Purpose or Profit? Have Both with a B-corp! A Conversation with Rick Alexander : Successful Nonprofits

Episode 118

Purpose or Profit? Have Both with a B-corp! A Conversation with Rick Alexander

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Episode 118

Purpose or Profit? Have Both with a B-corp! A Conversation with Rick Alexander

Listen on  iTunes    Android     Stitcher  Libsyn

by goldenburggroup

Today we recognize that corporations control a huge amount of the resources of society, with many effects. Financial performance is just one effect; pollution, social unrest, and inequality are sometimes other effects.

Dolph talks with Rick Alexander, author of Benefit Corporation Law and Governance: Pursuing Profit with Purpose. Rick schools us on the various Bs: B certified, B Lab, and B Corporation. He also outlines the similarities and differences between B corps and nonprofits, and shares instances where nonprofits spin off for-profit entities with B corp legitimacy.

 *****Timestamped Highlights*****

(3:51) What inspired Rick to get on board for B corps
(5:25) Cute and crunchy, but not something for serious corporate law
(9:44) A lot of Bs flying around
(12:30) Why become a B corp?
(15:30) Impact investors come in a variety of sizes
(20:45) Choosing between a nonprofit structure and B corp structure

If a nonprofit wants to spin off a for-profit arm, it’s important to get it right legally. Consult a lawyer.

(25:52) Rick explains his book’s dedication to the 1129 human beings lost in the Rana tragedy.
(29:15) Win-win: Rick and his publisher get the titles they want.

Links:

Rick’s Book, Benefit Corporation Law and Governance: Pursuing Profit with Purpose
Rick’s Website: www.FrederickAlexander.net
B-Lab’s website: www.benefitcorporation.net
Measure your Nonprofit’s B-Corp Fit: https://frederickalexander.net/resources/

Read the Transcript for Episode 118 Below or Click Here


Transcript

Episode 118 – Purpose or Profit? Have Both with a B-corp! A Conversation with Rick Alexander

 

A bit of corporate law history:
In an earlier era, as more companies became publicly owned rather than privately owned, people needed assurance that their investments would not be mismanaged.

Dolph Goldenburg: Welcome to the Successful Nonprofits™ Podcast. I’m your host Dolph Goldenburg. Today we will be speaking with Rick Alexander about this new-fangled type of corporation known as the B Corp, but let me first remind listeners that we are getting close to the deadline to register for our strategic planning facilitator cohort. As I’ve mentioned on previous episodes, this is a great opportunity for your organization to develop a strategic plan at a much lower cost. It does require that you have a volunteer leader with the bandwidth to shoulder the facilitation work, and we will guide your volunteer leader every step of the way. Check this out at www.successfulnonprofits.com to ensure that you and your organization don’t miss out. But now, let’s start talking about B Corp’s. Before we do, though, I want to harken back way, way back to 1894. That’s the year that the United States government first began to recognize organizations is exempt from some of the tariffs or taxes that they faced.

Now, do you know what else was created in the late, 1800’s? probably a term you’re familiar with which is robber baron, and if you recall, they were called robber-barons because they were often seen as doing harm to the public good while increasing their own wealth, and I don’t think it’s an accident nor is it a coincidence that the social sector was recognized from a tax standpoint in response to growing wealth in the hands of a few that also resulted in frankly some antisocial behavior on the part of those companies. Now, let’s fast forward over a hundred years into the future, and we are seeing something just as revolutionary in the corporate structure today. Like a lot of consultants who go to more than my fair share of nonprofit conferences, I am surprised that these conferences are not abuzz with the B-Corp, conversations about the B-Corp and strategies around it.

You have probably heard of B corporations but maybe a bit fuzzy about exactly what they are. They are for-profit businesses that voluntarily agree to meet standards relating to governance, workers, community, the environment, the product or service that it provides, that kind of thing. Essentially, they strive to meet the standards that so many of our nonprofits aspire to while also making a profit. That’s kind of called a win-win. So we’re going to learn a lot more about B-corps because today’s guest, Rick Alexander, is kind of the godfather of the B-Corp. Rick is the author of the book Benefit Corporation Law and Governance: Pursuing Profit with Purpose, and he’s head of legal policy at B Lab, a nonprofit organization dedicated to enabling people to use businesses as a force for good. Before working at B lab, Rick practiced law for 26 years. During that time he was selected as one of the 10 most highly regarded corporate governance lawyers worldwide. And let me share with you that I’ve also seen Rick in action as a nonprofit board member, and he is definitely a good governance disciple who practices what he preaches. So, let’s just say Rick’s got creds. Let’s dive in to this conversation with Rick Alexander.

