New vehicles for social entrepreneurship are clearing a path to scale business as a force for good.
As a growing slice of consumers and investors seek to align their values with their pocketbooks, an unmistakable trend toward social impact has been steadily on the rise in the business world. Today, many companies are finding they must not only address the financial interests of shareholders, but also their non-financial stakeholders: employees, suppliers, customers, the community and the environment. As this trend has picked up, so has awareness that an outdated legal framework was inhibiting for-profit companies whose social missions are integral to their identities.
Enter the benefit corporation, an emerging corporate structure that provides a foundation for such entities. Benefit corporations operate much like traditional corporations, but besides focusing on profits and earnings, they must also positively impact society and the environment. In addition, they must issue an annual “benefit report” on their progress toward these goals, as evaluated by an independent third party.
The social impact movement can be observed in the rapid adoption of benefit corporation legislation in states across the country. Maryland was the first, in 2010; 19 states have followed, with legislation pending in 18 others. On January 1, 2013, the movement hit close to home when the Illinois Benefit Corporation Act went into effect. The very next day, Peoria’s Thrive Capital Partners became one of the state’s first benefit corporations.
Impact Hub Peoria
The vision of former Maui Jim CFO Tim Krueger, Thrive was a private equity fund with a mission to “develop companies that do good while making money,” with a purposeful focus on Peoria’s south side, where 62 percent of the citizens live below the poverty line. Having volunteered in Carl Cannon’s ELITE program at Manual Academy and Big Brothers Big Sisters at Trewyn Middle School, Krueger witnessed a world far different from life at Maui Jim, one with little hope and few opportunities. Inspired to make a difference and do business in a different way, he left the comfort of the corporate suite with an eye on creating social impact where it was needed most.
Setting up at the former Blaine-Sumner Middle School in the heart of this poverty-stricken neighborhood, it was a leap of faith, to say the least—a deep dive into the heart of society’s thorniest challenges. Thrive identified six key sectors in which to invest—food, education, health, environment, manufacturing and microfinance—and soon begat Impact Hub Peoria, a business incubator, innovation lab and coworking space. Leveraging Blaine-Sumner’s sprawling footprint, “The Hub” would bring together people, passion, money and hard work to help rebuild the community through the creation of socially responsible businesses: benefit corporations.
A small group of enthusiastic volunteers worked through much of 2013 on a feasibility study and application to affiliate with Impact Hub, a global network of coworking spaces with similar missions for social impact. From the spring to the fall, nearly 2,000 people toured the old school building. After the application to join Impact Hub was accepted, a month-long crowdfunding campaign raised more than $30,000 for building renovations. An ambitious, inspired group of thoughtful, committed citizens—from techies and tradesmen to architects, artists and more—was poised to take on the status quo.
But despite the passions of its founder, Hub volunteers, Thrive board members and other supporters, the epic challenges of its plans proved too difficult, and by the end of November, Thrive and the Hub had shut down. “There was a lot of interest,” Krueger affirms. “But as we got closer to making the big decisions—rehabbing the building, leasing space, going to the city for TIF funding, putting investors’ dollars to work—it started to become obvious that it wasn’t going to work right now. The addition of Impact Hub broadened the initial scope, probably too far… and the location wasn’t conducive to lure businesses down there.”
The news came as a disappointment to those whose passions were ignited by the project—unique for its articulated focus on social benefit. “There are a lot of investor dollars that want to see change in Peoria,” Krueger says. “We all know we want something different. The money was not the issue… My focus was on how we could build a different corporate structure. We have to develop companies that make money… But as they do, they have to focus on more than just the shareholder.”
A Paradigm Shift
Amidst a long, sluggish recovery in the wake of the Great Recession, an unprecedented re-examination of the market economy has been quietly underway. From Alan Greenspan’s 2008 admission that he may have “put too much faith in the self-correcting power of free markets” to Warren Buffett’s 2011 New York Times op-ed entitled “Stop Coddling the Super-Rich,” mainstream business leaders are reconsidering some basic assumptions. And while the Occupy movement extinguished quickly, it placed a renewed focus on social inequality that’s had a much longer life, with Pope Francis and President Obama recently speaking to the topic, bolstered by a widely-circulated report estimating that the world’s 85 richest people hold as much wealth as the 3.5 billion poorest.
A recent article in The Atlantic suggests economist Milton Friedman’s theory of shareholder value—that the sole social responsibility of business is to maximize shareholder profits, as he famously wrote in 1970—“helped catalyze a divorce of business from society.” Noting that America’s business leaders in the 1950s and ‘60s “widely believed they were responsible to the community as a whole,” it submits that the rise of this worldview contributed to a fraying of the community fabric, even as high-tech globalization was transforming capitalism into something far different from the post-war economy that built a broad, robust middle class. With social impact infused directly into their mission statements, benefit corporations signal a new paradigm in which business and social interests are increasingly intertwined.
