Legalizing Good Behavior

If  the Supreme Court and Mitt Romney are to be believed, and corporations really are people, how many of them would you count among your friends?  How many corporations would you characterize as nice, friendly, or considerate?  Most people would say few, if any corporations fit that description.  They might – generously – suggest a more accurate description: rude, inconsiderate, with a pathological focus on money and profits. Indeed, corporations might best be compared to Charles Dickens’ Scrooge: a man with no friends, no love for his family, and a single-minded drive to earn more money.  But what if corporations were more like Tiny Tim?

That is the question proposed by a new non-profit, B-labs, the driving force behind legislation in several states that allows for the creation of “benefit corporations.” Unlike traditional corporations that have a legal obligation to maximize profits for owners and shareholders, benefit corporations have enshrined the principles of Triple Bottom Line accounting in their operating documents.  They care for social, environmental, and business sustainability in addition to earning profits, and have received legal recognition for doing so.

The idea behind B-labs is simple: change the laws so that corporations can change their operating documents to make themselves legally obligated to consider social and environmental effects of their actions in addition to maximizing profits.  In doing so they are protected against shareholder suits that could arise should they choose an action that might benefit the community but reduce overall profits.  The new laws give corporations the flexibility to develop into entities that are no longer pathologically focused on profits.  It also allows companies to avoid the fate of Ben & Jerry’s ice cream – a socially and environmentally responsible company that was forced to sell to the highest bidder for fear of shareholder suits.  Success in changing the law in seven states suggests that there is a receptive audience to B-labs’ message among both businesses and legislators.

The world needs more of this kind of thinking.  Business is not necessarily an enemy of sustainable development.  It has the potential to be a tremendous force for good if its energy is focused in the right direction.  However, in order for it to use its power for good, it must be empowered to make decisions that consider more than just profit margins.

Unfortunately, empowering corporations to make decisions based on environmental and social factors is not a cure-all or a replacement for government regulation; it is only part of the solution.  While organizations like B-labs increase transparency and can hold businesses accountable for their promises, there are still significant information asymmetries between businesses and consumers; businesses are not required to share absolutely everything with their consumers.  And while consumers have some power to indicate their own preferences through the purchases they make, they are still constrained by their incomes and by the available options.  Only the government has the necessary scale and reach to address some issues of environmental or social protection.  Programs like B-labs should supplement regulation and increase the options available to corporations.

The recent furor over the employment practices of Apple supplier Foxconn demonstrates that consumers care about the way their goods are produced.  As several stories have reported, consumers are even willing to pay more for products they know are produced by companies that treat their employees well.  While it could be said that consumers of Apple products have the high incomes necessary to be flexible in their purchasing decisions, the point remains that there is a place for companies that practice sustainable labor and environmental habits.  At the very least, it certainly should not be illegal for a company to do so.

If we are to live in a world in which corporations are people, why not make them friendly people?  Today the legal environment almost requires corporations to behave in a way that most people find abhorrent.  That needs to be changed.  While nothing can completely replace government regulation – after all, having a society of generally nice, friendly people doesn’t obviate the need for laws – but legally obligating corporations to behave in a manner similar to Scrooge does not seem reasonable.  And yet, this is exactly how the currently legal environment treats corporations.  If corporations should be required to act like anyone, why not Tiny Tim.

The founder of B-Corps on TED