Hey Rick, welcome to the podcast.

Rick Alexander: Thanks for that.

Dolph Goldenburg: So, I found it kind of interesting. You opened the book talking about the fact that when you first heard about B Corp’s, you were a little bit of a doubting Thomas. You were a little bit incredulous and notnecessarily immediately won over. Can you talk about that?

Rick Alexander: Sure. And I would say that even sort of that might understate the premise. As you said, I spent 26 years practicing law, and my focus was really a transactions, corporate governance, mergers and acquisitions, fundraising preferred stock. I did it as sort of a Delaware experts because as people know, Delaware sort of the heart of corporate law of those public companies are incorporated in Delaware. And we really operated under a very simple model where, you know, the purpose of the corporation was to make money and uh, the directors had a fiduciary duty to their shareholders to sort of maximize the return that shareholders got, whether it was over the short-term or the long-term. And you know, other issues that the corporation affected, uh, whatever your political [inaudible] might be, should be taken care of by government regulation and things like that.

So, it wasn’t the company, sort of a director’s job to worry about the environment. They just had to follow the environmental laws, and it was the responsibility of the government to think about those externalities, as economists would say. So, when B Lab came to Delaware and sort of promoted this new sort of law, the benefit corporation law, in the early 2010s, I was on the bar group that maintained the Delaware corporate statute. And we just thought it was kind of cute and crunchy but not something for a serious corporate law of jurisdiction like Delaware. So, we just want to set them on their way. B Lab was persistent, and they came back. I ended up being the person in Delaware who was really tasked with looking harder. Actually, our governor, Jack Markell at the time was very interested in the idea. And so, as I looked into it (and I talked about this in the introduction to the book), I did some research and some thinking and, and eventually occurred to me that, you know, maybe the way I’d always been thinking about corporate law wasn’t the only way and, perhaps, not even the best way.

Dolph Goldenburg: Interesting. And can you share a little bit more about your thinking and why you ended up feeling that way?

Rick Alexander: Yeah. So, you know, I think the logic and the logic of the traditional corporation, you know, this idea of shareholder primacy, where the directors are fiduciaries to the shareholders who can they run the corporation for their benefit, is one that came out of an era where people were worried in the early 20th century that as corporations became sort of more broadly owned and there was more and more public ownership of companies (so that it wasn’t for the owner operators), they were worried that the managers would have support of runaway, um, with all the assets and just wanted to run the corporation for their own benefit. And so, the idea was to protect shareholders from that risk, protect their capital. While shareholder primacy might be a good mechanism for that, you just have to sort of look around the world to see there are negative effects because it’s corporate activities that’s behind a lot of the carbon has generated a lot of food and security issues, a lot of inequality. All of that comes from corporate activity.

A bit of corporate law history, part 2:
Therefore, the traditional corporation operates under the mandate of shareholder primacy; that is, maximizing the returns to shareholders above all other goals.

And when you think about it, corporations control a huge amount of the resources of our society, and they have lots of effects. The financial performance is just one effect. And if, you know, you’re measuring success by financial performance, but at the same time generating pollution or inequality or social unrest, your balance sheet really isn’t giving you a true picture. And so, the idea of the benefit corporation is to say directors have to be concerned about the return to shareholders, but they have an equal obligation to be concerned about the effect that the corporation has on other stakeholders, whether that’s customers or employees or the community or the environment, generally. And so, you know, I think having thought about it quite a bit, that second way of running a corporation makes more sense, but importantly, right now when we advocate for benefit corporation legislation, we’re just advocating for an option, not a mandatory provision. Although I will tell you that since B Lab became active in this area promoting it at the state level, there has been a bill introduced in Congress by Elizabeth Warren to make all corporations that have $1 billion or greater in sales benefit corporations.

