By Mark Stapp
Director, Master of Real Estate Development
What is business success? Profitability, right? But what if you have other aspirations for your business, such as promoting a social cause or helping the environment? Up to now, for-profit companies could not codify those non-financial objectives.
Managers of for-profit businesses have a legal, fiduciary responsibility to increase shareholder value, and anything that deviates from this is a breach of their responsibility. Other kinds of outcomes, such as community building or environmental benefits, are valued as good public relations, but they must not conflict with the core purpose of optimizing profit. Traditionally, benefiting society is thought to be the work of not-for-profit companies and government.
Profit is critically important, and many for-profit companies — large and small — do a lot of good in their communities, including substantial contributions in support of social issues, all the while building wealth for their owners. Profit making and social and environmental responsibility do not need to be mutually exclusive objectives.
But problems can develop when social and environmental benefit is not specifically part of your stated business purpose, because investors/owners may then accuse managers of breaching their fiduciary responsibility. We are, however, living in an era of mission-driven business, impact investors, social entrepreneurs and conscious capitalism, and companies that want to align themselves with this trend may find the focus on optimizing financial performance alone misses an opportunity for competitive advantage.
Things are changing however. When SB 1238 became effective Dec. 31, Arizona joined some 30 states in authorizing the formation of benefit corporations — sometimes called “B Corps” — that give entrepreneurs and other business people the option of putting non-financial goals as well as profitability at the center of their companies’ objectives.
Under the new law, benefit corporations must create general public benefit, which is defined as a material, positive impact on society and the environment. B Corp status expands the fiduciary duty of managers and directors to non-financial objectives such as social well-being and the environment in addition to the financial interests of shareholders. In a traditional corporation, shareholders judge the firm on its financial performance. In a benefit corporation, they judge performance based on social, environmental and financial performance. B Corps also are required to publish annual reports of their performance on these non-financial objectives. In other words, they can’t just talk the talk — they must perform, and document it in writing.
So why would you, an entrepreneur or small business owner, be interested in B Corp status? Some business leaders are considering the move because they realize that as a community prospers and grows it becomes a desirable and healthy place to live. The businesses in that community are part of the local economy, and a healthy community increases the probability businesses will also prosper. A symbiotic relationship exists between business and the community. When business is concerned about the well-being of the community and supports its well-being and growth, the sustainable place that evolves helps business grow.
Creating and raising a socially and environmentally responsible company makes good business sense when competing for customers and employees in today’s business environment. Could this be the right path for your company? Explore the possibility and consult your attorney. You might find this is the way to do good and do well.
“Getting Started” is an entrepreneurship column by the faculty of the W. P. Carey School of Business at Arizona State University. Mark Stapp is the director of the Master of Real Estate Development program at the W. P. Carey School. First published in The Arizona Republic, November 9, 2015.