One of my all-time favourite stories is Hans Christian Andersen’s cautionary tale ‘The Emperor’s New Clothes’. Published in 1837, it tells the story of blind obedience to authority, overtly gratuitous concurrence and, well, the importance of one’s own due diligence. For those who aren’t aware of it, it’s not the original tale behind the 2000 animated Disney Film featuring David Spade as Emperor Kuzco. Sorry. Rather, Anderson’s story is of another emperor who is totally obsessed with his own vanity - often spending all day in his chambers dressing and undressing between his numerous elaborate coats. One day, two con artists arrive in the kingdom and tell the emperor that they are professional weavers who have a mystical talent: they can weave robes of the very finest silk available that become invisible to anyone who was stupid or unfit for the job they did. The emperor has the two “weavers” produce these robes for a hefty sum, and they put on an elaborate weaving charade that the emperor and his court are all suckered into - either naively convinced by the ruse or too haplessly obedient to the emperor to question it. It is only when the emperor puts on his new “robes”, parades through town completely naked, and a child calls him out that he realises that he has very likely been made out as a complete fool; yet he carries on anyway. You have to admire that kind of confidence.

This Insights post sets out to very deliberately question the voluntary industry certification regime for social good-oriented businesses we know as B Corps - effectively doing what the emperor’s court would not. We should point out before we delve in that we are advocates for both genuine transparency as a condition of the social licence to operate, and commitment to using the power of business to improve the world we live in. There are vast numbers of businesses out there doing the right thing and want to make that abundantly clear to their stakeholders, and credit where credit is due for that.

The question as to what kind of corporate form a new enterprise should adopt to best achieve social impact is the most common question we’re asked in the pre-formation/entity design phase of consultations. In our experience, clients tend to veer towards establishing a charity as a default social impact vehicle preference, however the humble charity may not always be the best option for a cause depending on what a founder is setting out to achieve, so others will express an interest in becoming a B Corp without understanding what that involves in practice. Certification systems like those offered by B Lab, which proclaims that it seeks to transform the global economy into a force for good - are a reasonable start but they’re quite combersome and in truth, far from perfect. In this Insights article we’ll explore the reasons why, in our view, a more thorough examination of B Corps in particular is warranted, particularly if you are assessing their worthiness for your custom or, in the case of the entrepreneur, deciding whether or not to join the B Corp movement.

To Be, Or not to B (Corp)

The sad history behind B Corps in Australia is that their existence is owed to the ultimate false start. Between 2013 and 2019 B Lab ANZ (the Australian arm of the firm behind the B Corp certification model) failed to convince parliamentarians or the broader business community that a social benefit company model akin to that which exists in the United States of America should be adopted - their advocacy movement for reform ceasing in 2020. B Lab ANZ explained this outcome at the time by acknowledging a range of Australian stakeholders believed the Corporations Act regime was sufficiently flexible in its application both to corporate purposes and directors’ decision-making considerations to make law reform unnecessary, while it may also have had the potential to encourage more negative behaviours on the part of non-certified corporates. Having failed in their efforts to enact change, we argue B Corp certification adds scantly more than a hint of marketing flair to aspirant organisations. And to some, that might be enough for time, money and effort to be committed. But like many fancy labels, these are rarely a guarantee of enterprise quality and at worst, are prone to abuse.

The first reservation we express here concerns what a label tells the market, which is typically called “signaling”. According to B Lab ANZ, the B Corp certification “signals to investors, employees, and directors that your mission is embedded into the core of your business“ and by extension, conveys a stronger social value proposition to the market over and above that achieveable by a for-profit venture solely through financial returns.

To become certified as a B Corp, an Australian enterprise must, amongst other things amend their constitution to include two clauses: (1) the purpose clause:

“The purpose of the Company is to deliver returns to shareholders whilst having an overall positive impact on society and the environment”.

and (2) the stakeholder clause:

“In discharging their duties under this constitution, the Corporations Act and the general law, the directors or other officers of the Company:

a. will include in their consideration the following factors

i. the likely consequences of any decision or act of the company in the long term; and

ii. the interests of the company’s employees; and

iii. the need to foster the company’s business relationships with suppliers, customers and others; and

iv. the impact of the company’s operations on the community and the environment; and

v. the desirability of the company maintaining a reputation for high standards of business conduct; and

vi. the interests of the shareholders of the company; and

vii. the ability of the company to create an overall positive impact on society and the environment; and

b. Need not give priority to a particular factor referred to in paragraph (a) over any other factor (included in paragraph (a) or otherwise).”