Dolph Goldenburg: Wow. So, that actually leads really well. One of the other questions I want to ask you Rick, but before I do, let me say, one of the things I love about having a podcast is that I get to ask really smart people stupid questions sometimes. So, I apologize because some of these are going to seem like stupid questions. Neither myself nor my listeners really have waded deep into the river of Benefit Corp. So, you know, for someone who has waded in like you have, it might feel like these are really shallow questions. So, I will just put that out there up front. Short of, for example, Congress passing legislation, requiring that all corporations that are billion dollars or more be B-corp, what’s the carrot? What’s in it for corporations to decide to either become or start as a B-corp?

Rick Alexander: I think what I should do is maybe step back just a little terminology to help everybody make some distinctions because there’s a lot of B’s flying around. So, I work for a nonprofit called B Lab. And B Lab’s goal is to create tools and paths for for-profit companies to be a force for good in the world, to have positive impact on society and the environment. And our probably Marquis product is something called a B-corp, and that’s not the legal form that you and I have been talking about. B-corp is a certification of of a corporation. So, if you think about something like fair trade or organic, which is a certification for a product, B-corp is a certification for an entire company. So, companies like Patagonia or Dannon Yogurt, or the American subsidiary of the known in France, those are, those are certified B Corp. That means they’ve gone through a complicated process of assessing their impacts across the board, and they have gotten a certain score and we at B-Lab that verify that.

And so that’s a, that’s a certified B Corp and there’s about 2,800 of those around the world. Part of getting your certification though is to take on a legal form, uh, that ensures that you operate for the benefit of all your stakeholders, not in a shareholder primacy. For corporations like a Delaware corporation, there was no way to do that before we passed legislation authorizing the benefit corp because the law in Delaware was if you were a corporation, you operate for the benefit of your shareholders. So B Lab wanted companies that were incorporated in Delaware to be able to certify. And in order to do that, there had to be a corporate form available. And so, they lobbied for this law, and it has now been passed in Delaware and about 35 other states in the United States.

And also, in a couple of countries like in Columbia, in South America. We’re working around the world to pass that law. So, [we have] B Lab (the organization), B- corp (the certification), and benefit corp (the legal form). And one other thing I’ll say is that the legal form has sort of taken on a life of the tone because there are many more benefit corpse now then there are B Corp’s lots of companies who, you know, can’t or don’t want to use our certification or nevertheless using the law. And then to get to your question of the carrot, why would a company want to be a benefit corp? What’s in it for them? For some companies, the motivating factor might be they want to earn our certification. But for lots of other companies, they might say, “Well, this is just a better way to operate. I’m an entrepreneur, I have somewhat of a social perspective, but I want to raise capital.”

You might have a business idea, and you’re thinking about whether it’d be a nonprofit or a for-profit. You might say, well, I want to be a for profit, but I don’t want to have that obligation to maximize the return to all my shareholders. I want to give them a return but not a maximize return. And so, for the entrepreneur who’s the ability to raise capital without having these absolute value, maximization obligations, you know, also it can be very exciting to the workforce. A lot of the companies that we work with will tell us that more important than the message to consumers is the message to their workers, especially the millennial workforce who care about purpose as much as their paycheck.

Let’s define some Bs:
B Lab: the nonprofit organization where Rick works. Its goal is to create tools and paths for for-profit companies to become a force for good in our society. Provides B Corp certification.

There is also the consumer facing piece, and there’s also the ability to engender trust with people in your network, whether they’re customers or suppliers or jurisdictions. A good example of this is a for profit educational company called [Laurie education] that went public as a certified B Corp. And a Delaware Benefit Corp, and that’s an industry that doesn’t have the best reputation. And they were trying to sort of address that. And one of the things that was important to them was often when they were competing for charters in different jurisdictions, they were competing with nonprofits; they wanted to be able to say to the jurisdiction, although we’re a for profit entity, we’re allowed to consider the interests of our students and the communities where we locate as importantly, as we think about our shareholders

Dolph Goldenburg: Thank you for that. Now, when I’m talking about the legal structure, I’ll say benefit corp. As I think about benefit corp, and as I think about how that might apply for listeners who are primarily interested in the nonprofit sector, I do actually think about benefit corp as a possible structure for what we’ve traditionally thought of as nonprofits. So, I find it interesting that one of the carrots is it might help companies that are in fields where their primary competitors will be nonprofits.

