A fairer, more sustainable stakeholder economy
by Lucien Wallace, May 31, 2021
In America today, most corporations are focused solely on profitability, often referred to as the “bottom line”. This leads them to make choices that increase profits, even when they may have negative social impacts. A situation is then created in which companies are no longer serving the community or consumers, but rather catering to the wants of shareholders who own stock in the company. Directors of companies are often afraid that if they try to prioritize non-financial interests, they may face legal repercussions from their shareholders. Many propose that the solution to this ongoing issue in American economics is to adjust the priorities of corporate operations and decision-making. They argue that instead of only valuing the “bottom line” of profitability, companies should seek to improve the “triple bottom line”. This includes social and environmental concerns as well as financial.
The disadvantages of the shareholder economy have caused many to support a stakeholder economic structure. The current economic structure of America is largely that of a shareholder economy. The desires of shareholders (also called stockholders) are the top priority for corporations. The success of a CEO and their company is measured almost purely by their financial performance (Kim et al., 2016). In contrast, a stakeholder economy argues for consideration of the wants and needs of all stakeholders in the company. While the definition of a stakeholder is somewhat contested, the general consensus includes the corporations’ consumers, employees, local community, and their shareholders. This structure weds itself more closely to social issues. In a shareholder economy, benefits for other stakeholders are seen as a “means” to the “end” of increased profitability. Company directors are encouraged to make decisions purely based on increasing profitability. This can lead to companies and CEOs valuing “profits over people” (Millman, 2002). In a stakeholder economy, social and environmental benefits are seen as “ends” themselves of the same importance as financial success.
Companies like Ben and Jerry’s and Patagonia are already making efforts to prioritize social and environmental issues. If these companies are seeing benefits in an economic structure that prioritizes stakeholder values, why don’t other companies make more efforts to transition to them? There are multiple excuses that companies use for their reluctance to adopt this new framework. They are often afraid that the market will punish them for failing to singularly maximize profits and they will fall victim to a hostile takeover or acquisition. However, in the past, these types of acquisitions have not produced a demonstrable increase in profitability for the companies, and therefore there is little motivation to perform them (Smith, 2003). Additionally, many argue that the US’s framework of laws inhibits this type of action. The law itself has not shown to prevent this if the directors are fulfilling their duties of care and loyalty (Smith, 2003).
In order to become a certified B Corporation, companies must be assessed by a third-party organization – called the B Lab – on their record of governance, worker, consumer, community, and environmental impact. If the company has a good enough record in those areas, they are given the opportunity to get certified. To do this, they must pay an annual certification fee, sign the B Corp Declaration of Interdependence, and agree to the legal obligations that comes with certification. The corporations are then legally obliged to prioritize the community and environmental impacts of their actions, as well as the financials. This makes companies engage in a stakeholder economy. Since starting, the number of certified B Corporations has grown exponentially. This shows a drastic shift in socioeconomic thinking.
One point of confusion in this issue is that there are many similar concepts with very similar names. The B-Corporation certification that is given by B-Lab is not the same thing as becoming a Benefit Corporation. While both programs have similar goals of shifting to a more stakeholder focused business model, they have different functions. Becoming a benefit corporation is a legal distinction that allows directors of companies to make decisions based on both financial and non-financial interests without repercussions from their shareholders. Laws supporting benefit corporations have passed in 37 states and 4 are pending approval currently. Becoming a certified B-Corporation is done by being approved by a third-party organization, rather than the state government. Both roles are vital for this movement. Becoming a benefit corporation allows corporations to operate with a focus on stakeholders without fear of legal repercussions, while being a Certified B Corporation allows companies to show consumers their dedication to social and environmental issues.
Being certified as a B Corporation is an extremely scrutinous process. Because of this, becoming a B-Corporation sets companies apart from their competitors in the marketplace. Now more than ever, consumers are becoming aware of the astounding impact that corporations have on the world, good or bad. The people of America have witnessed companies’ singular focus on profits contribute to poor working conditions, anthropogenic climate change, and other forms of environmental degradation and they want to make a change. Many companies like Patagonia are seeing the positive social momentum and have realized that being a B-Corporation allows them to stand out from the crowd in corporate America. In 2013 a study showed that, on average, corporations that had women on the founding team performed better in the B-Lab evaluation than all-male teams (Chen & Roberts 2013). Patagonia is a fantastic example of this; under CEO Rose Marcario, the company made great strides with financial, social, and environmental issues.
Aside from the marketing benefits of becoming a Certified B Corporation, it is also in corporations' best interests to limit their effect on the environment. Every company in every industry will feel the effects of climate change. In order to avoid these harmful impacts on business, companies are going to have to prioritize lowering the environmental impacts of their products and services.
The aim of the B-Corporation movement is to introduce moral decision-making back into American businesses. As the size of corporations ballooned in the 20th century, the economy developed a distinct shareholder structure. The decisions being made by directors and CEOs have become so detached from the communities and environment that they affect, that much of the sense of moral responsibility was lost. B Corporations represent an effort to return these social and environmental perspectives to CEOs and directors. It has become evident that the citizens of America and other countries care about these impacts.
B-Lab and B-Corporations is a fantastic proof of concept of stakeholder economics. It is apparent that the United States is ready for a shift from the “profit over people” mentality that it has been plagued by for the past few decades. In order to enact the change necessary to preserve our environment, protect our workers' rights, and strengthen our local communities, we must change the institutions that have stood in the way of the solutions. The practice of prioritizing social and environmental concerns should be the norm for businesses. This will contribute to the solutions for the colossal issues that we face today and will prevent similar situations from developing in the future.
Works Cited:
Certified B Corporation. (n.d.). Certified B Corporation. Retrieved March 18, 2021, from https://bcorporation.net/
Chen, L., & Roberts, P. (2013). Founders and the social performance of B Corporations. Academy of Management. https://journals.aom.org/journal/amproc
Kim, S., Karlesky, M., Myers, C., & Schifeling, T. (2016, June 17). Why Companies Are Becoming B Corporations. Harvard Business Review. https://hbr.org/2016/06/why-companies-are-becoming-b-corporations
Millman, G. J. (2002, July-August). New scandals, old lessons financial ethics after Enron. (Ethics). Financial Executive, 18(5), 16+. https://link.gale.com/apps/doc/A89274997/AONE?u=mlin_b_massblc&sid=AONE&xid=5d87f535
Smith, H. J. (2003). The shareholders vs. stakeholders debate. MITSloan Management Review, 44(4), 1. http://mitsmr.com/1g2ZmLj
What is a Benefit Corporation? (n.d.). Benefit Corporation. Retrieved March 18, 2021, from https://benefitcorp.net/