Legislating the B Corp standard for Australia’s ‘purpose-driven’ corporations

By Jennie McLaughlin

Friday August 9, 2019

Compared to a couple of years ago, most would agree that the ‘purpose movement’ has been gathering steam.  To this point, the Australian Financial Review named ‘purpose’ the Business Buzzword for 2018. Everywhere you look, there is another conference or leadership forum espousing the benefits of being a purpose-led organisation and how to become one.

As EY’s Purpose Leader in Oceania, my role is to help guide and enable leaders and the organisations they serve, embark on a Purpose journey. That said, I am generally the one pouring a large dose of reality into conversations with clients around how hard this is to do in practice.

For example, here are three test questions I put to leadership teams before embarking on a purpose journey to explore their commitment for their organisation…

  1. Do you truly believe that the pursuit of your purpose will drive performance and profitability?  If you are not deeply convinced on the financial benefits that flow from being purpose driven, then do your own research — identify a purpose-led leader in your sector and compare their previous five-year financial performance versus their competitors.
  2. Are you committed to an ongoing journey (read five-to-seven years on average) to embed your purpose within all facets of your business operating model? This means having the will to change your existing practices, processes and policies to deliver on your purpose.
  3. Are you willing to make tough decisions based on your dedication to your organisation’s purpose? If you want to see what this looks like in action, take a look at the super courageous purpose-led decision made by the CEO of U.S. CVS Caremark, which has paid back handsomely over the subsequent years.

Why make it sound so difficult? Because it is difficult. I want CEOs to proceed with their eyes wide open, clear on the hard work ahead but also confident in the compelling financial benefits that will follow.

Declaring to your employees, customers, and the market at large that you have a new purpose and then not living up to it puts your organisation (and you personally if you are the CEO) on very dangerous ground. This is especially so given the heightened level of activism and consumers cynicism that now abounds. The research from the EY Beacon Institute will tell you that the “risk of rhetoric” is real and companies risk negative growth by establishing a purpose program that is not well integrated into their business model. Neither consumers nor employees will tolerate a company that has a “say-do” gap they do nothing about.

It is relatively easy to define and espouse a feel-good, aspirational purpose. To live it is a far more involved and complex task. The top barriers I hear CEOs struggle with…

  1. Short-term shareholder pressure that hinders their ability to focus on long-term value creation
  2. Lack of meaningful metrics to capture and track long-term value creation (hence, point 1)
  3. Systems/infrastructure not aligned with purpose
  4. Insufficient buy-in across the organisation
  5. Staff performance targets/incentives not aligned with purpose
  6. Poor communication from leadership

Clearly, a number of these factors are often considered outside of the leader’s circle of influence, especially points 1 & 2; so, where does a benefit corporation help to solve this conundrum?

The genesis of the B Lab standard

Firstly, some important context — and bear with me if it gets complicated. Back in 2006, three friends left careers in business and private equity and created a not-for profit organisation called B Lab. Their mission was to make it easier for purpose-driven companies (with a for-profit remit) to protect and improve their positive impact over time. So, they created the B Corporation standard and corresponding certification process. Certified organisations are called B Corps. The B stands for Beneficial and indicates that the certified organisations voluntarily meets certain standards of transparency, accountability, sustainability, and performance. These organisations aim to create value for society, not just for traditional stakeholders such as shareholders.

Additionally, B Lab campaigned for the adoption and improvement of benefit corporation statutes. They envisaged an opt-in legal framework to help organisations grow while maintaining their purpose, values, and credible standards. To date, much of their focus has been directed at U.S. state level, where a benefit corporation is now a legally recognised status in 37 U.S. states. To date, more than 10,000 businesses have adopted this new form of corporate governance.

The challenge of shareholder primacy

The framework of a benefit corporation directly addresses the top two purpose barriers cited by executives — short-term shareholder pressure and lack of long-term metrics. Many commentators say these challenges stem from the enshrined shareholder-primacy legal doctrine that drives companies, investors, and their directors to maximise profits above all else. Australian corporate law differs from the US, and here there is a debate about whether, and how, directors should consider non-financial interests, which we’ve seen in the post-Hayne Royal Commission environment. In this context, the governance of a benefit corporation clarifies the scope of stakeholder interests that those company directors must consider when making decisions. This clarification aims to provide guidance on how to balance the interest of all stakeholders (such as employees, customers and society at large) alongside shareholders.

