B Corporations

What is a B corporation?

We are familiar with S and C corporation tax structures, but what is a B corporation? The B corporation status does not refer to a tax structure but instead represents at third-party verification for achieving high ESG (environmental, social, and governance) standards. The “B” stands for benefit, signifying that the company benefits all stakeholders and not just shareholders. The B Lab is responsible for establishing and issuing the requirements to meet B-certification standards and becoming a B Corporation (B Corp).

One of the key distinctions of what makes a company a B corporation is the shift from shareholder to stakeholder theory. Shareholders are the entities and individuals who own stock in a company. The shareholder theory focuses on maximizing profit for shareholders and basing business decisions on shareholder interest. In contrast, the stakeholder theory expands this vision. Stakeholders are the groups impacted by the company, this includes not only shareholders but also employees, consumers, creditors, suppliers, and society.Thus, businesses following stakeholder theory will consider the impact of their decisions on all stakeholders and decide accordingly, ensuring the least amount of harm for all stakeholders.    

History of the B Lab

The B Lab was founded in 2006 by Coen Gilbert, Bart Houlahan, and Andrew Kassoy, founders of the AND 1 brand mixtape and shoes. Their original business, AND 1, was ahead of its time regarding social and environmental awareness. Gilbert, Houlahan, and Kassoy promoted an active work environment centered on wellbeing through installing basketball courts and yoga classes at company buildings. Additionally, they incorporated better-than-average parental benefits, imposed a code of conduct on suppliers, and annually donated 5% of profits to local charities. They were a leading brand in the industry and a leading company in ESG standards at the time.However, as the industry changed and consolidated, they found themselves in a difficult situation. The company was sold in 2005, and Gilbert, Houlahan, and Kassoy were left to seek a new venture.

In pursuit of new investment opportunities, Gilbert, Houlahan, and Kassoy were inspired by their experiences and passion for social entrepreneurship and considered starting a social investment fund. After extensive research and speaking with hundreds of potential investors, they discovered a different need in the corporate social responsibility market. Companies needed a legal framework and reliable, but also verified, standards for claims of ESG excellence. Thus, in 2006, Gilbert, Houlahan, and Kassoy founded the B Lab to fill this gap in the industry, allowing companies to distinguish themselves in more competitive ways and open more growth opportunities. The mission of the B Lab was to ratify the excellent social and environmental performance of businesses seeking to do good for the world. Gilbert, Houlahan, and Kassoy established tests and standards for companies that would enable those companies to declare themselves as a benefit corporation.

 How does a company become B-certified?

The B Lab has established a guide for companies seeking to become a B Corp. Specific requirements depend upon company size and location, but the generalized standards are the same. The process involves four key steps: adopting a B Corporation legal framework, completing the B Impact Assessment, submitting the finalized assessment, and signing a term sheet. Each of these steps is explained in detail below.

B Corporation Legal Framework

A key part of the legal framework requirements is to amend the business articles of incorporation if they are an LLC; other types of corporations will amend them equivalent legal document. The articles of incorporation of a business represent the legal formation of a firm, outlining its name, type of structure, and number of authorized shares. B Lab mandates businesses to add stakeholder theory into their legal structure, which obligates them to consider the impact of their decisions on stakeholders. Implementing stakeholder theory into company policy and legal structure provides accountability to stakeholders because it ensures that the company preserves stakeholder interests.  

B Impact Assessment

The B Impact Assessment (BIA) comprises five categories: governance, workers, community, environment, and customers. A company must achieve at least 80 points out of 200 to pass the assessment. The test is administered through filling out questionnaires, computing company statistics, reporting on company standards, and supporting company claims.

Governance refers to the company’s mission, social engagement, environmental engagement, ethics, and transparency. The assessment analyzes the company’s corporate structure’s ability to maintain its mission and stakeholder interests, accomplished through the execution of policies and governing documents.

The workers section evaluates how a company supports its employees in areas affecting financial security, health and safety, wellness, career development, and satisfaction. Assessing these areas is measured through employee surveys that assess employee benefit plans, salary competitiveness, and career advancement opportunities. Another useful tool in this section is analyzing the percentage of company ownership held by full-time employees. Companies that have higher ownership of full-time employees, benefit plans that eliminate barriers to employment, and competitive wages tend to perform better in this section.

Community refers to the individuals in the local area from which the company hires, operates, and collaborates. This section covers a broad range of topics that include diversity, charitable giving, supply chain management, economic impact, and civic engagement. Hiring locally and more diverse workers can boost the score in this section, along with sourcing goods locally.

The environmental section measures the company’s impact on air, climate, water, land, and biodiversity. Measuring scope emissions aids the BIA of a company because it tracks the greenhouse gas emissions from not only the company’s operations but also from the activities throughout their supply chain and employees. Additionally, the assessment recognizes companies that have developed innovative solutions to reduce waste and aid the circular economy.

Lastly, the BIA analyzes a company’s stewardship over its customers, which includes examining the quality of goods and services, ethical marketing, and data privacy. Performance in these areas can be evaluated through customer feedback programs and other internal data stored by the company. Additionally, this section assesses products designed for solving social problems and helping minorities.

All five categories in the assessment represent key groups of stakeholders that businesses must consider to create a broader impact and effectively shift to stakeholder theory. In totaling the score for a company, the assessment assigns points to each category based on its weighted importance, which  varies based on  industry. An example of a scorecard is provided below, pulled directly from the B Lab website.

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B Lab Scoring Chart

The chart below comes directly from the B Lab online site, depicting an example of how the questions and categories are weighted for the average company.