The inherent problem with these statements is that don’t add anything to directors’ decision-making toolkits beyond their core duties of care, diligence and good faith which are contained in ss 180-181 of the Corporations Act 2001 (Cth). These duties require directors to cast their minds towards the consequences of their decisions on the company as a whole, which extends to suppliers, creditors and other like-parties depending on the company’s circumstances - Australian jurisprudence long having concluded that shareholder value maximisation is not the primary concern of corporate law or the responsibilities it imposes on company boards. Further, the relevance of these B Lab-mandated company constitution/memorandum & articles of association amendments has been largely displaced by ESG reporting, which leverages the legitimacy theory of governance in encouraging more comprehensive suite of disclosures on the part of companies in efforts to maintain their social licence to operate. As Alsayegh, Rahman, and Homayoun observe in their 2020 entry to the international Sustainability journal:

[C]ompanies must disclose certain information (community involvement, human resources, physical resources, environmental contributions, and product and service contributions) to convince society that the organisational activities are permissible and contribute to social value. Under the increasing pressure of social media and the attention of stakeholders, ESG disclosure provides potential business with benefits that may include transparency enhancement, motivating employees, and improving reputation and brand value, hence avoiding the market stigma associated with a reputation for environmental recklessness.

So against these factors and in particular, the rise of ESG scoring as a performance evaluation mechanism which now exerts pressure on firms to be good corporate citizens, the B Lab stakeholder clause has little work to do. We therefore argue that the amendment exercise is (a) unnecessary, and (b) in some cases administratively complex/costly corporate virtue signalling, which guarantees precisely nothing about “mission lock” to third parties to boot. Like any voluntary industry system of self-regulation, B Lab-certified companies can simply walk away at any time with no consequences and for the most part, you’d be none the wiser.

The Naked Truth

The second reservation we have about B Corps is what assumptions outsiders may make about them once they’re certified. After all, once firms have a B Corp certification, doesn’t that mean they’re well-founded, mission-locked, impactful businesses? In some cases, the answer may surprise you. To demonstrate this with an example, in the United Kingdom the beloved Naked Chef, Jamie Oliver’s restaurant chain Jamie’s Italian collapsed in 2019 taking 1,000 jobs with it. A year later, the Jamie Oliver Group (“the Group”) was certified as a B Corp and it went about casually ducking out of the restaurant business altogether so as to “mitigate the potential for future challenges of this type” and then buddied up with Shell (yes, that Shell) to produce the “Jamie Oliver deli by Shell” range of ready-made meals. And they did such a spectacular job of it, apparently, that the multi-million pound relationship with one of the planet’s biggest polluters proved to be a key relationship delivering a material amount of revenue for them.

The latest information on the Group’s B Corp performance which is rated with a B Impact Score - in the Jamie Oliver Group’s case, 92.4/200 when 80 is the baseline for B Corp certification - suggests two things: first, the certification passing grade doesn’t equate to a mathematical pass as it is (and even then, B Lab admits the median score of 50.9 results in a fail for “ordinary” organisations), and second, the Jamie Oliver Group is barely scraping by as a B Corp at the time of writing.

With a Mission & Engagement rating of 1.6 and an Ethics & Transparency rating of 6 in the Governance business impact area, those aren’t exactly scores that bolster one’s confidence. The Group is awarded an extra 10 points in that particular impact area for amending their holding company constitution though (which you’ll remember is is a prerequisite to certification), so the fact they managed a pass at all is one hell of a convenient coincidence. The Group otherwise achieves average-poor scores across the board, and disclosure reports for the Group aren’t available after 2020. So much like our fabled emperor, the confused, lackluster business empire that is the B Lab-certified Jamie Oliver Group has been laid bare for all to see. But don’t worry, its all good because sugary drinks aren’t available in their Shell petrol station meal deals any more, and news emerged on 1 May 2023 - one year after administrators finished cleaning up the collapsed mess that was Jamie’s Italian - that Jamie Oliver is turning full circle and launching a new range of upmarket restaurants in a bid to restore his brand.  Slow clap.