Rick Alexander: There is that, and I’ll also say… if you have a nonprofit and you want to operate a business that’s going to be more on the for-profit side and you want to raise some capital, you might use a benefit corp to do that. That way your intellectual property… raise some money, and the people who expect a return, but they may be impact investors who are, who care about the social issue as much as the return and you’re able to then operate that company as a benefit corporation so that, again, you can provide a fair return but not a maximized return.

Dolph Goldenburg: When you said they’re impact investors, I was going to ask, does that mean they’re okay with a slightly lower or even much lower return than what they’d get somewhere else? And it sounds like they typically they are.

Rick Alexander: Well, I would say that in the world of impact investing, there are full-return impact investors and then there are those who are not so full-return, and it’s a spectrum.

Dolph Goldenburg: So, if you have to think of the glass is half full or half empty, what percentage of the glass is full-return impact investors and what percentage of the glasses I’m not full-impact return?

Rick Alexander: I think that question really depends on your denominator. In other words, the biggest measure of impact returns, there’s something like $6 trillion in the U.S. which is about one sixth of investing money out there. But that includes everything that’s in any screened portfolio. If you buy the fidelity portfolio that screens out alcohol and tobacco and Firearms, but that would count. I think if you have a narrower definition of impact, then you’re probably going to have a higher percentage who really care about impact as much as returns. And there are some people who can impact almost as a tool for return. So, if you see some of the big private equity houses like TPG or Bane, TPG getting together with BONO and putting together a huge fund, they think of this as, you know, an economic opportunity.

Another B:
Certified B Corporation: a business of any size, structure, or state or origin that has undergone an extensive evaluation process to prove it meets the standards required for certification.

They look at the opportunity for renewables and look at the opportunity to bring a business tools to the developing world. And they say, there’s no tradeoffs here. So that’s one type of impact investing but, then there are people who just say… think of maybe an endowment that wants to invest their money but also wants or investing side to have as much impact as their, as their grant side. They might, they might be more interested, in a true, impact investment that trades off return

Dolph Goldenburg: For a nonprofit that is interested in maybe spinning off a business and spinning it off as benefit corp, what types of professionals should they be having conversations with to determine if it’s right for them?

Rick Alexander: There’s just the legal complexity of making sure you have whatever controls are in place to separate the businesses cause there will end up being a lot of shared services. You have to make sure that, you’re not using the grants and the tax-exempt money for your business. I think it’s largely legal. I mean, obviously there’s going to be business questions that’ll be different for every business. But I think getting it right legally… At B Lab, this isn’t a great story, but that what we did… We did this, and that business ended up not working. I don’t think it was that complicated in terms of the structuring. I mean we had an experienced lawyer help us with those issues. We put some IP into a media company, and we essentially rolled it in. It was a nice online property, Be the Change Media. It didn’t become what we were hoping you could pick up. But it did suggest to me that it’s not that complicated.

Dolph Goldenburg: Are there many nonprofits across the country that currently have a benefit corp that they run?

Rick Alexander: I don’t know the numbers. I hear people talk about it, but I don’t know how far along all these things are. A lot of this is pretty good when there’s a lot of discussion, but I just don’t know how many  actually got it.

Dolph Goldenburg: Are there any like stellar success stories that B Lab points to when they talked to nonprofits and say, look at what this organization did and the benefit that it’s had?

Rick Alexander: Not in the hybrid space? I can’t think of anything.

Dolph Goldenburg: Alright, totally fair.

The next, I think logical question and a lot of folks that listen to this podcast recur, people who are maybe interested in starting a nonprofit. Should people be considering maybe a benefit corp structure instead of a nonprofit structure when they’re thinking about starting an organization that will impact their community?

Rick Alexander: You know this better than I do. A lot of people go, Oh, I have this good idea. It’s going to have an impact. Wouldn’t it be great to be tax exempt and be able to get people to give us money to get started and not worry about taxes if it’s sort of business where we get returns? But the issue with that is that you’re in constant fundraising mode, and that is much more difficult sometimes than raising permanent capital. I think it’s a very company specific question, but what’s nice about the benefit corporation is you get to have something that’s between the traditional, if I raise money, then I’m only going to have to, you know, I’m going to have to return money to shareholders at the maximum rate that I can versus being tax exempt and only being able to raise charitable capital. So, I think it’s an option that people should be thinking about.

