Put down the rotten egg and hear me out. As a social financier, I have long yearned for a corporate structure that recognizes the validity of optimizing across multiple bottom-lines (MBLs) as an appropriate exercise of fiduciary responsibility. Formal academic research continues to validate the link between engaging & collaborating with stakeholders (as opposed to acting only on behalf of shareholders) and company performance. For the latest from academia, check out this fascinating and somewhat unlikely research from Prof. Witold J. Henisz & team in Stakeholder Cooperation & Performance in the Mining Industry in “The Pennsylvania Gazette”.
Even before research was available, my field work in development had left me convinced that investment managers should be able to pursue the mandates desired by their investors, regardless of whether or not the primary mandate was “maximize financial returns”. I don’t want to maximize financial returns, I want to optimize financial and social returns at the highest level possible. As an investment manager, I want the freedom to customize that optimization around the values and conditions established by the people whose money I manage.
So why aren’t I jumping up and down in joy over the creation of benefit corporations (B-corps) and low-income limited liability companies (L3Cs)? Basically, I think the intention behind these structures is excellent but the implementation is highly paternalistic and flawed.
Yes, there is probably a need for a centralized certifying entity with clear standards and active engagement (i.e, renewal evaluations rather than permanent status granted at the start of the enterprise life-cycle). A legitimate certification – along the lines of the “Good Housekeeping” seal of approval – can offer competitive advantages to growth-oriented MBLs aka “impact” ventures.
I do not, however, believe that certification should be a requirement. Nor do I think that having multiple government entities (State or Federal) attempting to define, verify, certify etc the universe of MBL ventures and social enterprises that will emerge if creativity is given free reign. The government is not giving tax breaks to B-corps or L3Cs, so why should they be subject to requirements that don’t apply to all for-profit corporations. Who are we protecting by mandating certification? How certain are we that we are certifying the right things, at a fair cost, in a transparent and constructive manner? Shouldn’t potential investors get to decide if they want a company to obtain certification? And from whom?
What if my investors have an environmental mission but don’t want to focus on social returns? Or vice-versa? What if they want to maximize financial returns first, but also achieve specific social and/or environmental goals? What if I think that paying employees fairly and offering career paths fills my community impact goals? Now that we can escape the “you must maximize financial return to successfully exercise your fiduciary responsibility”, will we get into trouble for someone else’s opinion that we’re not doing “enough” on the social or environmental front? I want to see a level playing field for impact investment and multiple bottom-line returns, not a straight-jacket of regulations that add questionable value.
All corporate entities have some form of by-laws, statues, operating charters or the like. This core organizational document is where all of the MBL objectives should be specified. Require a super-majority vote to change this core document and you’ve got the mission locked nicely into place. I may not feel that certification is necessary at this stage because I have the “comfort” I seek through a negotiated operating charter. When we get to the next growth round, I may decide the moment is ripe for certification as a tool for enhancing value for incoming investors. Or not. I may suggest instead that we conduct a specific type of impact measurement exercise instead. The thing is – I don’t know today what tools, tactics and strategies are going to create the most value for my investors or portfolio companies – and I don’t want to spend time and money on something that doesn’t have a clear, current value proposition.
Whether through legislation (B-Corp, L3C or otherwise) or practice (operating charters, statutes, etc), one thing I would require of MBL companies is an integrated report. Actually, I’d pick up on recent Brazilian legislation and require ALL companies to adopt an integrated report or explain why not. Given our current reality, however, an MBL integrated reporting requirement could help pave the way for this sort of broader adoption of integrated reporting. Given the growing number of standards, indicators and ratings, figuring out how to present a single report that clearly describes a company’s impact with respect to financial, social and environmental resources isn’t going to be a one-shot deal. Different companies will experiment with integrated reporting, and somewhere down the line, consensus will start to emerge. For now, moving from having a separate Annual Report surrounding financial statements plus a Social Impact (or ESG, or Environmental, or CSR) report, toward a single report addressing MBLs would be a huge step forward.
Having said the above, I’d like to extend sincere thanks and congratulations to the many people and groups who have worked to obtain B-Corp and L3C legislation, as well as to the intrepid entrepreneurs who have whole-heartedly adopted these new structures. Check out this well written article in “The Economist” for more on why B-Corps and the like are worthwhile (Firms with Benefits). The US is absolutely better off for the existence of these hybrid structures and for the still ongoing debate around their design and implementation. However, in order to reach that semi-utopian state in which all investments are assessed on their collective financial, environmental and social returns, as well as the potential sustainability of those returns, we’re going to have to keep innovating. We need to keep exploring legal and financial structures that align interests and can evolve as impact investment evolves. Bring on the B-Corps and L3Cs, but don’t stop there.
Lauren Burnhill – @LaurenOPV