In the wake of the Hayne Royal Commission and with the question of shareholder primacy in the spotlight, it remains to be seen whether benefit corporations will emerge as a clear answer. In the final report, Hayne made observations regarding the duty of directors to act in good faith; in the best interests of the corporation and for a proper purpose (section 181(1), Corporations Act), emphasising that directors’ duties are owed to the corporation. This “demands consideration of more than the financial returns that will be available to shareholders in any particular period”, he says in the report.

A bill for the introduction of Benefit Company status in Australia

While the benefit-corporation status is not currently legislated in Australia, moves are well underway by the local B Lab team to socialise the benefits to local lawmakers and make a compelling case for passing a new draft bill into legislation. Their aim is to achieve this as soon as possible. Strong support is likely to come from circa 250 certified B Corps in Australia (interestingly the highest number of certified B Corps per capita in the world). You may be familiar with some of the well-known ones, like Intrepid Group (adventure travel) and Koala (a mattress manufacturer).

Benefit corporations and B Corps are often (incorrectly) interchanged terms. They share much in common and are complementary, both being leaders of a global movement using business as a force for good. There are, however, a few important differences that you can better understand here.

Some success stories

While all this makes for interesting reading, a number of recent events are forcing the big end of town to take note and are driving the B movement to a completely new level of adoption.

Brazilian-based beauty brand Natura (listed as B3-NATU3) is known for brands such as Aesop and The Body Shop. It is currently the world’s largest B Corp, with revenues of $2 billion. In May this year, it announced an all-stock sale acquisition of Avon (NYSE-AVP). If the deal goes through in 2020, it will be the world’s fourth-largest beauty brand, with circa $10 billion in global revenue. What is truly ground-breaking is that Avon’s directors became the first directors of an existing U.S. listed public company to upend shareholder primacy by voting to adopt the benefit corporate model of stakeholder governance. Additionally, since 14 April 2015, when Natura adopted the US Benefits corporate model, its share price has more than doubled, from $27 to $64.

Also, French-based food giant Danone became the first Fortune 500 company to announce to shareholders its intention to achieve B Corp certification.  In April 2018, Danone North America, a $6 billion entity, achieved certification.

There is fierce market activity among listed companies and multinationals to acquire B Corps to provide the consumer and employee aura they desperately seek. For example, Unilever (itself on a purpose-led journey since 2010, when Paul Polman created ‘Making sustainable living commonplace’ their purpose) has acquired no less than seven B Corps, including Ben & Jerry’s and in May this year Olly Nutrition. This bold plan has led to remarkable financial success, with Unilever announcing in July that the Sustainable Living brands grew 69% faster than the rest of Unilever’s brands. This was up from 46% in 2017. The Sustainable Living Brands also accounted for 75% of their overall growth.

So back to my original question, ‘is a benefit company the purpose-driven company of the future?’ In short — yes. I believe benefit corporations and B Corps will play a huge role in the success of purpose-driven companies globally. In fact, many are already doing so.

So, if you are an SME or mid-sized purpose-driven organisation, hopefully you are already part of the B Movement and can expect some exciting market opportunities ahead. If you are a large organisation, then get closer to the B movement, perhaps taking a leaf out of Unilever’s playbook by considering B Corps as strategic acquisitions — this is where the significant growth in the market can be found.

Support the bill

On the legislation side, the team at B Lab Australia and New Zealand would welcome your pledge of support for the bill. I have included a link here. Hopefully when the benefits corporation status is legalised in Australia, you will be ready to sign up for the same bold steps as Natura and Avon. Until then, back to the hard work on embedding your purpose into your organisation.

Note: In the US, the term benefit corporation is equivalent to the Australian terminology of a benefit company.

Jennie McLaughlin is Oceania Leader for Purpose, Strategy, and Customer Experience, and CCXP at EY Australia,The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.

This article is republished from LinkedIn.

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