(Illustration by Adam McCauley)
With companies, especially publicly traded firms, embracing environmental, social, and governance (ESG) goals, markets are beginning to price in a corporation’s adherence to values other than strictly shareholder capitalism.
A new paper focuses on the firms at the center of a movement to create companies legally bound to uphold ESG values. Known as B Corps, these firms achieve a formal certification from the nonprofit B Lab, which demonstrates their allegiance to promoting the public good to a wider range of stakeholders beyond just those who own their stock.
The authors—Suntae Kim, an assistant professor of management and organization at Boston College, and Todd Schifeling, an assistant professor of management at Temple University’s Fox School of Business—looked at the effects of B Corps and incumbent firms on one another. Using databases of corporations, they tallied mass layoffs, income inequality between executives and average-paid workers, and stock repurchases—all evidence of classic shareholder-capitalist industrial behavior. Comparing this with B Lab’s directory of B Corps, they found that the more companies in an industry that exhibited these behaviors, the greater the prevalence of B Corp formation in the sector.
Similarly, they measured corporations’ public embrace of corporate social responsibility (CSR) by looking at trademarks, public CSR reputation, and acquisitions of CSR-related companies. The data showed that more CSR activity in an industry increases B Corp formation. Profit-driven companies were apparently reacting to the level of market interest in CSR by publicly showing their allegiance to the idea, and during the same period, socially minded companies were moving to codify their own CSR bona fides by seeking the rigorous B Corp certification.
The authors found that B Corps gave two main reasons for seeking the certification. First, “they want to go against this shareholder-value-maximizing, cold-blooded, hyper-capitalist corporation and ‘change the world,’” Kim says. The second reason was related to authenticity. While profit-driven companies used sustainability as a marketing tactic, these B Corps felt they were “the original sustainable businesses” and wanted to be recognized for their long-term, deep-rooted efforts, he says.
Kim became interested in studying B Corps when the movement was getting started around 2010, while he was a graduate student at the University of Michigan’s Ross School of Business. “These B Corps were emerging not only against shareholder-maximizing corporations, but also against these corporations that were embracing sustainability and advertising and doing a lot of CSR-related activities,” he says.
The B Corps’ drive to set themselves apart from ordinary companies was one of the most surprising findings that the research demonstrated, Kim says. Also unexpected was how the B Corp wave changed over time, keeping “a delicate balance between expanding the movement and preserving the original ethos of the movement.” Earlier alternative movements such as fair trade or organic farming focused on expansion, letting in existing players like Starbucks or Nestlé. As a result, “their standards have been diluted and their movements have been co-opted by incumbents,” Kim says. The B Corp adherents, by contrast, took a middle path, expanding their ranks somewhat without watering down their certifications.
These findings have broader implications for industrial theory. The researchers conclude that “incumbents’ countermobilization not only mitigates threats to their dominance in the short term but also stimulates the evolution of challenger movements, seeding reinvigorated challenges in the long term. Therefore, contestation continues not in spite of incumbent resistance but because of it.”
Regular corporations and B Corps continue to fight for dominance of the ESG label, a battle that won’t end until the shareholder-centric capitalists shift their organizational structures entirely—which would render them more aligned with stakeholder capitalism, the researchers conclude.
“The B Corp case raises the possibility that corporations’ merely ostensible embrace of the criticism can inadvertently invigorate the opposition, possibly worsening the crisis in the long run,” the researchers write. “To avoid greater peril, corporate leaders would have to authentically address the criticism by altering not just the facade but the substance of their operations.”
The paper’s importance lies in its finding that shareholder-focused companies’ efforts to appear fashionably sustainable made stakeholder-oriented firms even more determined to energize their movement against this form of governance, says Michael Lounsbury, a professor at the University of Alberta School of Business.
“The Kim and Schifeling paper shows that if one takes a broader, institutional view of the CSR movement, you can see how efforts of corporations to respond to CSR in merely symbolic ways can catalyze new reform movements (such as the B Corp movement) that can, in combination, lead to more substantive system-level change in favor of stakeholder capitalism,” Lounsbury says.
The research also points to a new finding about how organizations react to challenges from outside, Loundsbury adds: “Their paper suggests that as one movement wave gives rise to a new wave, the trajectory of institutional change can also shift from more evolutionary to more revolutionary forms of change.”
Suntae Kim and Todd Schifeling, “Good Corp, Bad Corp, and the Rise of B Corps: How Market Incumbents’ Diverse Responses Reinvigorate Challengers,” Administrative Science Quarterly, 2022.
Read more stories by Chana R. Schoenberger.