Bart Houlahan of B Lab: Stakeholder Capitalism Requires a Business Operating System

The current controversy about Stakeholder Capitalism and ESG (Environmental, Social, Governance) will eventually die down because it’s simply about better business and is non-partisan. B Lab nearly doubled the number of certified companies during the pandemic because of the surprising focus on creating value through people…Certified B Corporations did much better during the pandemic than most companies and having a B Corp Certification can help enhance an organization’s valuation upon exit. These are the highlights of my conversation with Bart Houlahan, Co-Founder of B Lab, a not-for-profit organization that was among the first to strategically promote the concept of Stakeholder Capitalism long before that name became better known.

By Bruce Bolger

The Stakeholder Capitalism Controversy Is an Unfortunate, Fleeting Side Show
A Nonpartisan Movement
The Basis for B-Lab Certification and Public Benefit Corporations
Addressing the Interests of Stakeholders on the Path to Organizational Success
The Benefits of B Corp. Certification
The Eventual Need for Government Mandates
The Potential Impact of the EU European Corporate Sustainability Directive
The Importance of a Business Operating System
Education to Businesses and Academics

This 60-minute Enterprise Engagement Alliance YouTube show with Bart Houlahan, an entrepreneur and co-founder of B Lab, B Corp Certifications and a promoter of public benefit corporation statutes, is optimistic that Stakeholder Capitalism will prevail in the long run because of consumer, talent, community, and other stakeholder demands. That said, he believes that corporate law eventually will need to be changed to prevent companies from freeloading by continuing, as many do he believes, to offload the costs on society of underpaying employees, producing shoddy products with misleading claims, and polluting communities, etc.

If anyone is an example that Stakeholder Capitalism can enhance returns for investors by creating value for customers, employees, supply chain and distribution partners, and communities, it’s Bart Houlahan, who along with his partners co-founded B Lab in 2006. Houlahan joined the EEA YouTube show to discuss the state of Stakeholder Capitalism, B Lab, and public benefit corporations.

Based on Bart Houlahan’s career, Stakeholder Capitalism is by no means inconsistent with wealth creation. As of 2022, there are more than 6,400 certified B Corporations in 89 countries covering 159 industries.

Founded along with Jay Coen Gilbert and Andrew Kassoy, B Lab describes itself as “a nonprofit organization dedicated to using the power of business to solve social and environmental problems. B Lab drives systemic change through three interrelated initiatives: 1) Certified B Corporations: a corporate certification for sustainable businesses and social enterprises that meet higher standards of social and environmental performance and legal accountability; 2) GIIRS Ratings and Analytics: a ratings platform (analogous to Morningstar and Capital IQ) that drives capital to impact investments by assessing the social and environmental performance of companies and funds; and 3) Public Benefit Corporations: a new, legally-recognized corporate form that changes corporate fiduciary duty, permitting companies to create shareholder value and social value.”

Prior to B Lab, Houlahan was President of AND 1, a basketball footwear and apparel company. Over the course of 11 years, he reportedly helped to finance, operate, and scale the business to $250 million in brand revenues with distribution in 80 countries. In 1999, AND 1 undertook a leveraged recapitalization in 1999 with TA Associates and was sold in May 2005 to American Sporting Goods of Irvine, CA. Before AND 1, Bart was an investment banker with Stonebridge Associates, BNY Associates, and Prudential-Bache Securities. He is a Henry Crown Fellow of the Aspen Institute and an Advisory Board Member of the Center for the Advancement of Social Entrepreneurship (CASE) at the Fuqua School of Business. The Aspen Institute describes itself as a think tank focusing on leadership, common ground, and exchanging discussions in a non-partisan and non-ideological manner.

The Stakeholder Capitalism Controversy Is an Unfortunate, Fleeting Side Show

Houlahan believes the political debate is unfortunate and based on a false definition that it’s about trading off shareholder rights to outside interests or corporatism, when “it’s just about better business. If you're trying to flip a company in three months, I get that that. You might not be focused on your stakeholders. But with any kind of reasonable time frame, companies do better when they consider the impact of all their stakeholders…Our community of B Corp Certified companies had about a 5% failure rate during the pandemic when overall one in six companies failed.”

A Nonpartisan Movement

Houlihan says he is particularly surprised by the rancor against ESG and Stakeholder Capitalism, given that many Republicans, including former Vice President Mike Pence, have supported public benefits corporation statutes.

The Basis for B Corp Certification and Public Benefit Corporations

The B Corp Certification is similar to an ISO (International Organization for Standardization) certification in that it is audited and comes with a logo that can be used for customer and talent marketing. The public benefit corporation is a legal corporate classification similar to an LLC that requires several articles in the incorporation statement authorizing and requiring the board to consider the interests of all key stakeholders in material decisions. The statutes exist in 44 states and jurisdictions and in about a dozen countries outside the US, he says. The designation can be relatively easily affirmed simply by selecting the public benefit corporate status when starting a new company or changing an organization’s status, subject to shareholder approval.

