Etsy’s debut on the NASDAQ last week introduced the investing public to the “Certified B Corporation,” a for-profit company committed to also delivering measureable benefits to society and the environment. Investors apparently liked Etsy’s dual mission and, despite the fact that its online marketplace in handcrafted goods is not yet profitable, nearly doubled the price of its stock on its first day of trading.
To become certified as a B Corporation like Etsy, a company has to satisfy certain corporate governance, employee benefits and community service standards established by an independent non-profit organization called B Lab.
In its prospectus, Etsy offers its full-time employees stock options and paid time for volunteering, pays part-time and temporary workers 40% above local living wages, teaches women and minorities programming skills and composts its food waste.
There are now more than 1,200 Certified B Corporations in 41 countries, including well-known socially- and environmentally-conscious U.S. retailers like Patagonia (silent sports outfitter) and Warby Parker (online eyewear designer). 1 Etsy is the second Certified B Corporation to go public (the first was Rally Software in 2013).
B Corporations certified by B Lab are not to be confused with Benefit Corporations (also known as “B Corporations”) organized under state law. Like B Corporations certified by B Lab, statutory B Corporations seek to achieve both profit and beneficial social and environmental results. Since 2010, twenty-eight states have passed legislation establishing this new form of corporate entity. Maryland was the first.
Directors of statutory B Corporations are legally required to consider the interests of non-financial stakeholders as well as those of shareholders. Company managements are therefore protected from shareholder claims of failing to maximize profits or, in the context of a merger or acquisition, shareholder value.
In a statutory B Corporation, the shareholders actually determine whether and to what extent the company has benefitted society. B Corporations are required to publish annual benefit reports of their social and environmental performance using a comprehensive, credible, independent and transparent third-party standard. Shareholders can enforce a B Corporation’s stated social or environmental mission by bringing a benefit enforcement proceeding in state court.
Etsy was formed in Delaware in 2005, well before the creation of the statutory B Corporation. It was therefore organized as a C Corporation which is the form of corporate entity in which virtually all for-profit U.S. companies are organized.2 For almost a hundred years, it has been assumed that the sole purpose of a C Corporation is to maximize profits for its shareholders.3 By electing to become a Certified B Corporation, Etsy has thus exposed itself to the risk that its shareholders may take issue with its twin financial and societal objectives. Under B Lab guidelines, companies incorporated in states that have authorized statutory B Corporations – which include Delaware — must eventually incorporate (or reincorporate) in that form and abide by the applicable statutory provisions.
For Etsy, reincorporation would require the approval of its shareholders, a step that the company has not yet decided to take. Etsy reportedly believes that the statements included in its prospectus and other public documents regarding its social and environmental missions should protect it legally from any shareholder claim that it is not pursuing a pure profit motive.
So far, no statutory B Corporations have elected to go public and no publicly-traded C Corporations have elected to reincorporate as statutory B Corporations.
1 Patagonia is a major contributor to environmental groups and Warby Parker donates a pair of eyeglasses to the poor for every pair it sells. Both companies are privately-held.
2 U.S. businesses intended to be closely held by a small number of shareholders are often formed as “S corporations” which are treated as pass-through entities (like partnerships) for tax purposes.
3 In Dodge v. Ford Motor Company (1919), the Michigan Supreme Court held that Henry Ford was legally obligated to operate his business to profit its shareholders and that has been accepted corporate practice ever since.