Does B Corp status really signal a force for good, or just a 'force for less bad'?

The B Corp idea disrupted entrenched narratives in business. But certification of companies like Nespresso shows that it must now evolve to embrace newer, bolder ideas in business – or risk being adapted to the needs of the “old economy”, argues Erinch Sahan of the Doughnut Economics Action Lab.

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The coffee company Nespresso is now a certified B Corp. This means that B Lab, the nonprofit network that manages certifications, has assessed the Nestle subsidiary’s entire social and environmental impact, and denoted it a ‘Force for Good’.

Yet serious human rights concerns have been expressed and a group of certified B Corps have signed a joint letter titled The B Corp Standard is at Risk, prompted by Nespresso’s certification. 

This poses a critical question about the role of B Corp certification in the transition from the old economy to the emerging new economy. Is B Corp certification primarily to improve the impacts of the businesses of the old economy, which remain built to extract maximum financial value for shareholders? Or is it to foster the businesses of the new economy, built to generate as many social and ecological benefits as possible? In other words, is B Corp status about being ‘a Force for Less Bad’ or a ‘Force for Good’? 

Much depends on key design choices that B Lab now makes

Much depends on key design choices that B Lab now makes: below I explore three such choices, and offer suggestions to ensure that B Lab helps transform the business world, instead of getting transformed by it.

 

Choice 1: Testing for shareholder-primacy to identify old vs new economy businesses

The businesses of the old economy are increasingly engaging with sustainability. They are becoming better at identifying ways to extract even more value for their shareholders by engaging with social and ecological issues. This enlightened self-interest can be helpful, but not sufficient because it turns down many possible investments and practices whose returns don't quite deliver on the expected margins or dividend growth enforced by mainstream financial markets. Doing good only when it helps profits ultimately holds back solutions that aren’t profitable enough, even where they are commercially viable. Instead, we need ways to identify businesses which are designed to pursue social and ecological goals, and which also sustain commercial resilience. These businesses embody purpose in their ownership and governance, ensuring finance is used to serve their social and ecological purpose. They don’t allow margin and dividend growth to become the overarching goal but are liberated to pursue a broader purpose. Such businesses are emerging around the world, but the proliferation of ethical claims is making it hard to tell them apart. Scrutinising the way companies accrue and channel profits is pivotal to distinguishing them.

Scrutinising the way companies accrue and channel profits is pivotal to distinguishing them

For 27 years, Nestle has increased the dividends it pays out to its shareholders. Within Nestle, with a profit margin of 23%, Nespresso is a star performer, ranking highest among ‘operating segments’. This raises two key questions that remain unanswered across the 500+ pages of Nespresso’s B Impact Assessment – the tool created by B Lab to capture a company’s performance in various areas:

  1. How does Nespresso decide to invest its profits, which stakeholders get a say and what role do social and ecological priorities play in such decisions?
  2. Would Nespresso consider lowering its margins to pay its farmers prices that allow them to earn much better incomes?

When corporations focus on growing their margins and dividends, this can stifle internal investment and hinder social and ecological goals. Critically, it also drives inequality because of how share ownership is distributed. For instance, in the US, the richest 5% of families own 71% of shares. The poorest 50% of families combined own just 1% of shares. Corporations distribute dividends in proportion to wealth, with the largest cheques going to the wealthiest who own the most shares. Over time, this channels ever more profits to the richest in society, serving to supercharge inequality. The priority given to accruing profits, and how they are used, can be a shortcut for determining whether a business is ultimately ruled by shareholder-primacy. In an era of record corporate profits, this lack of focus on how businesses use their profits is looking like an important blind spot for B Lab standards. 

Is B Lab ready to ask questions like: when Nespresso or any business does well financially, should it primarily channel its profits to shareholders or towards creating further social and ecological benefits? Currently, B Lab standards shed little light on this question. While they ask for additional transparency from multinational corporations, the assessment seems to shy away from commercial practices in supply chains and financial flows – questions that get to the heart of shareholder-primacy. Instead, B Lab’s assessment suggests that Nespresso has attained certification through some useful improvements in policies and practices while avoiding a redesign that would have freed it from the demands of the old economy. As more large corporations become drawn to B Corp certification, uncomfortable questions around the priority given to accruing and distributing profits will become even more important.