For the B Corp Certification, the impact assessment is divided into five areas, he says. Consumers, workers, community, environment, and governance practices. To receive B Corp Certification in many cases does require a legal change because some states do not allow simple changes in the articles of incorporation to accommodate the stakeholder language. However, he says it’s easy and not costly in most states to change one’s corporate status to a public benefit corporation. “The articles broaden the fiduciary duty for the board and the executives so that they must consider the impact of their decision making not just on their shareholders, but on all their stakeholders. The idea behind this is to stop the externalization of costs and make companies consider all their stakeholders. We have to get off this notion of maximizing returns for a very small group of shareholders while pushing costs outside the organization that all of us as taxpayers have to bear.”

The public benefit corporation “is about a covenant between the business and its shareholder. It is still accountable to the shareholders who voted to create or convert the company to a public benefits corporation.”

Addressing the Interests of Stakeholders on the Path to Organizational Success

Stakeholder management “changes the conversation in the boardroom. When you’re considering offshoring your factory, it doesn't prohibit you from doing that at all. It just means in the conversation about the change, you include what the impact will be on your local community where the factory currently is; on the workers who are part of that factory, on the environmental footprint and the nature of the environmental regulations in the country where the plant will be located. It requires the board and the executive team to have that conversation. What’s really interesting is that when you talk to most CEOs, even if they are not public benefit corporations, that they are already doing this.”

The certification is not about mandates. For instance, the B Corp Certification does not require "employee ownership. We don't want to mandate employee stock options. We encourage it in the way that these are included in the certification assessment in which the bar is 80 points. And included in there is everything from ownership structure and employee options all the way across to your environmental footprint through your supply chain. The idea behind it is to try to encourage better practices. What we do mandate is that the board and the executive team must consider the impact of their decisions on their employees when selling the company. This more often than not results in better outcomes for those employees.”

Houlahan notes that public benefit corporations do not change the nature of ownership: boards are still accountable to their owners. Only, in the case of public benefit corporations, accountability includes addressing the needs of all stakeholders.

The Benefits of B Corp Certification

During a time of deep skepticism, B Corp Certification is a mark of trust and confidence, not only for employees, but customers, supply chain and distribution partners, communities, and investors, Houlahan says. “It’s in effect a statutory affirmation that their interests will be considered.” He says he also has seen that B Corp Certification can increase the valuation of a company upon its sale because human-capital minded acquirers will see the benefits in terms of reduced risks, more tangible human capital, and a potentially more effective due diligence process.

“This is about helping you attract and retain the next generation of talent. What Millennials and GenZ say they expect out of work, and how that mentality has accelerated in the last three years. The data is off the charts that those folks are looking for both money and meaning in their work, and they will make trade-offs between purpose and money.” B Corp Certification is fundamentally a talent and customer acquisition strategy, he underlines.

The Eventual Need for Government Mandates

Houlahan believes that “at the end of the day, this cannot be optional. It’s going to take an awfully long time but at some juncture though you’re going to have a free-rider challenge. You’re going to have people that will continue to dump the costs of their health care and employees and the environment on society. In a free market you will always have people who take advantage of that. And so, in my opinion, eventually we're going to have to change the rules, like we did when we created environmental laws.”

The Potential Impact of the EU European Corporate Sustainability Directive

Houlahan believes that the new European Union disclosure requirements taking effect in 2024 for the 2023 calendar year will have a profound impact on business, much as the EU’s GDPR (General Data Protection Regulation) has affected marketing in the US. In fact, he sees a sustainability reporting mash-up in the offing, given that the IFRS (International Financial Reporting Standards) board is consider sustainability standards, as well as the Global Reporting Initiative and others. “There is going to be a disclosure reckoning….People are going to have the ability to truly benchmark companies where it's been incredibly difficult today. Yes, it's going to take another three years, but it's going to happen.” Disclosure requirements will create an entire industry of experts, he says, much as accounting was transformed into an enormous industry when the Financial Accounting Standards Board was created in 1973.

The Importance of a Business Operating System

A stakeholder orientation requires having a business operating system that much like total quality management embeds into the organization a systematic approach to achieving organizational goals by addressing the interests of all stakeholders. It’s so important, he says, that B Lab gives away a complete library of information on the principles and free assessment tools so that any organization can begin its path toward implementation, whether or not they get certified. While over 6,400 companies worldwide are certified, over 250,000, he says, have accessed its free materials and 50,000 have used its impact tool.”

Education to Businesses and Academics

Houlihan says over 500 universities across the globe teach about B Lab and public benefit corporations, and “it absolutely needs to be embedded into both in business and law schools.” He says that pressure for the courses is coming from students.” He believes that the siloes and traditions in academia pose a challenge to change but that the shift is happening.

For those seeking to evaluate their progress toward a B Corp Certification, click here for a link to a free self-assessment tool. Click here for information regarding the B Corp certification.

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