Time to Talk About Evolving American Capitalism Part 2: Alternative Approaches to a Pure Dollar Profit Motive
Continuing on from part 1, I proceeded to hit the ground researching more about the current private market alternative approaches to the traditional, myopic dollar-profit focus. I was exuberant (and a little overwhelmed) at just how many schools of thoughts and concepts there were which had already been developed, promoted and expanded upon.
It also felt good to be fully engaged in a state of learning again, to plunge into a brand new, heretofore unknown and massive bubble of knowledge. To re-initiate the process of shuhari all over again in order to forge a new expertise, evoking this process just as I did to become a go-to resource in my circles for search advertising beginning in 2012, and again for the mobile app marketing industry as a whole, beginning in 2016. The thought of possibly being able to carry the fruits of this research on societal profit forward into a new career blossomed vividly in my mind, just as the leaves outside my window as I wrote this second part became emblazoned in the beautiful hues of Autumn. I hope that I am not the only one to whom these feelings of inspiration and possibilities surface, dear reader ;)
In contemplating alternatives to a myopic dollar-profit focus, it is also worth acknowledging that by definition the path will be harder for those who choose this path. By eschewing a pure dollar profit focus in favor of the more dispersed societal profit focus, this is attempting to reverse the direction in which capitalism has fervently calcified for decades following Milton Friedman’s landmark declaration.
In terms of escaping a myopic dollar-profit focus, 501(c)(3) non-profits should be lauded for successfully creating a new set of rules inclusive of both legal requirements and incentives. While a societal profit focus is broader than pure dollars, its fundamentals still center on a dollar profit motive, which is what expands societal profit’s intrinsic-based motivation to also include an incentive-based motivation. Thus a societal profit focus is located fundamentally in-between the existing paradigms of a pure dollar profit and pure non-profit focus. Therefore, the rules of the game (such as loan interest rates and repayments, tax payments, and investment decision-making to name a few) are still oriented primarily around a company’s dollar profit outcomes. Societal profit leaders will be challenged highly to inspire others to care intrinsically enough about the generation of non-dollar profits. This is why the path will be harder, because it requires leaders to play successfully by the rules of the old game (a dollar profit focus), while also abiding by the rules of the new game (a societal profit focus) until the new game gains a critical mass, and/or is crystalized into rules that include both requirements and incentives (as non-profits have done).
The leaders carrying the banner of societal profit will need to be better than the competition and will carry more weight on their shoulders. Michelle Obama explains a similar story of “we must be better than our competition” in how, upon winning the White House she saw the unfolding of her and Barack’s path as the black first family trail blazers for the highest office. For the entrepreneurs and investors striking out towards societal profit models, it will be tough to see the competition take the easy route, play with simpler rules and cut the corners that your rules won’t allow. To all of those walking this path, I hope you keep going, and keep showing others the way.
Today I will provide an overview of three of the approaches to societal profit which I liked the most:
Benefit and B Corporations (my favorite)
The Triple Bottom Line (the unofficial grandfather of societal profit)
The Long Term Stock Exchange
I will not be touching on the United Nations’ transformational 17 Sustainable Development Goals today, but it is wholly deserving of a high-visibility mention. The UN’s SDGs are a highly imaginative and comprehensive program that can serve as a powerful treasure map to achieving societal profit outcomes. By laying down the gauntlet, one of the most powerful organizations in the world has already greatly influenced the purposes and operations of companies focused on societal profit, and will be integrated into future essays.
Benefit and B Corporations
This first approach that I and many others find most intriguing is one founded here in America. It directs the very core purpose of a business and also involves actually creating a legal mandate to pursue societal profit alongside dollar profit. By having created a legally-recognized set of rules, Benefit Corporations are the most advanced in societal profit approaches. These rules though, center mostly on serving as requirements to keep accountability to societal profit in-line. If the rules for a Benefit Corporation were to extend to the incentive side (such as loan interest rates and repayments, tax payments, and investment decision-making to again name a few), then this approach would evolve to create a full new set of rules within capitalism, which would truly create a renaissance of societal profit innovation.
Benefit Corporations are a full legal corporate entity, such as that of a traditional C Corporation. Benefit corporations are an officially recognized legal corporate entity in 35 states and counting, as well as the District of Columbia. In addition, several states have also created a less restrictive legal entity that sits between a traditional corporation and a Benefit Corporation, called a Social Purpose Corporation. And for entrepreneurs who want to establish their company to serve a public benefit but without becoming a full corporation, there is also the low-profit limited liability company (L3C) route.
