Paths to a Better Economy: Natural Capital, Benefit Corporations and Certified B Corps

Dateline: April 11, 2020

As the current pandemic plods on, many of us are sitting at home thinking about a post-pandemic future. It’s possible the capitalist-market economy as we know it will crumble under the dual weights of paying for the current massive health care response to COVID-19 and the halting of much of our global productive activity through social distancing. Some of us see this as an opportunity to build a more efficient and humane economic system. Will we have the courage to make changes? Let’s look at two ideas that have been developing over the last 50 years and see whether they are more appealing in this time of economic stress.

Better valuation and accounting for ‘Natural Capital’ is one change that might contribute to our recovery.

What is Natural Capital?

Natural capital can be defined as the world’s stocks of natural assets which include geology, soil, air, water and all living things.

Even though most elementary school children are taught about the distribution of natural resources around the world in their social studies classes, few countries currently account for the depletion of such valuable stocks in their reports of gross national or domestic product. When a seller figures the price of land for sale, access to mineral and/or water rights may be considered but rarely do we address the coopting of value to the nation or local community. As the whole world experiences shortages of protective medical face masks, hospital beds and bleach, our awareness of how and among whom we share scarce resources is raising. Most medical supplies are manufactured, not ‘natural’, resources but perhaps we can generalize the understanding of what it means to run out of toilet paper to running out of fresh water.

As we restart our extractive and manufacturing economic activity let’s think about whether we want to go back to the unbridled concentration of benefit derived from both natural and man-made resources into the hands of a few wealthy individuals. Is there a way to restrain excessive greed and self aggrandizement without loosing the motivation for hard work and productivity generated by free-market competition?

Organizational Purpose: Profits vs. Stakeholder Benefit

In the United States there has been much debate about the supposed obligation of corporate management to generate profits for shareholders even at the expense of the nation, local communities and stocks of natural resources. Stephen Bainbridge of U.C.L.A. Law School wrote in the NY Times a few years ago:

There are many reasons why the law requires corporate directors and managers to pursue long-term, sustainable shareholder wealth maximization in preference to the interests of other stakeholders or society at large, but the most basic one is that managers who are responsible for everyone are responsible to no one.

No one individual, that is, but certainly those managers already responsible to comply with government regulations. Expanding on this concept of the legal obligation, the Clark Program on Corporations and Society at Cornell University notes:

…modern corporate law does not require for-profit corporations to pursue profit at the expense of everything else, and many do not do so.” ( BURWELL v. HOBBY LOBBY STORES, INC. ) In nearly all legal jurisdictions, disinterested and informed directors have the discretion to act in what they believe to be the interest of the business corporate entity, even if this differs from maximizing profits for present shareholders [italics added]. Usually maximizing shareholder value is not a legal obligation, but the product of the pressure that activist shareholders, stock-based compensation schemes and financial markets impose on corporate directors. 

The Shareholder Value Myth , Eur. Fin. Rev. Lynn Stout (April 30, 2013) 

The Ideology of Shareholder Value Maxim (Watch), Evonomics

In other words, corporate managers get to balance using profits for shareholder returns against reinvesting in the firm itself. This still doesn’t take into account the benefit or harm to the many other stakeholders impacted by a business firm regardless of whether it operates within a small geographic region of a few square miles or around the whole Earth.

Any organizations, including sole proprietorships, partnerships, corporations and government entities, are free to take on a responsibility for the welfare of their employees, surrounding communities and to contribute to the public good. Consider, for example, the actions of the LLC, Johnsonville Sausage when a fire caused great financial losses to the company. Johnsonville continued to pay its employees while its facilities were closed and reassigned them to 1/2 time at local volunteer jobs and 1/2 time to their own education.

Johnsonville’s policy was crafted by its owners after the disastrous fire occurred. Is there a way to bake such an attitude into the very foundations of a firm?

Governments Are Recognizing New ‘Benefit Corporation’ Structures

Here are The Basics according to B Lab:

“A benefit corporation is a traditional corporation with modified obligations committing it to higher standards of purpose, accountability and transparency:

Purpose: Benefit corporations commit to creating public benefit and sustainable value in addition to generating profit. This sustainability is an integral part of their value proposition.

Accountability: Benefit corporations are committed to considering the company’s impact on society and the environment in order to create long-term sustainable value for all stakeholders.

Transparency: Benefit corporations are required to regularly report to shareholders on how the company is balancing these interests.”

As of 2020:

The Italian government led the way to official benefit corporation legislation in 2017. Canada and several South American countries are jumping on the band wagon.

Until more U.S. states and non-U.S. governments adopt benefit corporation laws, the private nonprofit organization, B-Lab, is offering certification for which companies anywhere on the planet can apply. An organization does not have to reincorporate as a ‘benefit corporation’ to become certified but it does have to meet all the requirements specified by B-Lab. So far, these are somewhat more rigorous than those of government corporate legislation.

So What?

What do corporate purpose and natural capitalism have to do with the COVID-19 pandemic? Nothing unless we choose to link them together and decide not to go back to business-as-usual when the world is finally allowed to be open-for-business again. Many of us are so steeped in the ways of competitive-only markets and self aggrandizing capitalists that we assume there are no other possibilities. Either that or we think that the only other models are radical socialism or (horror of horrors!) communism. The notions in this blog give us some intermediate steps to take in our economic practices that will change but not disrupt society as we know it. Our primary goal is to create an economy that is resilient to a variety of disasters, the relatively slow ones such as climate change and homelessness, faster ones such as the COVID-19 pandemic, and rapid-onset catastrophes such as hurricanes, wildfires and volcanos. Of equal importance to many of us is to strike an ethical balance among the interests of individuals, groups of various sizes from villages to nations, all of humanity and, perhaps, all living things. Finding such a balance is going to require that we recognize our connectedness and interdependence. We can build that recognition into our economic institutions. If not now, when?

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