A suggestion to B Lab: B Corps must prioritise paying workers and farmers adequately over pursuit of higher dividends. Incorporate a limitation on dividends until all workers and farmers closely linked to the business earn enough to meet their basic needs (ie actually fund living wage and living income processes).

 

Choice 2: Scrutinising if supply chains are a force for good

In supply chains, businesses of the old economy tend to embrace only the solutions that protect their margins. They typically avoid questions such as: “are we paying prices that cover the sustainable cost of production?”, “do our contract terms and purchasing practices pass on too much risk to our suppliers – entrenching issues like child labour and deforestation?”, and “how should we share any growth in our profits with those who grow and make our products?” Instead, they see issues like child labour as a reputational risk to be addressed through auditing and cutting out offending suppliers. And they see farmer or worker poverty as a productivity problem. You can tell them apart because they will focus on stronger auditing of suppliers and promote their projects aimed at helping farmers to produce more. By and large, solutions that threaten their margin are avoided.

In supply chains, businesses of the old economy tend to embrace only the solutions that protect their margins

The way B Lab has assessed Nespresso’s supply chain seems to be based on this old economy model, seemingly avoiding scrutiny of how Nespresso’s pricing and purchasing practices help or hinder efforts to address poverty, inequality and ecological degradation across their supply chains. This is the focus of the Nespresso Transparent Disclosures that B Lab has required, which side-steps Nespresso’s commercial dealings, avoiding issues like sustainable pricing, long-term commitments and contract terms. The assessment by and large ignores the core of how Nespresso does business with its suppliers. In assessing a business where their primary impact is through its supply chains, this omission seems glaring.

One suggestion to B Lab: to meaningfully assess companies whose primary impact is through their supply chain, update B Lab’s standards to require such companies to report on how their pricing and purchasing practices are aligned to solving social and ecological issues, like poverty incomes. Paying prices to cover the cost of sustainable production could be a clear requirement.

 

Choice 3: The role B Corps can play in creating the new economy

With more than 5,000 certified businesses worldwide, B Corps have spread far and wide. Starting as a small group of plucky businesses challenging mainstream narratives around the purpose of business, the community is now a big tent. Today, B Corps vary greatly in the extent to which they deviate from the core pillars of 20th century business: shareholder primacy and profit maximisation.

While other, older movements also demonstrate compelling alternatives to shareholder capitalism (such as cooperatives, social enterprise and employee ownership), in my view B Corps have always looked more accessible to a broader range of businesses. The B Corp model plays a pivotal role in reaching mainstream corporations. This is needed alongside the plethora of communities and organisations pioneering new big ideas. These are different but complementary roles.

Today’s big ideas in the future of business are coming from many directions. From Melanie Rieback’s Post-Growth Entrepreneurship incubator to Purpose Economy’s Steward Ownership models, from the Economy for the Common Good’s Matrix to employee ownership, from the Zebras Unite community to the concept of Exit to Community; many are diving head-first into addressing questions of money and power. As smaller communities and movements, they are often more nimble and can openly tackle issues like dividend expectations, investor exits, margin requirements and the way value is distributed. They openly ask who should be represented on boards and who should have voice and power in decisions – going beyond the B Corp requirement of boards being free to consider broader impacts. For many of the new ideas, the challenge being addressed is how to be a real alternative to the growth-at-all-costs ‘unicorns’ shaped and funded by venture capital. These are precisely the questions that could allow more effective ideas to emerge to serve as a real mission-lock, preventing investors from undermining the focus on a social or ecological mission (e.g. preventing what happened to former B Corp, Etsy).

For B Lab, supporting and collaborating with these emerging ideas, organisations and movements is critical. The profile and position of the B Corp movement mean it can help maximise the disruption these ideas can cause to business-as-usual by helping to give them space outside the parameters of the B Corp model. Encouragingly, there are senior voices in the B Corp community who recognise this. Some businesses may even leapfrog B Corp certification for ideas and models that go deeper or further on embedding purpose into their deep organisational design. Others may combine it with B Corp certification. This mix of approaches should be encouraged.

