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10
Mar

Hanging in the Balance

Posted by Crystal Lague

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Hanging in the Balance

How to manage selfish needs with the well-being of others

By Charles Lunon

Last May, as sales were taking off at his company in Salt Lake City, Cotopaxi founder and CEO Davis Smith was milling about a train station on the border of Slovenia and Croatia awaiting a train jammed with refugees from Syria. His mission was to learn what he could about their needs before traveling on to Istanbul to join 5,000 other people attending the World Humanitarian Summit.

That may not seem like the best way for the CEO of a startup to spend his time, but because Davis and Cotopaxi’s COO Stefan Jacobs incorporated the company as a public benefits corporation in Delaware, Davis was merely doing his job.

Delaware law requires that “B Corp” officers and directors balance the pecuniary interests of their stockholders with “the best interests of those materially affected by the corporation’s conduct, and the public benefit or public benefits identified in its certificate of incorporation.” The law enables B Corps to pursue social and environmental goals without risk of being sued by investors for not maximizing shareholder returns.

In the case of Cotopaxi, which makes tents, sleeping bags and other gear for outdoor adventures, the certificate calls for inspiring “social and environmental change that results in the improvement of the human condition, increased social consciousness and the amelioration of poverty.”

By the time Davis and Jacobs met at the Wharton School of Business in 2010, Davis was already running his second successful online retail startup in Brazil and scouting industries susceptible to disruption. But as someone who grew up in Latin America, he also had a yearning to lift people out of poverty.

So, in 2013, he and Jacobs founded Cotopaxi as a benefits corporation to send a signal to both consumers and potential investors that it was committed to a triple bottom line of profits, people and planet. Two years later, the company became the first incorporated as a B Corp from inception to raise venture capital from institutional investors.

Cotopaxi, which takes its name from a volcano in Ecuador, used some of that $6.5 million in Series A capital to hire Lindsey Kneuven at its first chief impact officer. Best known for writing a report on human trafficking in Silicon Valley for the region’s preeminent community foundation, Kneuven went to work bolstering Cotopaxi’s non-profit partnerships and social and environmental compliance programs.

That year, the company spent about 3 percent of its sales funding grants to non-profit partners working to improve health, education and employment outcomes in impoverished communities. It also inspired hundreds of people to collect trash, plant trees and donate food at festivals it sponsored across the United States. In Salt Lake City, it launched a pilot program to teach refugee youth computer science skills. Not too shabby for a three-year-old company with less than $1 million in annual sales.

In 2016, Kneuven focused on implementing standards designed to promote humane treatment of geese, ducks, sheep and llamas that produce the down and wool used in Cotopaxi’s products. She added a questionnaire to the company’s product design brief to get product developers to begin thinking about the social and environmental impacts of the products at the design stage.

That initiative aims to ingrain such thinking in employees and improve the company’s GIIRS Ratings, which are derived from an assessment tool B Lab developed to help its companies woo socially minded investors. It also helps back up the company’s tagline – “Cotopaxi: Gear for Good” – with consumers.

Research by professors at Harvard suggests that the more an industry engages in “hostile investor-centric behavior,” such as greenwashing, mass layoffs and high levels of income inequality between top executives and average workers, the more likely it is to spawn certified B Corporations.

That’s certainly true in the outdoor gear business, where Patagonia, Klean Kanteen, Newton Running, the footwear brand Olukai and fly fishing brand Fishpond have all converted to B Corps in a bid to distinguish themselves from the competition. All told, B Lab has certified more than 1,700 – or about 40 percent – of benefit corporations incorporated in the United States since 2007.

However, B Corps also are a response to socially minded entrepreneurs who are convinced that with the right legal protections, businesses can and should play a bigger role in addressing the world’s social and environmental challenges. “It’s no longer an option,” Richard Branson wrote in a preface to the latest annual report for The B Team, a not-for-profit group inspired by the B Corp movement that he co-founded in 2013 with 22 other executives. “Business must become a force for good.”

The report goes on to explain how businesses large and small can address global warming, income inequality and resource depletion to enhance the overall well-being of the planet and its inhabitants.

Echoes of Aristotle

While the “triple bottom line” was not widely used until 1994, when British author, entrepreneur and environmentalist John Elkington coined the term, the debate over the rewards of altruism can be traced back 2,500 years to a debate between two Greeks.

Aristippus of Cyrene argued that happiness could best be achieved through hedonism, or satisfying one’s immediate sensual pleasures, while minimizing discomfort. Aristotle countered that pursuing pleasure rarely produced long-lasting happiness, which could only come from realizing one’s full human potential. He described this as eudemonia, which is derived from the Greek word for “true nature” and connotes a more holistic sense of well-being.

“One swallow does not make a summer, neither does one fine day; similarly, one day or brief time of happiness does not make a person entirely happy,” Aristotle wrote in his ethics treatise, “The Nicomachean Ethics.”

In the United States, the notion of eudemonia gained adherents in the 1970s and 1980s as disasters such as Love Canal and Three Mile Island compelled many to question growing glorification of unbridled self-interest. The zeitgeist contributed to the making of the 1987 motion picture, “Wall Street,” in which a corporate raider played by actor Michael Douglas famously lectures business students about the virtues of greed.

When the Exxon Valdez slammed into a reef in Alaska’s Prince William Sound two years later, a small group of pension fund managers and other Exxon investors issued “The Valdese Principles,” which called for a new sustainable business model that would “protect the health of the planet and the long-term prosperity of its people.”

Today’s CSR movement

Corporate social responsibility, or CSR as it’s come to be known, has since flourished with help from Elkington’s pioneering work helping organizations figure out ways to measure their social and environmental impact. Elkington has served on the boards of dozens of not-for-profits and corporations, ranging from the Nature Conservancy Council and the Dow Jones Sustainability Index, to BP and his own consulting firms. Few have done more to expand and improve corporate disclosure of social and environmental impacts.

Meanwhile, the authors of the “Valdese Principles” morphed into Ceres, a global non-profit that has lobbied for fuller disclosure of corporate environmental, social and human rights performance globally via the widely adopted Global Reporting Initiative, where Elkington once served on the board. As of late 2016, Ceres had helped pension funds and other activist shareholders secure climate-related commitments from 350 publicly traded companies. The organization takes its name from the Greek goddess of fertility.

In the past five years, state pension funds have gone on to divest their stakes in companies that manufacture the modern sporting rifles used in mass shootings; banks have cut back their lending to the coal industry; and U.S. retailers have opted to close their stores on Thanksgiving Day in a bid to advance the common good. Thirty states and the District of Columbia have enacted benefit corporation legislation to make it easier for businesses to pursue the triple bottom line.

Kneuven, who has developed sophisticated grant-making and employee engagement programs for multi-national companies through the Silicon Valley Community Foundation and built rural literacy programs in Kenya, is convinced the benefits corporation movement marks a significant milestone.

“Companies like Oracle and Patagonia have been giving for decades,” Kneuven says. “These companies have made social and environmental innovation and leadership core to their businesses. Their persistence, disruptive thinking and longevity have enabled great impact. This hasn’t been the norm across the private sector but now you are seeing a shift in consumer expectation and entrepreneurial mindset that is leading to more and more businesses that have truly integrated models. That a young company hired someone like me to create a plan for social impact from the outset is different and exciting.”

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