Whether it’s the bad rap that capitalism got during the Great Recession or shareholder activism that has turned heads, no longer is it just the realm of do-gooder charities and nonprofits to save the world. For-profit businesses are getting into the act, whether it’s calling it a social enterprise, impact investing, or taking advantage of newly created legal structures such as Public Benefit Corporations (PBC or B-Corporations) or Low-profit Limited Liability Corporations (L3C).
Corporate Social Responsibility (CSR) has taken on a new life. And to some, it blurs the line between profit and nonprofit, potentially confusing donors, consumers and lawmakers.
B Lab in Wayne, Pa., is a nonprofit that certifies businesses based on a social responsibility assessment. B Lab creates corporate standards for social and environmental performance. Businesses must score a minimum of 80 points on a 200-point assessment and possibly participate in an on-site review. Certification is good for two years, at which point a company must recertify, with an annual fee ranging from $500 to $25,000, based on annual sales.
The most popular references for B Lab certification or B Corporations are typically Patagonia or Ben & Jerry’s (which only became certified last year). B Lab has certified about 850 corporations and some 400 benefit corporations have been created in the 20 states that have enacted legislation in recent years. Only about 50 of those certified are Benefit Corporations.
B-Corps are not required to focus solely on maximizing shareholder value and profits but aim for a bottom line that also incorporates employees, people or the environment.
A Benefit Corporation, or B-Corporation, does not have to be certified by B Lab. Likewise, a B Lab-certified entity does not have to be a B-Corporation.
For Erik Troijan, that means 350 were created generally in the marketplace, showing that there was a demand.
B Lab’s director of policy, Troijan said his organization’s assessment for certifying a for-profit is akin to organizations that provide guidelines in other areas, such as the U.S. Green Building Council and its LEED (Leadership in Energy & Environmental Design) standards or the Federal Accounting Standards Advisory Board (FASB) and its Generally Accepted Accounting Principles (GAAP). These are non-government entities that certify and keep up-to-date standards that industries can follow.
“Government doesn’t have the wherewithal to keep up with business and keep current with trends,” Troijan said. “New building products are coming out all the time, it would be daunting for government to keep up with it,” he said.
Two cities — San Francisco and Philadelphia — have adopted legislation related to B-Corporations. In San Francisco, public benefit corporations (B Corps) get an incentive in the procurement process, similar to formulas used to incentivize contracts for female- and minority-owned businesses.
In Philadelphia, as many as 25 companies certified by B Lab are eligible for up to $4,000 in tax credits annually against the gross receipts portion of the city’s Business and Income Receipts Tax. The measure was approved in 2009 but is available in tax years 2012 through 2017, accepting applications started in February 2013. There are approximately 38 certified companies based in Philadelphia, according to B Lab’s website. There were 19 applicants this year, all of which were approved. Eleven have received the credit so far, five are pending and three are on hold for compliance issues, according to Mark McDonald, press secretary for Philadelphia Mayor Michael Nutter. So far, the total credit granted is more than $12,000.
Count Phil Buchanan among the skeptics when it comes to B Corps. “If as so many ‘shared value’ proponents suggest, there is no trade-off between pursuit of profit and pursuit of social impact, then why would tax incentives be needed? If, in fact, there is a trade-off, and there is a case to be made that some firms in a competitive bidding process are doing more social good than others, than make the case for this being a criteria in the procurement process,” said Buchanan, executive director of the Center for Effective Philanthropy in Cambridge, Mass. “But a tax credit? I don’t get it.”
To be eligible to complete the assessment, a for-profit must be in operation for six months. Troijan estimated that 10,000 companies have taken B-Lab’s impact assessment, which looks at five categories:
- Governance;
- Impact on employees;
- Impact on the community;
- Impact on the environment; and,
- Overall generic specialty impact.
There are 200 points that can be earned. A company must score 80 points to obtain certification, however, there are 20 different variables for how a test can be given, based on the industry, according to Troijan. There are many similar questions but not all questions are the same, with the queries tailored to industry and size. For instance, a service provider with 20 employees would take a different test than a 1,500-employee manufacturing company.
The average score typically ranges from 35 to 40. Once an applicant completes the assessment, Troijan said B-Lab reviews the questions to make sure answers were appropriate and suggests changes to reach a qualifying score of 80. Changes could include business practices or policies. “There are some simple ways but also long-term ways to change,” he said.
If a company earns a qualifying score, it then must provide documentation and verification of certain items and prove high scores are official. “It’s kind of a sample audit of questions,” Troijan said. B-Lab has an annual audit rate of about 10 percent, randomly selected among the certified B-Corps.
There are new questions and concepts added to the assessment almost every other year as business practices change and new things enable companies to be more socially and environmentally minded. “It changes with more knowledge, like computer software,” said Troijan, referring to the current assessment as the fourth version.
Troijan described the assessment process as “cathartic yet arduous” for most organizations. “It shines a lot of light on what they’re doing, they find a lot of value,” he said. The intention of B Lab is to gather certified companies but Troijan said companies can use the assessment to review their operations, for example, if a company only scores a 70 and doesn’t earn the certification but improves from a score of 50.
B Lab certifications cover 60 industries and companies that tend to be small, with less than 2,000 employees, Troijan said.
Certification can be used as a marketing tool, Troijan said, to show consumers that a company is good, and also for managerial purposes, to quantify qualitative aspects of a company; how it treats its employees, or the environment.
Some companies use it for managerial purposes but many use it for investment purposes, providing data to investors that thrive on clarity and data. “Then they can say, this company meets the mission of my fund,” Troijan said. “If you can provide reliable information to investors, be as transparent as possible, now you’ve increased odds on getting investors to get into my business,” he said.
“These companies have always existed but there had not been metrics to evaluate activities in ways to bring the (B-Corporation) community together,” he said. NPT