The “B Corporation” and the Evolution of Capitalism

In The Ascent of Money, historian Niall Ferguson paints the picture of capitalism as an evolutionary beast. From the creation of stock-issuing corporations to the opaque engineering of collateralized debt obligations and other derivatives, capitalism is a story of constant innovation. More to the point, that innovation is what – in his telling – accounts for periods of dramatic economic expansion and growth. It is as if economies reach a sort of equilibrium state, and that progress requires some modification of an internal element of the system – meaning, in Ferguson’s story, the leveraging of vast new capital flows – in the underlying mechanics of the process.

We would be hard pressed to describe the current global economic context as an equilibrium state. The deep underlying imbalances that the sub-prime crisis of 2008 exposed are not close to being addressed. But going back to our evolutionary metaphor, sometimes what drives innovation in something like capitalism is not an internal dynamic, but an external one. Think of the extinction of dinosaurs and the beginning of the Age of Mammals 65 million years ago, ushered in partly by the planetary shock of an asteroid impact.

Human systems being messy things, let’s now bring those two strands together to consider whether we are witnessing – in the growing proliferation of Benefit Corporations (“B Corporations”) – an evolutionary step forward in capitalism.

A Benefit Corporation (or B Corp) is a corporate entity with much of the same attributes of the legal corporation we have come to know as the pillar of capitalist economies. The big difference is that the articles of incorporation of a B Corp explicitly state that the objectives of the corporation are not only to provide financial returns to its shareholders, but also to deliver material social and/or environmental benefits to society. Corporate law, especially in the United States, has for the most part considered the pursuit of anything but shareholder interests “immaterial” to the corporation’s objectives, and has even punished those enterprises that have sought to put other interests at the heart of their business.

What the economic crisis has demonstrated in spades is that the current legal requirement placed on a corporation, and its focus on primacy of shareholders’ interests, helped drive a dynamic in which the financial sector, in particular, came to be dominated by a mindset in which those interests where seen to be above and beyond all others. The absurd risks entered into by these corporations did not account for larger social interests (and in fact, did little to account for even the existing, very real, financial risks to shareholders). The tectonic consequences of this crisis have prompted many jurisdictions to consider allowing new innovations in the corporation’s historic legal framework – starting with the benefit corporation – to occur.

Maryland was the first jurisdiction in North America to bring in benefit corporation legislation, in April 2010. It has since been joined by six other states, including California and New York. The passing of these laws has been followed by a dramatic increase in B Corporations, which now total 517 in the U.S., with $2.9 billion in revenues.

In Canada, corporate law provides a more expansive definition of the stakeholders whose interests need to be considered, and so many existing corporations have already had themselves certified by independent third parties as B Corporations (39 at last count, including such names as Bullfrog Power). But legislation is required to provide assurance that the framework for such entities is secure and recognized by legal systems and financial markets. Moreover, clarity is needed over the requirements to become a B Corporation. For new businesses, or private corporations, the process of changing the “objects” of the corporation is easy enough. But for public companies with diverse and dispersed ownership, getting approval to convert the corporation into a B Corp can often be a very difficult or impossible undertaking. Proponents such as the MaRS Discovery District in Toronto are developing proposals for federal benefit corporation legislation.

The government should take these suggestions seriously, and develop the appropriate legislation.The old “adapt or die” dictum is one that is often invoked in capitalism, typically with reference to how businesses need to innovate and change in response to changes in the marketplace. But the corporation as a legal entity, and capitalism itself, is not immune from such logic. The economic crisis has plainly demonstrated that the corporation, as currently designed and structured, has its limitations with regard to society’s broader interests. In that light, the emergence of the B Corporation may in fact the beginning of a process through which capitalism is reinventing its constituent element. It may matter little that the sector is still small, as long as the possibility now exists for to prove its value to society.  In other words, capitalism is adapting. Better than the alternative, no?

Ed. Note: “Certified B Corporation” is a certification conferred by the nonprofit B Lab, whereas “benefit corporation” is a legal status administered by the state. Benefit corporations do not need to be certified. British Columbia introduced an act allowing for a new hybrid type of company – the community contribution company – on March 5, 2012. This post was first published in iPolitics in February 2012.

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