Now, you might be thinking, that’s great but what about an Australian example? Well then, sit back and take Andre Eikmeier (of Vinomofo)’s start-up, Good Empire as a further demonstration of what not to do if you want to succeed as a socially conscious for-profit company. The Good Empire was certified as a B Corp in February 2022 with a neck-snappingly brilliant Business Impact Score of 99.7/200 and set out to - in their words - “save the f**king world” through the gamification of altruistic endeavours of humans in a stand-alone social network which aimed to fund 1,000 projects across 17 impact goals by 2030. But despite claiming in their 2021 Birchal-hosted crowdsourced financing campaign that its app was “designed to be, and showing early signs to be, far more engaging and impactful than anything else on the market”, no-one would touch it. Good Empire had no established, let alone devised revenue model other than charging corporations per employee for participation, giving the everyman it sought to inspire and engage a completely free ride, while seeking to extract cryptocurrency transaction value from trades of their “⅁ Coin”. And while that might have sounded great for the young Web3-fluent changemakers out there on its face unfortunate enough to have been suckered into a retail crowdfund, the fact is that there are only so many firms that will be comfortable with being forced to underwrite a worldwide conservation movement, let alone the Good Empire’s cost of acquiring 100 million active, predominantly non-paying users; which we estimate to be at least USD$320-$360 million (or AUD$540.53 million) going by B2B media and information site BusinessofApps’ research from February 2023. That’s not accounting for the risk of exposing their investments to the machinations of an unproven, totally worthless cryptocurrency either.

With no investor interested in playing ball and his crowdsourced cash completely burnt, Eikmeier laid off his twelve staff in early May 2023 and called it quits. Say what you want about Jamie Oliver’s business empire and his petrol-pumping meal deals but its hard to see how The Good Empire achieved a better impact score without an actual business behind it. For all the good it proclaims to convey, in our view B Lab has a long way to go before its label provides any real assurance as to enterprise quality. To their credit, B Lab is currently undergoing a review their certification process to determine how B Corps can continue to take a significant leadership role on issues of global importance going forward. On 15 May 2023 B Lab published a summary report from their 2022 preliminary consultation process which can be accessed here.

Onwards: exposed, shivering, unfazed

At the conclusion of ‘The Emperor’s New Clothes’, once the emperor is called out by the child onlooker he shivers, contemplating that he may very well be a stark naked, total fool. Undaunted, he thinks to himself ‘This procession has got to go on‘, and he carries on parading through the kingdom more proudly than ever with his invisible train trailing behind him. This Insights article does not profess to serve like the heckler, dragging down B Corps as an exercise in grandstanding worth disparaging as a whole but it does in the same way serve as a cautionary exposition as to why the small, black “Certified B Corporation” label on a fancy company website isn’t always what it seems, and definitely needs more work which B Lab have acknowledged in their review efforts.

For those seeking to start a social enteprise in Australia, consider whether certification by Social Traders may suit your needs instead. Ultimately if your business idea has the right fundamentals from the outset, has clear, transparent governance frameworks in place and a mission which is consistent with achieving social impact alongside other profit-seeking motives, there’s no reason to not weigh up whether a B Corp certification is right for you. Its certainly a popular label which carries a lot of social gravitas with it and a lot of responsibility too, assuming you’re committed to a “mission lock”. The above cautionary examples we’ve cited are, of course, only a very small selection of the many thousands of B Corps out there and while some disaster stories may very well be chilling, with the right support you can be confident enough to carry on unfazed. And much like the emperor’s court, we’ll be right here, ready to help you on your journey. Just don’t expect gratuitous concurrence as of right.

Have you ever undergone a B Corp or Social Trader certification for your business? If so, how do you think it contributed to your corporate persona, your strategic priorities and your engagement with stakeholders? Let us know your thoughts in the comments section below.