A New Kind of Company

B Corporations worry about stakeholders, not just shareholders.

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By almost any standard, Give Something Back is a thriving business. Launched in 1991 with $40,000 from two founders, the office products company generated $25 million in sales in 2006. Give Something Back, which donates more than half of its profits to charity, could have grown even faster if founders Mike Hannigan and Sean Marx were willing to take in outside investors. But though they get offers regularly, they've always said no. The reason: "We couldn't offer an investor an opportunity to invest in us and feel in any way that our social goals were protected," Hannigan says.

It's a problem that has long dogged socially responsible businesses. Public companies are legally obligated to maximize returns to shareholders, according to a widespread interpretation of corporate law. For private firms, it's more a matter of withstanding pressure from investors. Hannigan and Marx, for example, fear their social mission could be threatened if an investor changed his mind about Give Something Back's penchant for charity. They want to avoid the fate of ice cream maker Ben & Jerry's, which received a buyout offer from the Dutch conglomerate Unilever (NYSE:UL) in 2000. Founders Ben Cohen and Jerry Greenfield didn't want to sell, so Cohen assembled a group of investors to make a counteroffer. When they couldn't offer as much as Unilever, shareholders sued, and the company, then publicly traded, was forced to relent. In April 2000, Ben & Jerry's was acquired by Unilever for $326 million.

That's exactly the situation that B Lab, a new nonprofit organization, aims to prevent. The group is creating a new kind of company--the B Corporation. (The B stands for "beneficial.") It's less a legal designation than a certification system that will allow businesses to define themselves as socially responsible to consumers and investors. To become a certified B Corporation, a company must amend its articles of incorporation to say that managers must consider the interests of employees, the community, and the environment instead of worrying solely about shareholders. Those amendments, according to B Lab, will let entrepreneurs like Hannigan take on outside investors without worrying that their values will be compromised. "For us, this is a huge step forward," says Hannigan, whose company recently became one of about two dozen certified B Corporations.

B Lab's founders got the idea from Leslie Christian, president of Progressive Investment Management. In 2004, she co-founded a new venture, Upstream 21, a holding company in Portland, Oregon. Christian says she and her partners "wanted to be really clear that we wouldn't be doing something solely in the interest of shareholders." Upstream's attorney drafted the language, and earlier this year Upstream acquired its first company. "When you look at what makes a company successful, is it the absentee landlords? No, it's the people who work there," Christian says.

B Corporations must do more than simply edit their articles of incorporation. They have to pay B Lab one-tenth of 1 percent of revenue, and score at least 40 out of 100 on a survey B Lab developed after consulting with more than 150 entrepreneurs, investors, and academics. It's similar to the LEED certification system for green buildings or TransFair's certification of fair-trade businesses. Companies gain points for a number of practices, including democratic decision making, having good benefits, donating profits to charity, and being energy efficient. "We want to help consumers separate good companies from good marketing," says Jay Coen Gilbert, co-founder of the apparel company AND 1, who launched B Lab with Bart Houlahan, AND 1's former president, and Andrew Kassoy, a principal at private equity firm MSD Capital, which manages Michael Dell's money.

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