In Defense of B Corporations
Does being a B corporation really matter?
This is a question that many companies and investors ask us. (Our answer: yes).
However, it’s an increasingly hot topic now that Etsy, the first public B corporation, faces increasing pressure from activist investors.
Bloomberg recently published a piece titled, “The Barbarians Are at Etsy’s Hand-Hewn, Responsibly Sourced Gates,” challenging whether Etsy could/would/should remain a B corporation given these pressures.
Some asked: Is this the beginning of the end for B corporations? Does Etsy’s experience prove that this model is broken? Is there a direct trade-off between duty to employees and duty to investors?
Bloomberg suggests yes. But most of their reporting focuses on Etsy’s spending and employee perks. However, these issues plague many tech companies these days. They don’t necessarily have roots in a company’s duty to its employees.
While we expect B Corps to take employee welfare seriously, fancy offices and unique benefits are likely more to do with a fight to attract talent from companies like AirBnB and Pinterest.
In fact, we tend to observe that our portfolio companies can use their mission and values as an advantage in recruiting, such that they can attract better talent for equal or lower compensation and benefits vs. companies that don’t have values that resonate with employees. Compensation aside, people want to feel like their work matters.
So why is it important that Etsy is a B corporation?
Spending aside, Etsy has made decisions, enabled by its B Corp status, related to its seller guidelines and business initiatives that benefit its artisan community. Even in a purely for-profit context, these might be considered accretive to the company’s brand and long-term value, but B Corp status makes it easier to justify these decisions in the short-term.
I’d argue that Etsy’s challenges don’t stem from its B Corp status. We see across the board that companies – public or not – face increasing pressure when they aren’t performing to investor expectations.
If a Series A company is running out of cash in five months, it will have a lot less latitude to invest in employees or non-financial stakeholders than if it is hitting its projections. We believe this is, in some ways, the nature of capital markets.
Nevertheless, B Corp status enables companies that are performing well to have greater flexibility in making tradeoffs that might sacrifice short term profit for other considerations. If a company has significant investor interest in its IPO, that gives it more negotiating power to insist on B corp status or other terms that give the company more latitude in maintaining its mission and values through a public offering. All in all, that ultimately may not be a bad thing, because even if fewer companies are able to go public as B corporations initially, those that do will be the cream of the crop (and will pave the way for others).
Will fewer founders want to have a B corporation because of Etsy’s experience? We doubt it. One takeaway, however: mission-driven founders are increasingly concerned about going public given the challenges of public markets and short-term thinking.
A critical solution to pave the way for B Corporations at scale is to enable forms of liquidity that do not force companies to be dogmatically focused on next quarter earnings. Morgan wrote a long piece about this here. That’s the reason we are investors in Long Term Stock Exchange (LTSE), and think it can be a deeply transformative innovation.
Longer-term thinking, even if it is purely profit driven, can often result in better alignment between mission driven founders and investors because of the importance of brand and reputation. Few things improve those two factors more than a company’s commitment to its mission and community.