Texas Tech University

Benefit Corporations Could Change Approach of the Business Community

George Watson

March 19, 2015

Research by a Texas Tech professor shows companies that focus on social enterprise can be just as profitable in the long term as regular corporations.

Andrea Romi
Andrea Romi

Answering to shareholders is one of the most pressure-packed, nerve-wracking parts of any job in the world of business. Profitability is obviously the main goal, and some companies are willing to do whatever it takes to make that happen.

Sometimes, with some companies, that may come at the expense of other aspects of the business, such as employees or social interests. But a professor in the Texas Tech University Rawls College of Business has performed research that shows ignoring social benefits doesn't always make a business more profitable.

In fact, what Andrea Romi, an assistant professor of accounting, has found is there are no differences between the short-term profitability of social entrepreneurial benefit corporations (B-corp) an other companies. More importantly, her research shows B-corps are more apt to produce greater long-term profitability than non-B-corps.

B-corps also aspire to higher standards of transparency and accountability and tend to be more innovative and forward-thinking in finding ways to meet social obligations while maintaining profitability.

"When companies first adopt their sustainability strategy, they face many questions about whether it's actually good for a firm to use this approach," Romi said. "But here is a group of firms that not only decided it is a good approach, but they believe that focusing on the customer, the employee and/or the environment can have long-term implications, benefitting them in terms of profit as well as having a social impact. You can do both."

According to Romi's research, a private, non profit organization called B-lab was created in 2007, providing structure for B-corps who were attempting to unify their message in hopes of radically impacting social change.

"They are the first set of firms to develop a group-oriented social entrepreneurial strategy while also attempting to change current regulations in order to avoid any potential harm from a legal perspective," Romi said.

According to B-labs' website, B-corps are 55 percent more likely to cover at least part of the health insurance cost for employees, 45 percent more likely to give bonuses to non-executive members and 28 percent more likely to have women and minorities in management. They also are 47 percent more likely to use on-site renewable energy and four times as likely to provide paid professional development opportunities than non-B-corps.

Examples of B-corps include clothing manufacturer Patagonia and baby and children's food maker Plum Organics.

"There is a lot of anecdotal evidence in addition to a variety of academic literature indicating the more a company focuses on employees, the more committed to the organization the employees become," Romi said. "Additionally, evidence suggests employees want to work for firms that are focused on social and environmental issues."

The areas a B-corp can choose to practice social enterprise are varied, Romi said, from focusing on creating great products for customers to focusing on employees, helping the environment or social issues. It's also important that B-corps clearly state in the company's charter what areas of social enterprise it will focus on in order to maintain transparency and accountability.

This is where accounting plays a pivotal role in not only determining the profitability of a company but in Romi's research in determining whether B-corps were more or less profitable than their non-socially impactful counterparts. Blended Value Accounting (BVA) shows not only what the company is doing to meet its financial goals, but also its social goals and provides the accountability and transparency necessary to improve performance.

"Without accounting to demonstrate how well a company performs in each area, we wouldn't be able to determine its impact or where operations continue to be profitable," Romi said. "Blended Value Accounting indicates a company's actual performance versus its intentions and how that company ranks from year to year between other organizations and within their industry."

With the help of BVA, Romi's research determined B-corps are financially similar in relation to other private, non-B-corp firms, and that past arguments claiming a focus on social issues decreases profitability are not necessarily accurate. In fact, the only significant difference between the two organizational models appears to be that B-corps have significantly better long-term revenue growth, leading her to believe B-corps may actually outperform non-B-corps.

Because B-corps are accountable to more than just a financial bottom line, companies are also forced to become more innovative and forward-thinking when solving problems. Not only are there monetary stakeholders, but also environmental or organizational stakeholders with significantly different expectations.

"Management must develop integrative thinking and determine the best ways to impact the different interests without changing the strategy of the business," Romi said. "Management must be responsive to those stakeholders but also remain profitable in the process."

Obviously, she said, there are hurdles to starting a company as a B-corp, the biggest being costs. But it could also be well worth it, her research showed.

"There is substantial evidence indicating firms can implement a social strategy where the benefits outweigh the costs," Romi said. "That certainly provides management more motivation to operate in ways they felt they couldn't before."

"The likelihood of mass adoption to this business form is only likely if the possibility of doing good (social outcomes) while doing well (profits) is possible."

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