The main difference between a Social Purpose Corporation and a Benefit Corporations is that the legal mandate of a Benefit Corporation is to pursue a “general benefit,” while a Social Purpose Corporation’s mandate only requires that it pursue its identified, specific (non-general) benefit.
An article by the Florida Bar Journal offers a clarification of this mandate component of a Benefit Corporation:
“The distinction between the B corporation and the SP corporation is that the B corporation has a broad purpose to benefit the public generally, while the SP corporation can choose to limit the benefit goal or goals it pursues… The B corporation’s stated statutory purpose is to pursue a “general public benefit,” defined as “a material, positive effect on society and the environment, taken as a whole… Directors and officers of a B corporation are mandated to consider the effects of any corporate action or inaction upon 1) the corporation’s ability to accomplish its general public benefit purpose and any specifically adopted benefit purposes; 2) shareholders; 3) employees; 4) suppliers; 5) customers; 6) communities where the business is located; 7) the local and global environment; and 8) the short- and long-term interests of the corporation.
The Florida Bar Journal also includes a real-world example to further illuminate the nuance of the two entities’ legal requirements, as directed by the presence/omission of the word “general:
“Suppose that a for-profit corporation plans to manufacture and sell an anti-malarial drug and, as part of its business plan, will distribute that drug at low or no cost in African countries. If distribution in Africa is the corporation’s sole benefit purpose, the corporation could appropriately be a SP corporation. However, if the corporation is a B corporation, directors and officers would be mandated to consider as well employee programs, environmental concerns, community issues, and similar societal factors, and cannot concentrate on a single benefit program to the detriment of other general benefit concerns.”
An article by Triple Pundit offers another example, which is more extreme but nonetheless lucid in highlighting a more critical distinction of how the approach between the two companies could play out in the corporate world:
“A social purpose corporation could devote itself to anything… It could be a factory that dumps toxic waste while serving society by giving away free handguns. That would be a perfectly legal SPC.”
As part of their legal requirements, Benefit Corporations are required to file a public Benefit Report that offers insight into the following, among other requirements:
The ways in which the Benefit Corporation pursued a general public benefit during the year and the extent to which general public benefit was created.
Any circumstances that have hindered the creation by the Benefit Corporation of general public benefit or specific public benefit.
An assessment of the overall social and environmental performance of the Benefit Corporation against a third-party standard.
The Benefit Report also requires the company to name their Benefit Director and/or Benefit Officer, if applicable. The explicit recommendation to create a specific, senior executive role (as opposed to a collective ownership) who is vested with the ability to coordinate and own the responsibility for the Benefit Corporation’s requirements is a linchpin step in ensuring that the decision to become a Benefit Corporation is given accountability and muscle. Shared responsibility can degrade quickly when there is a conflict of interest of time, effort or budget, and ultimately leads to a watered down effort to pursue a company’s societal profit goals.
A B Corporation (which is not the same as a Benefit Corporation), is a more lightweight certification that allows companies who are not yet ready to make a legal corporate structure change to still commit publicly to optimizing for societal profit. In this way, the B Corporation certification in approach is somewhat similar to the LEED and Fair Trade sustainability certifications, in being a public badge and requires the company’s engagement in following the set of guidelines, and holding itself accountable to those guidelines.
To become certified, B Corporations must conduct a survey and score an 80 (out of 200) or higher to become certified. Companies must re-certify every 3 years to maintain their B Corporation status. Some examples of certified B Corporations include Ben & Jerry’s (subsidiary of Unilever), New Belgium Brewing and Hootsuite.
Patagonia’s B Corporation Score is pictured to the left.
Allbirds and Patagonia are two highly successful examples of companies that are both Benefit Corporations and certified B Corporations.
In the words of Allbirds Co-Founder Joey Zwillinger:
“I’m completely comfortable with the fact that we’re a public benefit corporation and a Certified B Corp, and I’m really proud of it. I think it helps our business because I believe people — particularly younger people — see business and the private sector as part of a larger ecosystem.”