“It’s been amazing over the last year to meet so many people who are concerned about the lack of opportunity… the world we’re leaving for our children,” Krueger says. “That’s what the benefit corporation is really getting us back to. It’s like with a person… Most people who are truly happy have balance in their lives, with different stakeholders: their health, God, their family, friends and financial [security]. If you only focus on one thing, happiness will probably elude you.”
Krueger credits his previous employer, though not a benefit corporation, as a model for looking beyond the bottom line. “I saw at Maui Jim, how they treated employees and customers that was different from other companies,” he explains. By embracing employee well-being, rather than externalizing it, turnover is relatively low, and by focusing on superior service—even if it takes longer in the short term—customer loyalty drives sales in the long run, though the connection can’t always be quantified.
Too often in the corporate world, short-term incentives come at the expense of long-term performance. “That’s what is so tough about measurement,” Krueger says. “It’s the things that are easy to measure that are measured most often. I’m a numbers guy… but I also know the best things in life can’t always be measured. If what you do is always based on what you’re going to get in return, you start to lose the human impact of what you did. It becomes just a transaction.”
Krueger cites employee engagement—or the lack of it—as a significant issue in the workplace, noting studies that show up to 70 percent of Americans are disengaged in their jobs. “It’s very sad. The things we spend most of our lives doing, we’re not engaged in.” By placing the social and financial missions on a similar footing, benefit corporations are leveraging the results of countless studies showing that money is not the primary motivator for attracting and retaining employees, especially young professionals. It’s an indicator—a signal that your work matters beyond the bottom line.
The Triple Bottom Line
Closely related to the benefit corporation, and often confused with it, is the Certified B Corporation. Where the benefit corporation is a legal corporate entity, the Certified B Corp is a certification—not unlike “fair trade” certification—conferred by B Lab, a nonprofit that rates “triple-bottom-line” companies, those that have folded social and environmental concerns into their core missions. Upon passing an assessment of its social and environmental practices, any company can be certified, whether or not it is set up as a benefit corporation. There are currently 963 Certified B Corps in 32 countries around the world.
Scott Settelmyer of Peoria is managing director of TerraCarbon LLC, an advisory firm that develops market-based solutions for forest conservation efforts. Founded in 2006, when neither the certification nor the benefit corporation existed, TerraCarbon achieved Certified B Corp status two years ago. “We always considered ourselves a social business,” Settelmyer explains. “For a few years, we were trying to figure out the best way to express that. That’s when we learned about the Certified B Corporation.
“It’s a way to communicate to our clients that we have a mission that’s more than just profit,” he adds. “Even though we’re structured as a for-profit company, we have a bigger goal in mind, and not only that, we measure how we’re doing against that goal.” Every two years, Certified B Corps must update their assessment documents to maintain certification, measuring everything from employee policies and corporate governance to civic involvement and environmental practices. But it’s not just about passing an assessment—“you’re actually trying to bake these values into the DNA of your business,” Settelmyer explains.
And that, he adds, can lead to a range of benefits. “We’ve had RFPs come in asking about the environmental and social aspects of our business. [B Corp certification] has become an easy way to communicate how we approach that. It’s also been great for hiring employees.” A third benefit, he adds, is “having an organization like B Lab behind it to promote the brand among consumers and in state capitals, as well as facilitate networking with other certified B corporations.”
A Balanced Approach
Dr. Eden Blair, assistant professor of entrepreneurship at Bradley University, serves on TerraCarbon’s advisory board. She believes that social entrepreneurship—including benefit corporations, Certified B Corps and L3Cs (low-profit limited liability companies)—will continue to grow, with business becoming an ever greater factor in solving societal ills.
“Many people do see this as a social movement,” she declares. “I actually see it as a way to make large-scale systematic change because it helps us look at things on a much bigger scale. Small nonprofits do a lot of good work, but they don’t seem to solve major problems. Like a food bank gives food to people, but you still have hungry people.”
The benefit corporation provides a legal basis for companies to act with a more balanced approach toward their communities. “The idea is that… you can do things for the benefit of the community, even if it hurts the bottom line. Prior to this, shareholders could sue if a company was not maximizing shareholder wealth,” she says, citing a case against Ben & Jerry’s, which was sued in 2000 by shareholders demanding its sale to Unilever over the objections of its founders and longtime supporters. The case helped spark a movement to challenge the theory of shareholder value, and today, Ben & Jerry’s, still a division of Unilever, is a Certified B Corporation.
Like Settelmyer, Dr. Blair believes the more balanced approach can improve a firm’s long-term sustainability. “A lot of people invest in socially responsible businesses because they think they tend to be more stable over time,” she says. “[They believe] that by taking into consideration the community, your employees and the environment… that it’s actually a better, more stable company. Look at the banks that failed because they only went for profits without thinking about the issues they were causing for people. Not only were they bad for the community, they were bad for themselves in the end.”
