to a socially-conscious set of values.

LESLIE CHRISTIAN: I call it a one-word revolution.

That’s Leslie Christian, co-founder of Upstream 21, an Oregon Holding company focused on building small businesses that strengthen the local economy. The tweak that she made to traditional articles of incorporation is being used as a model for B-corporations.

CHRISTIAN: There’s a provision that says the company may consider the interests of the community and of the employees and the effect on the local economy. We simply changed that requirement from “may” to “shall.” It’s not enough to say you can consider these interests — you must consider them.

That’s in addition to shareholders, not instead of. So when it’s time to sell, the highest bidder isn’t guaranteed to win. Non-monetary factors will count, too.

But that’s not a popular idea with shareholder rights advocate Nell Minow of the Corporate Library.

NELL MINOW: Is it really right for the companies to say, “I care more about the butterflies so I’m gonna put my money on that, instead of returning the money to the shareholders, who have trusted us?”

She says social responsibility is fine, but corporations function best when they’re accountable to one and only one group: shareholders. She fears anything else could let the managers abuse their power by claiming to act in the interests of something abstract — like those butterflies — instead of the quantifiable dollar.

That criticism misses the point, says Jay Coen Gilbert.

COEN GILBERT: It’s pretty simple: you change the rules, you change behavior. You change behavior, you change outcomes. If the rules of the game are maximize returns to shareholders, then by definition, other stakeholders are gonna suffer.

And it’s those other stakeholders — like your employees or the environment — that need more looking after right now. Not just shareholders, he says.

We’ll see which companies get the title B-corporation next month, when Gilbert’s nonprofit, B-Lab, announces its first certified list.

In New York, I’m Alex Goldmark for Marketplace.

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