Patagonia transitioned to become an official Benefit Corporation in 2012; on the topic, founder Yvon Chouinard has commented:
“Benefit Corporation legislation creates the legal framework to enable mission-driven companies like Patagonia to stay mission-driven through succession, capital raises, and even changes in ownership, by institutionalizing the values, culture, processes, and high standards put in place by founding entrepreneurs.”
Unfortunately, not all companies who have made or who want to make firm commitments to steering their companies towards societal profits have been able to persist and withstand the pressure of the status quo.
In 2012, Etsy CEO Chad Dickerson wrote a blog post proudly explaining that Etsy had decided to become a certified B Corporation:
“Decades of an unyielding focus on economic growth and a corporate mentality has left us ever more disconnected with nature, our communities, and the people and processes behind the objects in our lives. We think this is unethical, unsustainable, and unfun. However, with the rise of small businesses around the world we feel hope and see real opportunities: Opportunities for us to measure success in new ways… to build local, living economies, and most importantly, to help create a more permanent future… When you support a B Corporation, you’re supporting a better way to do business. Governments and nonprofits are necessary but insufficient to solve today’s most pressing problems. Business is the most powerful force on the planet and can be a positive instrument for change.”
As part of the requirements of the certification, B Corporations are required to adopt a full Benefit Corporation legal corporate structure after going public to keep their B Corporation certification.
After Etsy went public (or more likely beforehand and through the IPO), it began to struggle with its business profitability. Naturally, pressure ramped up from investors for Etsy to grow its dollar profits, which spurred Etsy into action. However, instead of leading to more planning and innovation to figure out how Etsy could become more profitable within the fulfillment of its duties as a Benefit Corporation (i.e. to be profitable while also creating a general benefit), the pressure from investors broke down the societal profit focus and led Etsy to narrow its official focus to dollar profits; Etsy lost its B Corporation certification. Warby Parker, another company that had become a certified B Corporation and is reportedly planning an IPO also let its B Corporation certification lapse.
Toms is another B Corporation, and one that popularized the “buy one give one” model that many others, including Warby Parker, adopted.
Toms bears mention, not only for trailblazing an innovative idea that centralized a societal profit goal of meeting basic human needs into its business model, but for the way in which Toms and its shareholders reacted to the challenges it faced.
After tremendous success Toms, began experiencing challenges in growth, caused in part by tremendous price pressures from competitors and copycats. Ultimately Toms sold 50% of its ownership to private equity firm, Bain & Co, which led to the assumption of a very large debt load, the servicing of which hampered Toms’ financial outlook and ultimately led to a 2019 takeover of Toms by its creditors. On the one hand it is an unfortunate reminder of the challenges which can occur in the growth of any business. Groupon was once a wunderkind of the VC world as the fastest company to reach $1 billion in annual sales, only to suffer from a downward spiral in prices caused by the siphoning off of customers by hundreds of copycats.
What is interesting about Toms’ case is that, despite the fact that a near-majority stake was acquired by private equity firm, Bain, and despite its challenges in growth, Toms has thus far maintained its commitment to its B Corporation responsibilities. Despite the fact that Bain is a stalwart in the private equity space, where the goal is usually to gut non-core operations such as those found at B Corporations in order to flip companies for maximum profit, Toms remains a certified B Corporation with a score that sits 20% higher than the acceptable score threshold. Despite the fact that its creditors took its operations over, Toms still published its latest Impact Report in 2019, with its CEO commenting on its continued commitment to giving:
“Combined with an enhanced capital structure, this funding will enable TOMS to further invest in our promising growth areas and continue our commitment to giving, which have been initiated and supported by Bain Capital and Blake over the past five years.”
In its 2019 Impact Report report, Toms’ Chief Giving Officer detailed how over the last several years, Toms branched out from its “buy one give one” shoe roots, reimagining and expanding on its giving model into areas such as vision, clean water, and many others funded by its giving fund. Incredibly, Toms cites that its giving fund contributes to philanthropic causes through allocations of at least 30% of its annual profit.
Instead of being crushed and forced to capitulate on its official commitment to producing a general benefit, Toms managed to face its challenges head on and negotiate with its investors and creditors, while remaining steadfast in its efforts to produce societal profit.
After my research, I decided to purchase products from both Allbirds and Toms (I had been a customer of Toms years ago). While investors and entrepreneurs lead the direction of a company, it is we as customers who decide with our dollars which companies and which business models survive and ultimately thrive or not. Even if a full new set of rules supporting both the requirement and incentive for societal profit are not yet written, the critical mass can come about if enough employees and customers demand societal profit to be a major focus, which will in turn lead the allegiances of entrepreneurs and investors.
