30 Sep 2019 “Positive Impact Business: Symbolic or Genuine Actions”, Dissertation by Evelyn Sukadolnik

The first paper of a three-part series based on the dissertation presented in September 2019 for the LLM in Comparative Law, Economics and Finance at International University College of Turin (IUC) and Università degli Studi di Torino (UNITO) with the assistance of Prof. Dr. Daniela Carosio. It proposes to discuss legal, economic and financial aspects regarding for-profit companies that incorporate sustainability in their practices and, beyond, as their core business.

Dissertation title: For-benefit corporations and a business culture shift

by Evelyn Sukadolnik, BBA (Hons), LLB, PgD Branding, LLM, Professional in the Financial Market, volunteer at Trê Investindo com Causa (non-profit association for positive impact investment), independent consultant at IFAD-UN. E-mail: sukadolnik@alumni.usp.br

The increasing awareness about our societal problems and the scarcity of natural resources made people question if corporations were succeeding at the expense of society and the environment as a whole. This fact led governments to improve the legal framework as well as stimulated companies to voluntarily adopt Corporate and Social Responsibility (CSR) practices beyond complying with the law. Some have gone further and a new model of “ethic for-profit” companies emerged incorporating sustainability in their core strategies, generating positive impact and changing the way of doing business, which we would call “for-benefit” corporations.

CSR has developed over the years, and its definition changed since 1950 “from purely social, philanthropic methods, to comprehensive approaches incorporating social, environmental and legal responsibilities” (Hack et al 2014:52). Nowadays we can observe corporations embracing different CSR levels. With the significant rise in the number of conscious customers demanding ethical and sustainable products or services, along with professionals seeking meaningful work with a sense of purpose, some companies realized opportunities of creating value with sustainability. Meanwhile, more investors figured out not only there is an extremely promising market but also that Environmental, Social and Governance (ESG) issues might be a “risk management tool” since remediation of negative impacts usually is more expensive. Nevertheless, it is not always easy to distinguish between real initiatives and “window-dressing” or “greenwashing”, where companies are actually looking for profit opportunities.

Skeptics still believe sustainability increases costs that, in the end, would mean fewer dividends to shareholders. This idea is part of a paradigm established by the Neoclassical Economic Theory which considers profit maximization the best allocation of resources: maximization of goods and services provided with the most efficient results to society (Milton Friedman [1962], 2009:112). The profit maximization paradigm has been repeated for decades, turned into a rooted business mindset as if it was the only proper way to run a corporation. It encouraged companies to operate exploiting resources and minimizing costs without evaluating all consequences involved (Khandwalla 2004:98). Therefore for-profit companies historically left societal problems to be solved by government and NGOs alone while they were focusing on making money for shareholders.

This is why companies initially considered sustainability as something “extra” to business, an expense that could help with their image and maybe catch an increasing green or ethical demand in the market. Nowadays most corporations still consider profits as their main goal, meanwhile already considering other stakeholders in their activities when complying with the law or adopting “complementary” sustainable practices. Part of these companies exaggerates communication about social and environmental practices or selects what prefer to publicize while concealing less sustainable areas or processes. Marquis et al (2016) analyzed 4,760 large companies from 45 countries in the period 2004-2007 to understand deliberated selective disclosure. The study concluded corporations tend to be more substantial in their reports because of public pressure and reputational risk, mainly in countries globally-connected, with more environmental NGOs, strong civil liberties and political rights. The authors also suggest customers and investors should look for an independent third-party validation to prevent symbolic disclosed information.

Certifications aim to help consumers recognize products meeting sustainable policies, such as FSC[1], MSC[2], ISO 14000[3], Fairtrade[4], organic, among others. Furthermore, different initiatives using the internet and social media spread to boost public awareness regarding corporate practices and push the increase of transparency, for example: Behind the Brands[5], lists of animal testing[6], initiatives from consumers’ associations and a number of smartphone applications to understand product labels and their impacts. However, even though certified products and a higher level of CSR/ESG may be considered a huge advance on the path to becoming more sustainable, it does not assure the company does enough. A company with specific products certified may be generating negative impacts in its operations. Else, certifications usually analyze parts (processes or products) and are queried if they really act with independence.