Solving the Aldi Problem
Last December, the Aldi on Western Avenue—one of the few grocery stores left on Peoria’s south side—announced it would soon be leaving for a new location across the river. From the C-suite of the German-based firm, the move surely makes sense, but here in Peoria, it leaves a devastating hole in an already troubled neighborhood—further desertifying the food desert on the south side. It’s a situation that calls for a community-based solution, the very reason Thrive Capital was formed in the first place.
“Obviously Aldi didn’t think the return was good enough to stay,” Krueger says. “So how do we fill gaps like this? You see the things that should be different, you want them to be different, but unless there is a strong group of people working together, you’re probably doomed to hard things… How do we build that structure so we can effectively deal with these situations?
“Food is a great opportunity, but it’s a very low-margin business,” he adds. “You have to have a great model to make it work. There are some great community grocers inside urban areas—that’s where we have to look. Who’s doing it well? And then having a strong group driven by investors and getting that public support… There are solutions out there, but they are partnerships. And at the end of the day, if it doesn’t make money, it won’t last.”
Krueger maintains that to build the momentum for change, we have to break down the silos that keep us separated from each other. “How do we connect people from different places?” he asks. “I met a lot of interesting people [through Thrive] from different walks of life, who I wouldn’t have had an opportunity to meet… because we tend to go where we’re comfortable. They all want something different, but we’re struggling with how to make it happen.
“There so many good people out there… When you sit down and talk to them, we agree on 90 percent of things. Republicans, Democrats… each has part of the solution. We all know we need jobs. Now how are we going to create jobs in Peoria? How do we build businesses that are good for people? We’ve got to develop the investors and structures and companies and people to work on these things… As we start to meet different people, that’s when great things start to happen.”
A Matter of Time
This trend of “doing good while making money” can be seen in a range of efforts, both for-profit and philanthropic. The B Team, co-founded in 2012 by Sir Richard Branson of the Virgin Group, is bringing global business leaders together to create a “Plan B” for business: “a better version of capitalism.” One can see it in the work of Bill and Melinda Gates, whose Gates Foundation is tackling issues from education and polio eradication to hunger and poverty. It can also be seen in the efforts of legendary investor Warren Buffett, whose “Giving Pledge” has committed many of the world’s wealthiest people, from Paul Allen to Mark Zuckerberg, to dedicate much of their wealth to philanthropy.
“It’s driven by leaders in the private sector doing the right thing, and then it starts to become accepted,” Krueger declares. “Where maybe 20 years ago, having power and wealth was the ultimate [goal], now people are starting to say, ‘That’s not what I really want. I want to be successful, but I want to have an impact on people’s lives.’ And they see Buffett and those guys doing it—living by example. They’ve taken it upon themselves to say, ‘I think something is broken.’ And that, I think, is what’s going to change the system.”
As the lines between business and philanthropy blur, nonprofits have become more like businesses in terms of measuring their impact, even as many businesses are acting more like nonprofits through their social commitments. The benefit corporation codifies this dual purpose. “Many companies are finding they have to measure their social and environmental impact,” says Dr. Blair. “A lot of that is a push from consumers. It makes good business sense to care for your outside community, because consumers are now watching.”
Meanwhile, rumors suggest that as early as this year, Etsy could become the world’s first Certified B Corporation to go public. “That would be a milestone for this concept,” notes Settelmyer. The popular online marketplace has been an evangelist for social impact through business. “B Corp certification has served as a galvanizing force in our march towards a mission-driven business,” declared Etsy VP of Values & Impact Matt Stinchcomb in an interview last fall. “We want to help it become the default corporate structure for the world.” If Etsy does go public, writes The Economist, it “will provide an important test of whether such notions can withstand the short-term pressures of the stock market.”
Whether or not this nascent movement takes off in the years to come remains to be seen, but it’s clearly a meaningful trend. “Like a lot of movements, it takes time, and there’s sometimes an entrenched status quo that doesn’t back down,” says Settelmyer. “But it’s a trend I think you will see continue.”
As for Krueger, the dissolution of Thrive Capital and the Hub left him some time for soul-searching. And though its ambitions may have exceeded the capacity to fulfill them, the underlying social issues remain stubbornly in place, as does the passion that drove its supporters. “I think Thrive, the original focus… still has a lot of potential,” he says. “It’s really about bringing investment by the community into the community with companies that can start changing the community… I’m just trying to figure out how to focus that.
“I have a deep passion or calling to make an impact on the community through business,” he adds. “It’s why I left Maui Jim. But it’s a process. And if you don’t try, nothing will ever change.” The rise of benefit corporations and other vehicles for social entrepreneurship are making that change a little more foreseeable. “It’s going to happen—it’s just a matter of time.” iBi