June 11, 2012 7:49 pm

Riding the wave to a new type of model

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Patagonia company©Zuma

Visitors to Patagonia’s headquarters in Ventura, California, should not to be fazed by the man at the front desk who doubles as a surf instructor and is happy to sign up visitors to the outdoor clothing company for a lesson. Founder Yvon Chouinard’s autobiography-cum-corporate-philosophy is called Let My People Go Surfing, after all.

More surprising is to hear Rick Ridgeway, Patagonia’s vice-president of environmental initiatives, describe the drafting of the company’s articles of association as “the most fulfilling and satisfying thing that I’ve done”. Mr Ridgeway is a member of National Geographic’s Adventure Hall of Fame and once nearly lost his life in a Himalayan avalanche. Is it possible the award-winning film-maker and photographer now revels in the legalese of corporate America?

Apparently, it is. Patagonia is in the final stages of converting the business, environmental and social values laid out by Mr Chouinard into a legally binding corporate credo, as one of the first Californian companies – and with annual sales of more than $414m, the biggest – to have turned itself into a benefit corporation.

The novel corporate form seems to fit the contrarians at Patagonia like one of its own windproof gloves. Benefit corporations are one product of a global re-examination of corporate models – from employee-owned companies to mutuals and co-operatives – after the financial and economic crisis. First introduced by the state of Maryland in 2010 and now legal in seven US states, benefit corporations have to take account of non-financial interests, such as social, environmental or community objectives. Critics say the new form is unnecessary and may be counterproductive. Supporters see the structure as a middle way between traditional listed public companies, whose directors, they claim, have to chase profit to the exclusion of all else, and non-profit organisations, such as charities.

However, benefit corporations’ most ardent advocates have grander ambitions than simply providing a structure that appeals to “reluctant businessmen”, as Mr Chouinard styles himself. They want to catch the wave of change in capitalism and ride it until long-held preconceptions about business are permanently altered.

“It’s either the vanguard of a paradigm shift or it’s a fringe movement – and I think it’s the former,” says John Montgomery of Montgomery & Hansen, a Silicon Valley corporate lawyer who co-chaired the legal working group behind the California benefit corporation legislation.

Why do it?

US companies that wished to enshrine a “triple bottom-line” approach to business, combining environmental and social considerations with economic ones, used to have to choose between existing corporate models or repurpose statutes first used in the 1980s to see off corporate raiders. But these options were vulnerable to challenge. They also constrained the growth of the companies that used them, because the legal uncertainty deterred potential investors.

“If you want these businesses to attract investments and [increase] scale, you need to create clarity,” says Andrew Kassoy, co-founder of B Lab, a non-profit organisation that promotes benefit corporation legislation and also certifies that companies meet high standards of social and environmental performance. (B Lab oversees a network of “B Corporations” or B Corps, which adhere to these standards. Not all B Corps are benefit corporations, sometimes because they are based in states that have not yet passed the necessary legislation.)

Benefit corporations range from Sun Light & Power – which claims to be the oldest solar company in California, with annual sales of $16m – to a skateboard-maker in New York and a pet store in Maryland. The reasons why they have chosen the new structure vary almost as widely.

For instance, Sean Marx, co-founder of Give Something Back Office Supplies, in Oakland, California, says benefit corporation status “allows consumers to distinguish between companies that are doing good and companies that say they’re doing good”. GSB typically donates about 70 per cent of its $800,000 net profit to the local community.

He and his counterparts at other benefit corporations claim that the certification requirement of benefit corporation status adds rigour to efforts to improve social, community or environmental performance, and helps them to benchmark themselves against companies with similar goals.

These executives also say the sense of shared purpose makes their businesses easier to run, even if the basic management challenges are the same as at conventional companies. As a potent side-effect, wearing their heart on their sleeves allows them to recruit and retain talented employees. “We’ve been able to attract a group of people that you wouldn’t usually find in an office supply company of our size: highly competent, engaged, hard working,” says Mr Marx.

The extra step matters

Michigan-based Cascade Engineering, with an annual turnover of more than $300m, makes injection-moulded products and is run by Fred Keller. Mr Keller sums up his attitude as “find something good to do and figure out how to make it good business. If you do, you’ve got a good product, an empowered workforce and a wonderful community.”

Cascade is a B Corp, as Michigan has yet to adopt benefit corporation laws. Its example, however, raises a key question: is changing legal status necessary to achieve the advantages these companies say flow from a public commitment to social, environmental and community objectives?

Are you a capitalist?