You know, one thing I’ll also say in that area is for people who are thinking about starting a nonprofit, a question we get a lot at B Lab is, do you certify nonprofits? Because you have all these tools about being environmentally mindful and treating your employees well; we’d score great because we care about those things. And the answer is that we do not certify nonprofits. However, we do have a free online tool available. We use our own tool at B Lab. We go through our survey once a year, you know, we figured out where we can get more points and try to make a goal of doing that. The next year we’ve taken out pull out all the parts that relate to anything to do with equity and diversity and inclusion. So you can really focus on those if that’s something you want to do. And it’s, you know, the best part is it’s free.

Dolph Goldenburg: That’s really awesome. And so, that’s available at the B Lab website.

Rick Alexander: Yup. You just go on there to set up an account, and you can grade yourself.

Dolph Goldenburg: That is super cool. So I will make sure that we link to that as well in the show notes because admittedly, that was one of the other [stupid questions] I wanted to ask you. So, thank you. Another question that I know that I wanted to ask you, when you talk about the impact investors, are foundations able to be impact investors in benefit corps?

A Final B
Benefit Corporation: the legal form a corporation takes that allows it to operate without adherence to stakeholder primacy. Available in 30+ states in the US, in Italy, and in Columbia

Rick Alexander: So, you have to talk to your tax lawyer. There’s been some back and forth about whether you can invest your corpus for reasons other than return. I think there was a pretty good letter from the IRS about two years ago saying that you could, but you have got to ask your tax advisor. I do think that it’s an often-neglected question 501c3’s tax exempt organizations that have endowments, how they’re investing their money. And you know, you find companies that have green policies and they’re investing in a tar sands; it’s a really good thing I think for investment committees to think about and get some advice from their counsel about. I think you should be able to think about some of these issues and try to make some impacts on the investing side.

Dolph Goldenburg: Couple of years ago, Iinterviewed someone who was running a major hospital system in the Midwest, and they actually made the strategic decision to take I think like a third or half of their endowment and invest in businesses in the communities that the health system was in. It really kind of help those communities blossom and grow all around their hospitals. At the time, when I first heard it, I was like, “Wow, that is revolutionary to take a piece of your endowment and say, instead of investing in Philip Morris work, invest in the wellbeing and health of our community around us.

Rick Alexander: Yeah. Reduce stress and all the other social determinants of health, then that’s going to help with your case. That’s how the world should operate. It’s funny cause at the beginning you talked about robber barons, and you’ve got the classic Carnegie’s and Rockefeller’s destroying the world and creating endowments to try to fix all the problems [they] created. Wouldn’t it be so much better if we just had businesses operating in the same responsible, respectful manner?

Dolph Goldenburg: Exactly. Well, Rick, I have got to make sure I ask you see Off-the-Map question, and I have two of them. I walked in knowing one that I wanted to ask you, but now I’ve got a second one as well. Your book is dedicated to the memory of the 1,129 human beings who perished in the collapse of the Rana Plaza garment factory. And my guess would be (not to minimize the tragedy that happened there) is that there have been other real catastrophes like that, that have been caused by companies that are ignoring the social good of all of their stakeholders. So, how did you choose that tragedy as the one that you wanted to dedicate your book to?

Rick Alexander: A lot of things go on for that. The list could go on forever. The sense that so many garments, uh, purchased here in the United States in a very competitive industry where price point is everything to many people. All along the supply chain, it’s, how much does it cost? How much does it cost? You know, how many pennies can I save here? I always assume good intentions, and people along that chain are acting out of ignorance, not out of if they would be happy to pay more if it meant safety. And so, it just seemed to be something that was very relevant. That tragedy was very unnecessary, very driven by a profit motive and very addressable if there was more awareness and more tools in our toolbox. Also, you know, separately, it’s poignant in the sense that, you know, in United States we always talk about the Triangle Shirtwaist Factory tragedy, which was something similar but happened a hundred years ago, which would probably never happen now. And so again, this is something we can address and have addressed in the United States closer to home. We should be finding tools to address that around the world.

