Case Studies in Industry Self-Regulation: Social Impact Reporting by Public Benefit Corporations
May 17, 2023 by Justin Connor, Executive Director, Center for Industry Self-Regulation
How can the public tell when a company is making a genuine commitment to reporting on its social impact versus when it is greenwashing with no real “there” there?
As part of BBB National Programs’ Center for Industry Self-Regulation June 2022 Research Roundtable, held in partnership with George Mason University’s Center for Law and Economics, Professor David Lucas of Syracuse University’s Whitman School of Management presented a paper that examined social impact reporting by business, a topic of much current interest as companies of various types report on their environmental, sustainability, and governance (ESG) commitments.
Professor Lucas took an empirically informed approach to the topic, as he developed a novel dataset examining all annual public benefit reports filed from 2016–2022 in the population of public benefit corporations (PBCs) in Minnesota, a state he selected because, interestingly, it is the only state in the United States that effectively enforces reporting by PBCs on their impact. As Professor Lucas noted to me in a recent interview, he has had a longstanding research interest in social entrepreneurship, not only the dual goals of pursuing profit and social goals but also the role of certification within that framework.
Before diving into the specific findings in the paper, let us start at the beginning and consider first what are Public Benefits Corporations (or PBCs)?
A PBC is a type of corporation that, by virtue of the law under which it was incorporated, is legally required to pursue the public good/benefit in addition to its traditional profit-making objectives. This means that the company must consider the impact of its decisions on all stakeholders, including employees, customers, the community, and the environment.
Notably, companies have some flexibility in defining relevant stakeholders and objectives, partly due to a lack of consensus around applicable reporting standards in this area among companies, whether incorporated as PBCs or not.
Professor Lucas notes that the premise of his paper is that compliance in sustainability reporting is socially constructed and that third-party organizations (such as the non-profit organization B Lab, which was created to audit and certify benefits corporation, enabling the awarding of the designation of Certified B Corp) serve as legal intermediaries influencing how extensively hybrid ventures report their social impact. Professor Lucas used computer-aided text analysis to find that benefit corporations that have attained the B Corp certification from the third-party organization B Lab produced the most extensive reports, followed by non-certified firms that reference B Lab, followed by other benefit corporations.
Professor Lucas concluded from the results of his research that benefit reporting, which he sees as a key governance tool for this prominent legal structure for hybrid ventures, reveals the profound role of industry self-regulation via private, third-party governance in facilitating sustainability reporting compliance. Otherwise, he argues, a corporation’s choice to incorporate as a public benefit corporation can easily become meaningless virtue signaling to the market, and effectively false advertising or greenwashing, with no substance behind the corporation’s social commitments.
This conclusion of Professor Lucas reminds us of one of the takeaways from the Roundtable, namely that self-regulation by a sole organization acting alone must be distinguished from truly independent industry self-regulation, which inherently has a greater capacity to effect meaningful change.
In this instance, the certification program offered by B Lab is one example of independent industry self-regulation through the development and enforcement of a standard and associated professional certification/seal, after audit and compliance with its standards by the corporation. Professor Lucas found that those organizations adhering to the B Lab standard produced significantly longer and more detailed reports of the public benefits created by the corporation over the preceding year.
A similar example of independent industry self-regulation is BBB National Programs’ Children’s Food and Beverage Advertising Initiative (CFBAI), a program created in 2007 by leading food companies to improve food advertising to children. Under the CFBAI pledge, participants voluntarily commit that, in advertising primarily directed to children, they will either not advertise foods or beverages to children at all or advertise only products that meet CFBAI’s strict Uniform Nutrition Criteria. Participants also agree not to advertise in elementary schools.
Professor Lucas noted to me that the public benefits reporting he studied empowers consumers by giving them the information that they need to make more informed decisions about the companies with whom they wish to do business and the values they wish to support. This is of particular interest to the younger generation of consumers who often wish to align their values with their spending and decisions about where they choose to work. The legal form of being a PBC also provides companies flexibility on the values pursued and articulated, allowing consumers a broader range of choices than the confusing array and variety of numerous ESG standards and top-down regulation would.
The Center for Industry Self-Regulation is pleased to be able to support further research into the ideal conditions and use cases for self-regulation and aims to empower business accountability as part of its commitment to transparency, truth, and responsibility. Along with BBB National Programs, we seek to build an honest and fair marketplace for all with trust at its core and welcome your interest and engagement with us as we pursue this vision.
We invite you to consider the potential power of self-regulation for your industry and how it may help support your goals.