When 'B' means better

'B Corporation' status reveals commitment to benefiting others.

NORWICH, VT. - Considering an expansion of their baking-ingredients plant in historic Norwich, Vt., the managers of King Arthur Flour are asking the hard questions: What are the investment’s risks? How long before it pays for itself? What about the trees?

Yes, trees.

It turns out that King Arthur – America’s oldest flour company – would probably have to clear some woods to expand its facility. And the company looks out for its 248-year-old community. It does this not just because it wants to, but because it has to.

Nearly two years ago, employee-owned King Arthur changed its company charter to include a promise to make decisions based not only on the interests of its employee-shareholders but also its business partners, and even the environment. It is one of 200 “B Corporations” – B as in “for benefit” to society – in the United States that have made their charters more inclusive and, in the process, are creating the foundations for a new kind of corporation.

“It’s really asking us to consider something broader than our bottom line,” says Allison Furbish, spokeswoman for King Arthur. “Once we’ve said we’re holding ourselves accountable to this and built this into the guiding principles and documents of our company, then we really do have to be committed to it.”

Along the way, these B Corporations are discovering rewards that seem to come with pushing the envelope. They’re also grappling with perceived risks that lead some to warn of possible legal dangers down the line. For San Francisco-based Clean Fish, a distributor of sustainably harvested seafood, adopting B Corporation status brought a quick payoff. The firm needed start-up financing. When a socially conscious venture capital fund looked at its charter, committing the company to do right by its suppliers and by the world’s oceans, it was happy to oblige.

B Corporation status, including an unorthodox charter, “just made us more credible for them,” says company chairman and cofounder Timothy O’Shea. “Within this circle of entrepreneurs and investors, it’s just kind of a nod that says, ‘OK, you’re for real.’ ”

Other firms point to different benefits.

Strictly speaking, five-year-old Upstream 21 is not a B Corporation. But the holding company in Portland, Ore., has since its inception aimed to be “a new kind of corporation,” according to its website. Its charter includes employees, the environment, and suppliers among the firm’s “best interest” considerations. In practice, this means when Upstream 21 considers acquiring a new business, the business owners, their employees, and even local residents will sometimes offer a relatively warm welcome, according to Upstream 21 cofounder and chair Leslie Christian.

“The owners whose companies we’re interested in have an interest in perpetuating the best of their companies,” Ms. Christian says. “They get reassurance from us. They know long-term ownership is our goal. We say it right in the charter.”

Still others say their new commitments help boost their brand reputations. Changes in the charter only account for part of the bump, says Andrew Kassoy, cofounder of B Lab, the Berwyn, Pa., nonprofit group that certifies B Corporations. That’s because B Corporations must also earn high marks on a social responsibility score card to qualify for certification.

The three-year-old B Corporation movement began when Mr. Kassoy and two former classmates at Stanford University in Palo Alto, Calif., formed B Lab to encourage alternatives to what they call “short-termism” – a tunnel-vision focus on generating quick returns for shareholders.

Starting with 21 companies in 2007, the movement has grown to 200 firms and expects to reach 300 by the end of the year. It has also captured attention on both coasts. In June, at the second annual Summit on the Future of the Corporation in Boston, business people working in this arena attested to the value of putting promises in ink.

In California, a working group of corporate lawyers has been developing a bill that would create a new legal structure for companies eager to embrace broad social commitments without fear of recourse from disgruntled shareholders, says Susan Mac Cormac, a partner in the corporate law group at Morrison & Foerster in San Francisco.

Thus far, companies that have pledged to consider wider stakeholder interests are reaping some benefits from other socially conscious businesses. For instance, all B Corporations save as much as 80 percent on SalesForce.com software that helps them manage customer service.

Another perk: B Corporations that conduct transactions through credit-card processor Inspire Commerce are getting a portion of their philanthropy and B Corporation licensing fees underwritten.

“One of the most important things that can happen here is a B2B [business-to-business] network, where these businesses start to do business with other mission-aligned businesses” that share a common vision, Kassoy says.

On the downside, observers say, accommodating multiple stakeholder interests could in some cases invite trouble. One scenario: Shareholders might argue that they, as owners, have a right to top stakeholder status under the definition of a corporation and seek damages if a company seems to give preference to another group’s interests.

“I would not advise you to put it in your articles [of incorporation] to say, ‘We are choosing these [social and environmental] purposes over shareholder value’ ... or to say those purposes are even equal with shareholder value,” says Ms. Mac Cormac. “Because then a court in California or Delaware could find you in breach of your fiduciary duties if a shareholder sues.”

Another risk: Other stakeholders, such as local communities, might try to sue on the grounds that they were entitled to more consideration in a particular decision. To mitigate such concerns, companies are structuring their charters to limit stakeholder recourse. King Arthur, for instance, prohibits nonshareholders from claiming any right to sue.

But critics say such defensive measures make these firms’ responsibility claims ring hollow. If companies can’t be held accountable to named stakeholders, then their professions to be new kinds of corporations amount to little more than baseless public relations, according to Charlie Cray, director of the Center for Corporate Policy, a think tank in Washington, D.C., with a focus on corporate accountability.

‘Do those stakeholders have any additional, meaningful leverage as a result of this?” Mr. Cray asks. “I’m not convinced that they would. That’s one litmus test: whether they actually have leverage to challenge management on business activities that would impact on their interests, as a local community or environmental group, or so forth. I just don’t see a workable model here.”

To date, legal questions remain largely in the realm of speculation since no B Corporation has faced a lawsuit challenging its charter. But if companies need more incentive to amend their charters, Kassoy says B Lab founders are already working on it. Their suggestion, offered to Obama administration officials in a meeting earlier this year: Tax B Corporations at a lower rate.

In the meantime, innovative charters are functioning as a type of insurance against mission drift. At King Arthur Flour, a charter revamp allowed employee-owners to codify long-understood but never formalized principles, according to Ms. Furbish.

“We’re really institutionalizing [our commitment to multiple stakeholders],” says Furbish, who is also an employee-owner. “No matter who is in charge or who’s here in the future, that commitment will be part of our company culture and our core beliefs and values.”