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The Real Benefit of Socially Conscious Companies

How unconventional ownership structures strengthen America’s crazy-quilt economy.

(originally published by Booz & Company)

Recently, a new business structure—the B (for benefit) corporation—has been gaining traction in the United States to facilitate the growing “social entrepreneurship” movement. B charters are currently available in 13 states, and some 860 companies (Patagonia is the best known) are chartered in a way that permits their directors and boards to make decisions that benefit society, even when those actions aren’t in the immediate interest of shareholders.

Before the creation of B charters, state laws tended to treat businesses as one of two clearly distinguishable types: privately owned companies and publicly traded ones. The first (in the form of small business) serves as the primary engine of job growth, and the second (in the form of giant corporations) harnesses the vast amounts of capital required to compete globally. While both types play essential roles, they also are sources of economic instability: Small businesses have high failure rates, and large corporations engage in high-risk mergers and pursue short-term profit across national boundaries.

The B corporation was created to facilitate the management of organizations with priorities and purposes that differ from those in which owners and investors are focused solely on profit. Indeed, there may be as many as a dozen other distinct forms of business “ownership” also designed to produce social benefits while, at the same time, making a profit. Significantly, these organizations with alternative ownership provide a (largely unrecognized) bedrock of stability to the overall economy.

Organizations with alternative ownership provide a bedrock of stability to the overall economy.

For example, many of the nation’s highest performing companies (including Whole Foods, Herman Miller, UPS, W.L. Gore, and Nucor) have significant employee ownership, and the stability of that ownership allows their mangers to make longer-term investments than is typically possible in investor-owned corporations. Moreover, research shows the greater the financial stake that employees have in a company, the more likely it is that they will be productive, loyal, and ethical. It is not coincidental that two of the most highly successful engineering giants, Parsons and CH2M Hill, have been 100-percent owned by employees for decades, as has mammoth government contract SAIC. Recology, a trash collector in California, Oregon, and Washington, has been completely employee owned since 1921, when Italian immigrants founded the Sunset Scavengers to collect garbage in San Francisco. Today, the company is recognized as the nation’s leading recycling innovator, its 2,200 employee–owners known for their customer service and high productivity. (Recology collectors have been observed running from one trash bin to the next!)

Mutual companies (“owned” by their policyholders) have a similarly long and successful history. Traditionally, most large life insurance companies have had mutual charters, including Mutual of Omaha, Prudential, and Guardian Life. The giant New York state–chartered pension fund, TIAA-CREF (founded by Andrew Carnegie to provide retirement income for professors at private universities), today competes against publicly traded and privately held Wall Street investment firms and now serves an expanded clientele of “participant–owners” who democratically (one vote each) elect “their” company’s governing board. And federal- and state-chartered credit unions have a sterling record of providing services to members while avoiding the wildly risky behavior of the Wall Street banks against whom they compete in the mortgage market.

In the cooperative arena, Denver-based, US$92 billion behemoth CoBank recently was named “one of the world’s 50 safest banks,” thanks to a resolute focus on its mission of providing financial services to the thousands of farmers who are its owners. And the cooperative movement is active in other industries where it addresses several distinct purposes. Consumer co-ops (such as sports equipment giant R.E.I.) are designed to serve their customer–owners, and producer co-ops manage marketing and distribution for their manufacturing and agricultural owners. Within 15 miles of my neighborhood in San Francisco, 34 co-ops are active in such diverse lines of business as printing, bookselling, and groceries. (I buy pizza from the co-op Arizmendi—remember that name—a bakery providing healthy food at four locations around San Francisco.)

I’ve been studying companies with alternative forms of ownership since 1979 and, in general, find they manifest several admirable characteristics: high productivity (employees “act like they own the place”), exemplary customer service (motivated by these organizations’ “higher purposes”), good (often great) environmental records, ethical behavior (and legal compliance), and long-term sustainability (the characteristic that provides an element of stability to our otherwise boom-and-bust economy). Because the compensation of executives in these companies is not measured in bloated multiples of average employee pay, they have little incentive to take wild financial risks or engage in nonproductive “deals” that can shake the entire economy.

However, these nontraditional enterprises tend to grow slowly and not be technologically innovative. And, before we all jump on the bandwagon, we should note the recent news from Mondragon, Spain, home to a group of 289 worker–owned cooperatives employing some 80,000 people that was founded in 1941 by Basque priest Jose Arizmendiarrieta. (The co-op in my San Francisco neighborhood that I mentioned earlier was named after him.) These companies often are cited as the most successful alternatives to both state ownership and shareholder capitalism. Yet one of the largest companies in the group has announced it could file for bankruptcy, a move that might trigger the downfall of dozens of other companies in the financially integrated group. Because the local Mondragon economy is overdependent on this one form of business organization, the entire community thus finds itself at risk financially.

The lesson is that there is no one “right” form of business ownership, and that’s why the incredible diversity of America’s crazy mixed-up economy may be its greatest, unrecognized strength.

James O'Toole

James O’Toole is director of the Neely Center for Ethical Leadership at the University of Southern California’s Marshall School of Business.

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