Last December when my son, Tom, was a senior in college, I asked him to name his favorite course. The answer? “Social entrepreneurship.” At the time, I had no idea what that meant. But over the past year, I’ve met dozens of people who believe that this concept of setting up companies that contribute to the social good, at the same time that they earn profits for shareholders, will change the way we do business—indeed, that it will alter the definition of capitalism.
Tom used the example of an eyeglass company named Warby Parker, which sells prescription eyeglasses online at a price of $95. For every pair of eyeglasses sold, Warby Parker distributes a pair of eyeglasses to someone in need, someone who cannot see well enough to read or to work. Almost 1 billion people in the world lack access to glasses, according to the company, which means they cannot work or learn. Warby Parker aims to change that. As soon as he earned a little money of his own, Tom bought a pair of eyeglasses—and later prescription sunglasses and then a second pair of eyeglasses—from the company. He’s very happy with both the products and with the company’s mission.
And Tom is hardly alone in his desire to make a difference in the world. Indeed, the growing movement of young—and older—people who have decided to buy products from companies that meet certain criteria for treating employees, consumers and shareholders well at the same time that they work to battle social inequities and injustice has created a groundswell of support for companies like Warby Parker, according to Glen Macdonald, a senior vice president at Hillview Capital Advisors LLC and co-founder and the president of the Wealth & Giving Forum, a national organization that has promoted greater giving among families of means since 2004. The Wealth & Giving Forum, with a database of about 1,500 individuals, families and advisors to wealthy investors, puts together forums where peers learn from one another about what they can do to change the world.
So my son and Glen Macdonald are hardly unique in their commitment to change the nature of capitalism—to work for, invest in and buy products from companies that have made a commitment to social change. You might argue that this is old news. Many baby boomers remember marching in the streets demanding social and political change. But it’s different this time around, according to Macdonald and others. For one thing, the present-day reformers have tools to make that change happen.
Structures now exist to perpetuate economic change. A new type of corporation, called a B corporation or “B corp,” designed to measure a company’s level of commitment to change, requires that in order to organize—or reorganize—as a B corp, a company must have a defined social or environmental mission as well as a legally binding fiduciary responsibility to its employees, the community and the environment as well as to its shareholders. The company must publish independently verified reports on these social and environmental accomplishments just as it must publish independently verified reports of financial results.
This requirement is critical to Macdonald, who says that in more traditional structures such as the C corp and the S corp, the prime responsibility is the fiduciary commitment to the company’s shareholders. That creates a climate where pressure on directors and managers may well encourage them to cut financial costs at the expense of human costs. For example, he says, suppose a company has a plant in Bangladesh with one door. Clearly, the factory would be safer for workers with four or more points of entry and exit. But the board’s fiduciary responsibility is to protect shareholder interests at all costs. “So why should they go to a four-door factory when one door is cheaper?” Macdonald asks. “Some boards are well-intentioned, but they don’t want to get sued.”
The movement to form B corps was developed in 2006 by a Pennsylvania non-profit called B Lab, which provides tools for measuring a company’s “score” under B corp standards as well as a free “assessment test” to help a company determine its strengths and weaknesses. Becoming a B corp requires a lengthy certification process, which includes evaluation on social and environmental matters.
Macdonald, who served as a partner focused on management consulting at Coopers & Lybrand, discovered in his work there that helping a family devise an investment plan that included charitable giving required an investment background that he did not have. He decided to act on that, which led him first to Merrill Lynch, then to Wealth & Giving full time and then back into the private sector with Hillview Capital.
A recent Wealth & Giving forum featured Howard W. Buffett, Warren’s grandson, who talked about his family’s foundation, as well as Scott Harrison, a successful promoter of top-drawer events at the prestigious nightclubs of the world, who woke up one morning in Uruguay to the realization that he hated himself and his career. He went on to found “charity: water,” in which he uses sponsors’ money to help provide clean drinking water to the countless people in the world who suffer diseases caused by polluted drinking water. Legal requirements of transparency allow shareholders of B corporations to hold managers accountable for failing to accomplish the company’s public benefit purpose.
In April 2010, Maryland became the first state in the U.S. to enact legislation authorizing the creation of the B corp. Several states followed, including California, Hawaii, Maryland, New Jersey, New York, Vermont and Virginia. But it was when Delaware adopted B corp legislation in July 2013 that companies and legislators took notice. After all, Delaware has long been viewed as a corporate haven, a place where corporations could incorporate to get around restrictive laws in other states. Passing a law to enable corporations to form with the purpose of changing the nature of business seemed a sharp U-turn in that state’s law.
Other states are considering B corp legislation. Common to B corporation legislation is the requirement that these entities have a general public benefit purpose. In other words, B corporations must make a material positive impact on society and/or the environment. A higher standard of transparency is another common requirement of B corporation legislation.
Macdonald, whose academic research includes a Fulbright scholarship in Mexico and a Ford Foundation Fellowship at the Harvard Center for International Affairs, says he has studied the economic structures of society for 30 years. “The evolution of the economy definitely influences investment policy,” he says.
He rejects the well-worn argument that no one will want to invest in a company that puts social good at the top of its list of priorities. “The naysayers say that you have to give up returns if you want to do social good,” Macdonald says, “and that there are not enough ‘good’ companies to invest in.” But the new B corp structure is proving them wrong, he says. Young people want to work for a company that values the public good. So do older people. And investors want to invest in such companies, too.
Macdonald has been observing corporate structures and their influence on the economy for 30 years. “One of the reasons I was studying the formation of markets at the state and national and international level is because I’m interested in the problems societies have with tremendous inequity and injustice and in conflict resolution,” he says. “What I have seen in the last 30 years is that attitudes are shifting.”
He doesn’t believe that capitalism is necessarily the best economic system or that it will necessarily be a lasting one. “Someone once told me that capitalism is the invention of man, just as feudalism was,” he says. He believes that there is no proof that one will be more enduring than the other. He recalls that in the ’60s and ’70s, many college students wanted to dump the system, but instead many of them decided to change their own outlook by going to a party and taking a trip on LSD.
Macdonald doesn’t see that happening now. “Look at the business schools and the courses they’re offering,” he says. Who was offering courses on social entrepreneurship in the ’60s? “Students are not looking to take drugs and check out. They want to transform and innovate.” He believes in that transformation and thinks it will be the next step to economic growth.
Mary Rowland can be reached at [email protected]. She has been a business and personal finance journalist for 30 years and has written two books for financial advisors: Best Practices and In Search of the Perfect Model.