A suggestion to B Lab: make clear how B Corp differs from other emerging ideas and movements (for example in how B Corps are different to social enterprises), give the emerging ideas profile as allies that sometimes go further and avoid positioning B Corp certification as the big tent that already covers all such ideas. In other words, primarily promote the ideas, not certification.

 

Enter the Three Horizons

“When a disruptive innovation meets business-as-usual, something is going to get transformed”. This insight arises from the Three Horizons Framework (created by Bill Sharpe, summarised by author and economist Kate Raworth here). It reminds us that any disruption could help create the emerging future we desire but could also be captured by business-as-usual.

Above: Three Horizons Thinking shows the relative domination (on the Y axis) of different economic scenarios and how these may change over time. As degenerative ‘business as usual’ inevitably declines (we hope), the ‘emerging future’ of a regenerative and distributive economy becomes more dominant. As competition between the two approaches heats up, disruptive innovation peaks, but it can either be captured by old, dominant structures (with negative outcomes) or harnessed by new, emergent ones (with positive outcomes). Find out more in this video explainer by Kate Raworth
 

Perhaps the disruptive innovation of B Corp is beginning to be captured, and adapted to fit the needs of the corporate giants of today’s economy ­– who want the advantages and kudos of certification, while minimising the fundamental changes they themselves need to undergo. Or perhaps B Lab is successfully achieving a deep transformation in business-as-usual, while also supporting the businesses that represent the seeds of the emerging future (those who have ditched the enterprise designs of the old economy). I suspect it’s a mix of both.

This is a fork in the road moment for the B Corp community. It is one that is felt by many movements who seek to transform the mainstream by starting with a small pioneering group who serve as a ‘proof of concept’. Like B Corps, Fairtrade certification also started with a group of pioneers from the broader fair trade movement: businesses like Café Direct, Divine Chocolate or Equal Exchange, who holistically embody the values of the movement across their business. It, too, eventually certified mainstream corporate brands like Cadbury’s and Nestle (who have both since ditched Fairtrade certification). It too can be swept up in promotion of a label and certification at the expense of supporting bigger, bolder, newer ideas that may go beyond its own model. And it too continues to grapple with deep-rooted transformation vs scale. None of this is simple. But in seeking to transform mainstream players, do certifications that arise from grassroots movements inevitably leverage the authenticity of the pioneers to attract the mainstream players? In this exchange, who ends up transforming whom?

In seeking to transform mainstream players, who ends up transforming whom?

I know very well the difficulty of setting and enforcing universal standards to assess the entirety of a business. I attempted it in leadership roles in fair trade and at Oxfam. I learned that each business is so unique, that the questions would need to be tailored and common-sense questions introduced, for an assessment to be meaningful. In fact, it may not yet be possible to definitively judge large, complex businesses through universal standards. B Corp took a crack at this by taking the big, hairy ideas in business a decade ago to create a comprehensive questionnaire that can be palatable to many mainstream companies. Even if the assessment was imperfect, it played a key role in validating and promoting emerging ideas around the future of business. The B Corp idea disrupted entrenched narratives. It continues to do so.

But the biggest ideas in the future of business have evolved in ambition and practice. The new ideas raise uncomfortable questions around dividends, margins, investor term sheets, ownership and power that would scare off many currently drawn to B Corp certification. It is possible for B Lab to embrace some of these ideas while shaping its own narrative and activities to give space for newer, bolder ideas to gain traction. At the very moment demand for the certification grows, can B Lab and the broader B Corp movement pivot to look beyond its own standard and certification to support the next generation of disruptive ideas? If so, it can remain a pivotal force in transforming the business world.

B Lab has responded to some common concerns about cerification on its website. It is running a multi-stakeholder process to develop new standards for certification, open to those within and outside the B Corp community. Pioneers Post contacted Nespresso's international and UK offices for comment, but had not received a response as we went to press.

 

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