It will be interesting to see how things continue to pan out with Toms, and how its new owners will work with it to navigate its goals of maximizing the growth of dollar profits and also societal profits.
This brings me to a notion of the balance between an official (legal) commitment and a benevolent (also known as “intrinsic") commitment. A benevolent commitment to do good (e.g. corporate donations) can have a very significant impact on raising societal profit. Yet, a benevolent commitment alone creates no binding promise to the act, and hence benevolent actions can easily be minimized or revoked when the going gets tough, or when there is a change in leadership. Transparent and consistent reporting of benevolent actions is also not required which further weakens the resolve, as reporting is an essential component of sustainable systems.
The official commitment is what makes the Benefit Corporation approach so powerful.
In a Benefit Corporation, the creation of the mandate to pursue a general benefit and to report on progress (including challenges) therein is what gives societal profit the space to exist alongside, and not subservient to, dollar profits.
Notably, Etsy along with Kickstarter are two certified B Corporations that Union Square Ventures funded, offering proof that not all investors are closed off to investing into societal profit-driven companies.
This is not to say that benevolent commitment is not powerful or remarkable in its sincerity, or that companies must become Benefit or B Corporations to make material progress in generating societal profit. Examples such as Etsy’s continued achievements such as offsetting 100% of their carbon emissions from shipping and the massive and genuine support for improving society through efforts led by many other companies such as Microsoft’s recent commitment to addressing racial injustice and Warren Buffet and Bill and Melinda Gates’ Giving Pledge also prove this.
The Triple Bottom Line
This framework (also known as the TBL) was coined in 1994, and refers to the practice of reporting a company’s impact on not just its Profit and the impact for is primary shareholders, but also its impact on the People stakeholders who are affected by its business, as well as the company’s impact on its Planet stakeholder. A TBL approach directs a company’s planning and operations to optimize for growing its final bottom line of profit, without creating damage to the other bottom lines of people and planet, and ideally actually creating a positive outcome on those bottom lines.
As an accounting-based approach, the TBL fits directly into the current mode of operating in business (accounting for costs and revenues and ultimately profit); by speaking the same language as dollar profit operations can serve as a direct ladder into operating on the expanded basis of societal profit (people and planet in the TBL approach).
Benefit Corporations can be thought of as a specific legally-recognized framework within the principles of the Triple Bottom Line, which resides at a theoretical and academic level and does not have a specific and legally-recognized definition or book of rules.
That said there are multiple books of non-legally recognized rules that can help inform companies’ approach to internalizing the TBL. One of the most thorough specific incantations of the TBL that I discovered was the Global Reporting Initiative. The following examples highlight just a few of the hundreds of reporting items included in the Global Reporting Initiative (GRI) framework:
GRI reports must specifically identify the company’s stakeholders (which can include direct shareholders as well as employees, suppliers, NGOs, governments, local communities and others).
Reports must identify the most senior leadership across each major pillars of the TBL, such as sustainability, risk management and social ethics, and to whom in the reporting hierarchy these leads report to (e.g. the board of directors, C-suite, a departmental VP, etc.)Reports also require the disclosure of whether the company’s identified stakeholders (e.g. local communities) were consulted by senior leadership when relevant decisions are to be made, and which risks and how many were raised from the leads.
Reports require the disclosure of how often the company’s most senior leadership (i.e. CEO or president) reviews economic, environmental, and social topics and their impacts, risks, and opportunities, and what the process for reporting risks to senior leadership looks like.
Reports should also indicate whether, and if so how the company applies the precautionary principle.
For a more summarized list of GRI standards, check out the World Economics Forum’s ESG (Environmental, Social and Governance) guide.
A sample reporting guideline from the GRI on a required disclosure from the company’s most senior decision-maker
Another example is the Corporate Sustainability Assessment, a survey run by the S&P Global that creates an index and reporting system for companies based on their sustainability score.
A sample scorecard from the Corporate Sustainability Assessment
Novozymes, a subsidiary of Danish medical company Novo Nordisk, offers a case study for a corporation that has embraced the Triple Bottom Line in its operations, achieving and maintaining accountability for the goals of the TBL in some of the following ways:
The establishment a board-level body to oversee its sustainability efforts.