Dolph Goldenburg: Definitely makes sense. My second Off-the-Map question for you. When I first picked up a copy of your book, I was confused by the title. And so at the very top and (and I’ll have to post a picture of this in the show notes), it says Benefit Corporation Law and Governance. And then in the center and a beautiful blue box outlined in white and gray and blue, green, it says Pursuing Profit with Purpose. And so when you and I first got on a Skype today, I had to ask you, I had to say, well when I talk about your book, is the title Pursuing Profit with Purpose and then the subtitle Benefit Corporation Law and Governance, or is it the other way around? And you shared with me that it starts Benefit Corporation Law and Governance with the subtitle of Pursuing Profit with Purpose. But there’s an interesting story about that that I hope you’ll share.

More important than the message to consumers is the message to the workforce for a lot of B corporations – especially the millennial workforce.

Rick Alexander: You asked me that question and prefaced it by saying that you thought it might be a stupid question. I said, no. I’m so happy you asked me that question because actually I had a disagreement with the publisher. I wanted the title to be Pursuing Profit with Purpose and have the subtitle be the sort of boring Benefit Corporation Law and Governance. But the publisher thought it was important that people understand that this was about benefit corporations and not some other more general topic. And so they pushed to go the other way, and I relented. But when it came time to sort of designed the cover, I sort of pushed for a cover that made it somewhat ambiguous and made the subtitle, uh, almost as prominent as the title. And so, it is very intentional that you would be confused

Dolph Goldenburg: And I have to share with you then the work that you did with the publisher and in making that subtitle very prominent worked. I also have to share with you that the cover is such that it’s a book than I would pick up cause I go, “Oh, Pursuing Profit with Purpose. That interests me.” If it was only Benefit Corporation Law and Governance, I would think, “Eh, I don’t know. I’m not up for that. Just not up for going to sleep every time I picked this book up.” Yeah.

You achieved your purpose, and that this is 100%, as a nonlawyer, a book I would pick up,

Rick Alexander: It was drafted from my perspective to the lawyers but to really anybody who’s interested in the relationship between business and positive impact

Dolph Goldenburg: and, and and I have to say as a non lawyer, it is absolutely drafted in a manner that those of us that have no formal legal training or no legal training at all, absolutely would enjoy this book.

Rather than create foundations and endowments to fix the problems they’ve created, it makes sense for businesses to operate in a sane, responsible, respectful manner from the start.

Rick Alexander: Yup. That’s nice to hear.

Dolph Goldenburg: So Rick, it has been amazing talking with you today, and I have such admiration for the work you’re doing and also just to be quite frank, for the person that you are. I know you from outside of the podcast, and as I was reading the book, I could literally hear your voice and the person that you are really comes through in this book. I want to make sure that listeners can find you. And so your website is www.frederickalexander.net. That’s right listeners, it’s Frederick, not Rick. We’ve been informal today by calling him Rick, but go to www.frederickalexander.net to get to his website. Now, you can buy Rick’s book Benefit Corporation Law and Governance: Pursuing Profit with Purpose from his website or at www.amazon.com. Now, at his site, you can also check out Rick’s blog and benefit corporation news that’s out there as well. Finally, if you want to catch up with Rick at the day job, you can find more at www.benefitcorporation.net. That site has a directory of B corporations that I found very interesting. Also, do not forget and we’re going to link to this as a nonprofit. If you want to take the quiz and see how you score and see how you need to improve to be similar to a benefit corporation, you can do that at the website as well. Hey Rick, thank you so much for coming on the podcast.

Rick Alexander: Terrific. Thanks.

Dolph Goldenburg: If you were checking your 401k to see if you have any benefit corporations and the mix, good work and keep on doing that, and always remember that when you’re done checking your portfolio, you can find Rick’s contact information at our show notes at www.successfulnonprofits.com. I would love to hear from listeners about this show. I know that it’s sort of tangentially related to the nonprofit sector because we’re talking about really a corporate structure that is good for society, and we’re also talking about the possibility of some opportunities for nonprofits to start benefit corporations. But again, I would love to get your feedback on this. Tweet me, call or send an email that I can share on the air. I just really want to hear what you have to think about benefit corporations. That is our show for the week, dear listeners. I hope you have gained some insight to help your nonprofit thrive in a competitive environment.

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