Be philanthropic or eco-friendly is little, disconnected from companies’ role and the actual society demands much more. Worse, as explained by Bowen (2014:17), a merely symbolic way to perform sustainability is a mistake in an era of social media where incoherencies are easily exposed. An attempt to go further and create a different way of doing business, and also help to distinguish between “good company or good marketing”, is the B-Corp movement that strives to be the agent of positive change.

B-Lab is the non-profit organization responsible for the third-party validation, assuring reliance on the certification. They certify “businesses that meet the highest standards of verified social and environmental performance, public transparency, and legal accountability to balance profit and purpose” (B-Lab 2019). Their impact assessment covers governance, workers, community and environment. Reaching a minimum verified score, the candidate must provide evidence and supporting documentation. When B-Lab confirms the standards are met, the company publishes its impact assessment and changes its corporate legal documents highlighting an important difference: profit is no longer the single or most important goal, but to deliver value to all stakeholders.

B-Corps are part of a significant movement of a business cultural shift, although it is not the only model of “for-benefit” corporations. Certainly, the certification process and third-party validation facilitate the general public to understand the company’s purpose and way of running a business. In addition, the community enables B-Corps to join forces and share mutual support, a “network effect” that creates positive externalities to improve their performance as “better companies for the world”.

We suggest further discussions to analyze that the “for-benefit” approach and the stakeholder governance lead to a number of competitive advantages, building trust, adding value to the company and delivering strong financial results in the long run. We reached a point where business as usual is not anymore acceptable or even feasible, companies are required to take responsibility, understand the full cost involved in doing business and put positive social and environmental impacts in their core with the same importance of profits.

[1] Forest Stewardship Council certifies products with responsible forest management.

[2] Marine Stewardship Council certifies products with responsible fishing.

[3] International Organization for Standardization: ISO 14000 series define standards for environmental management systems.

[4] Fairtrade International has standards for decent working conditions and fairer deals for farmers.

[5] Behind the Brands, Scorecard assesses the agricultural sourcing policies of the 10 largest food and beverage companies.

[6] PETA (People for the Ethical Treatment of Animals) publishes databases of companies informing those that do not test on animals and those that do so.

References

B-Lab. About B-Corps. 2019. Retrieved from: https://bcorporation.net

Behind the Brands Scorecard. Retrieved from: https://www.behindthebrands.org

Bowen, F. (2014). After greenwashing: Symbolic corporate environmentalism and society. Cambridge: Cambridge University Press.

Chakraborty, S. K., Kurien, V., Singh, J., Athreya, M., Maira, A., Aga, A., … & Khandwalla, P. N. (2004). Management paradigms beyond profit maximization. Vikalpa, 29(3), 97-118.

Fairtrade International. Retrieved from: https://www.fairtrade.net

Friedman, M. ([1962], 2009). Capitalism and freedom. University of Chicago Press.

Forest Stewardship Council (FSC). Retrieved from: https://fsc.org/en

Hack, L., Kenyon, A. J., & Wood, E. H. (2014). A critical corporate social responsibility (CSR) timeline: How should it be understood now. International Journal of Management Cases, 16(4), 46-55.

International Organization for Standardization (ISO). Retrieved from: https://www.iso.org/standard/60857.html

Marine Stewardship Council (MSC). Retrieved from: https://www.msc.org

Marquis, C., Toffel, M. W., & Zhou, Y. (2016). Scrutiny, norms, and selective disclosure: A global study of greenwashing. Organization Science, 27(2), 483-504.

People for the Ethical Treatment of Animals (PETA). Cruelty Free Database. Retrieved from: https://features.peta.org/cruelty-free-company-search/index.aspx