Rick Ridgeway

How some early adopters in the benefit corporation movement responded

“Maybe ‘neo-capitalist’, recognising that it is more than just about money”
Rick Ridgeway, Patagonia (above)

“Yes, It’s the best system we’ve got – if it’s tweaked a little”
Gary Gerber, Sun Light & Power

“Capitalism is a pretty broad spectrum. I don’t believe we should be overthrowing capitalism. We have an opportunity to expand [the definition] as opposed to being focused on making money”
Fred Keller, Cascade Engineering (below)

“Yes. What’s important for us is we feel we should be able to make choices about what we’re investing in and what others are investing in us”
Stefan Pellegrini, Opticos Design

“I’m not a capitalist in a free-market way”
Sean Marx, Give Something Back Office Supplies

Read more at www.ft.com/businessblog

Most large companies and many smaller ones already have well-established programmes of corporate social responsibility. Many large listed public companies, whose diffuse shareholder base rules out a radical change in corporate status, have backed a “shared value” approach, which binds the interests of the company and the community it serves. John Mackey, co-founder of Whole Foods the natural-goods grocery chain, has thrown his weight behind a parallel, broader movement for “conscious capitalism”.

Benefit corporation executives say they will be happy if their initiative encourages other companies to adopt even a selection of the values they espouse. Where they differ is that they also want the security of the new legal status, which, according to Mr Montgomery, offers a safe harbour for entrepreneurs who fear outside investors may force them to give up their social or environmental principles in return for new finance.

Gary Gerber, Sun Light & Power’s founder and chief executive, is typical. He is the kind of environmentally aware executive who apologises for picking up visitors to the group’s Berkeley base in a hybrid-engine Toyota Prius rather than his electric car. He was an early backer of benefit corporations when the idea was raised at the Social Venture Network, a 25-year-old group for socially conscious entrepreneurs.

The precedent that haunts him, and a number of other benefit corporation executives, is that of Ben & Jerry’s, the ice-cream maker. In 2000, shareholders agreed to sell it to Unilever, after socially conscious businesspeople who had offered a lower price withdrew their offer. While co-founder Jerry Greenfield is now at ease with Unilever (itself a high-profile advocate of shared value), Mr Gerber says Ben & Jerry’s was “the one that went wrong. Even if Ben & Jerry’s had written into their bylaws that they had these principles, any shareholder could have challenged those bylaws and won”.

Concern that carefully constructed values could be threatened by future owners is also the main reason why Patagonia chose to become a benefit corporation. Mr Ridgeway says he does not want to downplay the positive impact of the certification process, but “the legacy question was more important” to the company.

As Mr Chouinard said in January, at the launch of the California law: “Patagonia is trying to build a company that could last 100 years.”

Causes for concern

Such forecasts worry sceptics. Some corporate lawyers say there is no need for a different legal form: courts would protect directors of conventionally incorporated companies if they took a decision in favour of other stakeholders that also supported the long-term interests of the company and its owners. Writing for the Harvard Law School Forum on Corporate Governance and Financial Regulation, Mark Underberg, former partner at Paul, Weiss, Rifkind, Wharton & Garrison, said benefit corporations’ “crabbed view of directorial fiduciary duties perpetuates the unfortunate misconception that existing law compels companies to single-mindedly maximise profits and share price, and in so doing undermines the very values that corporate governance advocates should seek to promote: responsible, sustainable corporate decision-making by companies of any stripe”.

Charles Elson of the University of Delaware, the state where most US listed companies still incorporate, warns the new structure – like the original “poison pill” takeover protections constructed in the 1980s – could “completely destroy managerial accountability” and entrench managers, to investors’ detriment. “Management can do basically anything it wants and claim that one or other stakeholder is being satisfied.”

Who would invest?

So far, few US states offer the benefit corporation route and only a minority of companies within those states have chosen it. Most of these are still closely owned – often by their founders – which means the big question of who else might choose to invest in benefit corporations has yet to be fully answered.

Mr Kassoy points to a number of venture funds that have already backed B Corps. Mr Montgomery is hunting for Silicon Valley companies that could attract more of this “patient capital”. “We will have a change point when the next socially conscious entrepreneurs build the next iconic company,” he says.

The public market remains untested, but the prospect a benefit corporation could list inspires some of the lead group’s members, even as it worries sceptics such as Prof Elson, who foresees disputes between outside investors and other stakeholders. “I would love to be the first IPO-ed benefit corporation,” enthuses Mr Gerber, though it is not a near-term plan. “That would be a thrill.”

It could be a long wait. As Mr Keller points out, the benefit corporation movement “isn’t one of those things that’s going to go viral: it’s going to be debated and discussed over a period of time”.

But, as Patagonia’s surfing staffers know, when it comes to catching the perfect wave, patience is a virtue.

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