A regular briefing for the alternative asset management industry.
Demonstrating a lasting commitment to sustainability – and to respecting the interests of key stakeholders – is increasingly recognised as a driver of long-term commercial success. But persuading outsiders that such commitments are meaningful can be a challenge. Achieving accreditation as a "B Corporation" sends a powerful and very public message – one reason that many UK companies, including an increasing number of private equity firms, have taken that step. In doing so, they have joined a community of over 4,000 B Corps from 77 countries. Although it is not a once-and-for-all decision, getting a positive impact assessment from B Lab, and making a promise to report annually on positive and negative impacts, should reassure stakeholders that the directors take social responsibility seriously. However, although there are important reputational issues at stake, there are unlikely to be any significant legal consequences for directors of companies that decide to opt in.
It is true that any UK company that wants to be a B Corp has to change its constitution so that directors must, while doing their best to maximise shareholder value, also seek to ensure that "through its business and operations, … [the company has] a material positive impact on society and the environment". External impact has equal priority with shareholder value.
That is certainly a strong statement of intent, and might well inform the directors' behaviour in practice. But the directors' duty remains subjective – meaning that striking the right balance between various interest groups (including investors) remains a good faith business judgement for each director, and one that will be very hard to challenge. In any case, other than in very exceptional circumstances, directors' duties can only be enforced by the company itself – and not by other stakeholders – something that remains true after the switch to B Corp status. In addition, the shareholders of a solvent UK company can ratify decisions of the directors with which they agree, protecting them from future legal action. The shareholders can also appoint and remove directors, and can change the constitution at any time to delete the B-Lab required mission statement.
...striking the right balance between various interest groups (including investors) remains a good faith business judgement for each director, and one that will be very hard to challenge...
So directors of a B Corporation remain well-insulated from challenge, and (while the company is solvent) investors are still very much in the driving seat. The directors of a private company seem very unlikely to overlook shareholder interests – and, in any case, it remains possible to protect those interests in other ways. That may reassure some directors who might otherwise be concerned that highly subjective decisions about how to balance the interests of diverse stakeholder groups could land them in legal difficulties. But it does not mean that the decision to become a B Corporation is one that can be taken lightly, or is without long-term consequences. B Lab's initial certification process can be demanding, and includes an assessment of the business' impact on its workers, customers, community and the environment. Businesses must score a minimum of 80 points (out of 200) to qualify, and that is obviously more difficult for some companies than for others. Then, every three years, the business has to recertify, and may be subject to an in-depth site review. In addition, the directors have an ongoing obligation to publish an annual impact report for the business, containing "a balanced and comprehensive" analysis of the impact the company has had on society and the environment. There are no mandatory templates or pre-determined metrics for this report, and it is unlikely to be a huge additional burden for UK companies – especially larger companies who already have to produce a "strategic report" as part of their annual accounts. But given their public commitment to positive impact and regular reporting, expectations may be higher for B Corps than for their peers. B Corporations will continue to be in the vanguard of the sustainability revolution. Although clearly not appropriate for everyone, some private equity firms and their portfolio companies will find that accreditation as a B Corp helps them to demonstrate their sustainability credentials. It may also help to dispel notions that private equity ownership implies a lower level of commitment to wider society.
For more information on UK B Corporations – and considerations for those looking to acquire one – see our recent briefing note.
Accessing Retail Investors: In September we are hosting a webinar on Long Term Funds for the retail market, focused on ELTIFs and LTAFs. These important structures are generating significant interest. Register for this webinar.