Leveraging the United Nation’s sustainability development goals as its own goals, such as setting a target to achieve 30% female membership in senior management roles by the end of 2020.
Focusing on the development of a swath of products that produce dollar revenues by increasing societal revenues, such as enabling customers to produce more agricultural output while reducing greenhouse gas emissions, use less water in their operations, use biomass-based renewable energy, or more efficient waste management technology.
Committing to a “cradle-to-grave” analysis for assessing the impacts of its products in order to capture knowledge of any potential societal costs influenced by its products or operations.
Notably, Novozymes, ranks as #6 on a well-known list of the world’s most sustainable companies.
In the spirit of innovation and curiosity, here are a few questions that might be interesting to explore about Novozymes’ sustainability goals and company operations:
Are the products it sells reasonably affordable for customers in developing countries, or only for those in developed nations?
How does Novozymes’ racial minority participation in company leadership look when compared to the industry averages and country overall demographic?
If a cradle-to-grave investigation were to turn up a significant, unanticipated societal cost how would this be handled? For instance, Monsanto/Bayer’s own studies as well as the US Environmental Protection Agency regard Glyphosate, the ingredient in Monsanto/Bayer’s Roundup weed killer as non-harmful or “not likely” to cause cancer humans; yet mounting evidence points to the opposite, in the form of customer lawsuits, governmental bans and a condemnation of the chemical by the World Health Organization. The GRI’s TBL-based tenants say that the best move is for an organization to err on the side of caution when it relates to the health of its stakeholders. But what if that caution to avoid a potential societal problem stands in direct conflict with protecting shareholder value, and with arguable evidence over whether or not it is a significant cost at that? If Novozyme, a TBL-embracing company were to find itself in the shoes of Bayer/Monsanto, what would it decide to do?
If the Triple Bottom Line concept piques your interest, be sure to read this article from the creator of the Triple Bottom Line, John Elkington, on the many flavors of TBL, and why the Triple Bottom Line now may not be enough.
Another term that is related to the TBL is ESG, which stands for Environmental, Social, and Governance. Like the TBL, ESG serves as a guiding principle underlying the approach to reporting and management strategy, and is used by companies such as Southwest Airlines, and also vendors who analyze companies, such as Nasdaq.
The Long-Term Stock Market
Lastly, the creator of the Lean Startup approach, Eric Ries’ Long Term Stock Exchange (LTSE) is another interesting approach from the investment standpoint of evolving towards societal profit.
The LTSE is another legally-recognized approach that incorporates principles of the TBL into its fundamental approach, but there is not much publicly available information on the LTSE or examples of its guidelines applied in the real world. As a brand-new exchange literally just opened for business in September 2020, the actual operations and results of the LTSE remain to be seen but it will be an exciting one to keep an eye on.
Update as of 11/12/2020: Airbnb announced it was considering dual-listing on the LTSE after its IPO.
The implications of the LTSE are interesting, as it explicitly aims to eliminate one of the key constraints to pursuing broader levels of value that companies currently face (being tethered to a quarterly profit growth expectation) and thus expand an organization’s ability to innovate and focus their strategy on generating the best returns. Setting such expectations with investors by listing on the LTSE will hopefully be effective in clearing a path for companies to be allowed to work at a less profitable rate today in exchange for investing into more progressive long-term growth opportunities, such as the renewable energy market (which is virtually future-proofed compared to the limited lifetime fossil fuel market), investing extra effort to recruit a diverse workforce (which might enable the company to mitigate group think and problem solve more effectively), or paying higher compensation or profit-sharing to employees (to mitigate the tribal knowledge and network relationship loss and the other costs of employee churn).
Long Term Stock Market Five Guiding Principles
In the terms of its guidelines, the LTSE principles at first glance make only vague reference to a societal profit goal, encompassed within the phrase “broader group of stakeholders.” Yet double clicking into the LTSE’s definition of this reveals the following bullet points, referencing specific tenets of societal profit:
Which stakeholder groups the company considers critical to long-term success
The company’s impact on the environment and its community
The company’s approach to diversity and inclusion
The company’s approach to investing in its employees
The company’s approach to rewarding its employees and other stakeholders for contributing to the company’s long-term success
Stay tuned for part 3, where I will proceed to leverage insights from my research thus far while also getting curious to imagine new ideas in how we can think about quantifying societal profit.