Submit and Sign

To pass the BIA, a company must score at least 80 out of 200. After the company produces a passing score, it can submit its application to the B Lab for further evaluation. If the company has not passed, it is allowed to make improvements to its business and retake the assessment as soon as the new policies are implemented for a recommended time of 2-6 months. To help companies improve their BIA score, the B Lab has incorporated interactive features in the assessment report that allow the company to analyze its strengths and weaknesses and offer suggested improvements.

During the B Lab evaluation, an analyst verifies the information provided by the company on the test. The company is then evaluated against other organizations that have previously completed and passed the BIA to ensure it aligns with the goals and standards of B Corporation certification. During this process, analysts may ask follow-up questions and review documentation. After the review is complete, the company can sign the B corporation agreement and pay its first annual fee.    

Reporting on Sustainability as a B Corp

In recent years, the B Lab has established benchmarks for performance that a company must meet in the following years after achieving B Corp status.There are Year 0, Year 3, and Year 5 standards for companies. Year 0requirements are adopted when the company becomes a B Corp and must always be followed. Year 3 and Year 5 benchmarks are introduced in the third and fifth years, respectively.The new benchmarks in subsequent years were updated to provide clarity and to focus the efforts of businesses on their areas of significant impact. Along with compliance, the B Lab publishes the BIA score and assessment on its site.Additionally, B Corps must release an annual transparency report on social and environmental impacts as well as their financial performance.  

From an accounting perspective, the B Lab encourages companies to focus on the triple bottom line. The traditional bottom line refers to the company’s net income or loss for the reporting year. The triple bottom line combines the net income (loss) with social responsibility and environmental stewardship. In practice, this means that B Corps are expected to report on financial performance and social performance. For example, the B Lab mandates that B Corp revenues generated from fossil fuels, gambling, pornography, prisons, tobacco, and weapons be under 1%. Although no current accounting guidance exists in mandating sustainability performance, the B Lab encourages ESG-focused accounting.

Why would a company choose to be certified?

Companies choose to become B Certified Corporations because they have already committed to making an impact. For-profit companies see B certification as a means to validate their claims of doing “good” in the world socially and environmentally.

Achieving B corporation status has many advantages for companies. Financially speaking, there are benefits from striving to make an impact on both shareholders and stakeholders.From the 1970s, there has been a major shift to prioritizing social and environmental concerns in addition to profits and losses. Incorporating these issues into the scope of the business can improve relationships with the consumers and public trust, which may benefit the bottom line.

Additionally, it can also supply a competitive advantage to attract investors and partners, making it more likely for B certified companies to acquire funding. Ned Smith, a Kellogg Professor, conducted a study showing that a “nonconforming” identity among other types of funds can influence the capital decisions of investors. “Nonconforming,” or simply said “different,” types of funds receive greater investments and fewer penalties forbad returns on investments. The B Corporation status is one of these“nonconforming” businesses that can attract investments and boost company goals.

Another advantage of B certified companies is their ability to attract more like-minded and top talent employees. Certification can signal a commitment to social and environmental values that have become more popular among employees. In addition, the information sharing platform monitored through the B Lab can provide waste-eliminating, cost-effective, sustainable, and innovative solutions to problems faced within the company. Overall, B Corps can stand out from traditional firms, which is advantageous to their business.  

Furthermore, B Corps offer a strong alternative to nonprofit structures. While B Corps and nonprofits focus on stakeholder governance, B Corps can continually generate revenue and pursue social impact. They answer to shareholders and other investors, whereas nonprofits answer to the public, granting B Corps greater autonomy regarding social initiatives and allocation of resources. However, this can also be a disadvantage because B Corps are still accountable to shareholders and must provide financial returns. Another key difference between B Corps and nonprofits is that nonprofits are tax-exempt, whereas B Corps are not. In any case, it is up to the company what structure works best for its goals.

There are numerous benefits of becoming a B Corp, however, criticisms do exist that should be considered. One of the main concerns is greenwashing, or the practice of making misleading claims about a company’s real environmental and social impact. Since the B Impact Assessment initially relies on self-reported data, companies can misrepresent themselves. Later in the verification process, analysts consider qualitative factors that can be more subject to bias than quantitative data. Additionally, the BIA does not thoroughly examine the supply chains of applying companies, which can lead to unethical practices and harmful environmental effects not directly associated with the company. Thus, the B Corp can claim ethical sourcing even when this information is not thoroughly verified and may misrepresent the company. Finally, the certification process can be long and complex, adversely affecting smaller companies and deterring them from pursuing B Corp status.

Conclusion

B Corporation certification offers for-profit companies the opportunity to engage in social and environmental issues more effectively and impact the world for good.Companies seeking to go beyond the pursuit of profit can apply for B Corp status by undergoing tests and legal requirements that commit them to not only shareholder interest but also stakeholder interest. The B Corp movement represents and defends the shift in corporations towards accountability, social impact, and transparency. The long-term impact of B Corps is not yet seen, but it reflects the growing effort to align profit with social responsibility.

Sources

B Corp Certification Overview‍

‍B Corp Advantages and Requirements‍

‍Why Patagonia, Unilever, and Danone Are B Corp ESG Leaders‍

‍Warby Parker SEC Filing Form 10-K 2024‍

‍Patagonia B Corp Report 2023–2024 PDF‍

‍How Did the B Corp Movement Start?‍

‍Articles of Incorporation Definition‍

Defining Scope in the Workers’ Impact Area‍

‍Community in the B Impact Assessment‍

‍B Corp Certification Review Process and Timeline‍

‍Why Companies Are Becoming B Corporations

‍‍B Corp vs. Nonprofit Organizations‍‍

B Corporation vs. Nonprofit