Why do companies exist? The traditional view is to make shareholders rich. But those running startups know that they have no hope of getting there unless they can attract great talent. And the best people won't join your cash-flow negative venture without a really compelling reason.
Eleven years ago I wrote Value Leadership amid a wave of nausea following the Enron and Worldcom scandals. I concluded that the right tonic would be to show that companies that create more value for employees, customers and communities end up making shareholders better off as well.
And while that message landed with a thud in 2003, ever since 2007 there's been a growing interest in formalizing this idea through the creation of B Corporations. A B Corp is set up as a for-profit organization that submits itself to outside audits -- conducted by social and environmental performance auditor B Lab -- and that strives to achieve specific social goals as it seeks to make a profit.
This week The New Yorker described the case of eyeglass company Warby Parker, which as a B Corp has committed itself to carbon-neutral production and distribution. It tries to accomplish this by distributing via VisionSpring one pair of glasses in the developing world for every pair sold in the developed world. B Lab's site indicates that there are currently 1,063 B Corps in more than 30 countries.
Of all the good reasons to make a venture a B Corp, one of the best ones I can think of is that this legal form puts real teeth into a lofty-sounding mission. Enron's mission statement (which I quoted from for the opening of Value Leadership) sounded very much like the ones that B Corps use -- all about trying to make society better. Enron's CEO had read a study that he said proved that companies with lofty-sounding mission statements have higher shareholder returns. But had Enron been a B Corp, it would have needed to act according to those high ideals.
Entrepreneurs who have been out waging the war for talent know that today's younger workers are particularly keen on working for organizations that make a difference. And running a B Corp helps. As Dave Gilboa, another Warby co-founder, told The New Yorker, his company's social mission helps it to attract and retain talented employees. "Survey data show that workers -- especially young ones -- want to work for socially conscious companies, and will take less compensation in exchange for a greater sense of purpose," the magazine stated.
Here are two reasons entrepreneurs might want their startups to be B Corps:
1. Pay less for great talent.
The most practical reason for entrepreneurs to set up a B corp is that they struggle with ambitions that can exceed the resources they control. This is inherently frustrating. But if these business leaders are gifted, they will turn that frustration into inexpensive solutions.
What great entrepreneurs offer in greater abundance than do big-company CEOs is emotional currency. Rather than being able to afford high pay checks and ample bonuses and benefits to lure talented people into stultifying corporate jobs, startups can create work environments that deeply engage talented people through a meaningful mission.
By choosing a legal form that requires a company to act in a way that's consistent with making society better off, B Corps have an easier time convincing talented employees to join their operations because they are serious about their mission.
2. Attract loyal customers who share the mission.
B Corps like Patagonia have proved that customers are willing to pay a price premium for products that make them feel as if they are giving back while making a purchase.
Sometimes the employees who go to work for companies with meaningful missions will talk about the organization to their friends and family who then become customers. A company's registration as a B Corp can aid this process because potential customers see that the company intends to act according to its lofty mission.
It would not shock me, though, if cynical executives hijack the idea of the B Corp -- just as Enron tried to do with its lofty mission.
Ultimately the B Corp is a useful tool for entrepreneurs who want to make it clear to potential employees and customers that their startups exist for reasons that are bigger than simply enriching investors.