Giving your stakeholders a real stake

We've talked before about why it's important to know the stakeholders of your organization—I mean both the people who can affect your decisions, and those who will be affected by them. This is the kind of information every business needs to know,* and at some level you probably already do. The ISO 9001 standard goes so far as to require you to determine who are "the interested parties that are relevant to the quality management system" and what they want from you, and then also to "monitor and review information about these interested parties and their relevant requirements" as they naturally change in the future.**

Who speaks for your stakeholders? Mostly, you do. Depending on which stakeholder you have in mind, there are multiple ways of collecting their input: customers might bring you complaints (or praise!), local governments might send around inspectors, employees might communicate their opinions through their managers or through company meetings. But one way or another some degree of stakeholder input is channeled into management, and then management decides what to do with it. If these inputs conflict—maybe shareholders want larger dividends at the same time that employees want higher wages—the organization's management makes a decision and then the stakeholders mostly live with the results.

But what if you want your organization to serve some higher purpose—for example, a charitable purpose or something similar? What if you want one of your stakeholders to have an actual stake in the success of your business, so that they are sure to prosper as long as you do? If it's a small business and you are the owner, it's easy enough: just decide that every year you'll give them a percent of the profits, and then don't change your mind. But as soon as you involve more people in running your organization, the answer becomes more complicated.

It's an interesting question, though, and it turns out that there are several ways to do it. Strictly speaking this isn't a question about Quality, so normally I would stay away from it. But it is a question about governance, which is a closely related topic. So with your indulgence I'd like to take a few minutes to describe some of the common answers to this question. I can address a more recognizable Quality topic next week.

To be precise, the question I have in mind is this one:

"How can I ensure that my company supports a cause or beneficiary that is important to me, even if I bring in other shareholders or even after I die? How can I prevent the situation where future stockholders force future boards of management to neglect my cause or beneficiary so they can squeeze out the maximum short-term profit?"

I have found three answers to this question. In practice they can overlap, but there are important differences between them. One answer is to certify your business as a B-corporation. Another is to make it a benefits-corporation. (These are not the same thing.) And there is a third approach which appears to be called "steward-ownership." I explain the differences below.       

B-corporations

A B-corporation is a for-profit corporation that has been certified for its social impact by B-Lab. B-Lab is a private, non-profit organization that has been set up explicitly to offer this certification to qualified companies. To qualify for certification, an organization must score at least 80 out of 200 on a detailed questionnaire that covers five general areas: governance, workers' rights, community impact, environmental impact, and customer care. Then the organization pays an annual fee to B-Lab, based partly on its location and gross annual revenue, and recertifies every three years.

B-certification is not a legal status, and it does not (by itself) offer any legal protection against lawsuits by disgruntled shareholders. In some ways it is like ISO 9001 certification, in that it represents compliance to a voluntary standard which a company adopts either because of the discipline it imposes or as a marketing tool. (Or both, of course.) That said, certification does require companies to incorporate stakeholder commitments into their governing documents; in some cases these documents might offer legal protection that B-certification itself does not. Certified companies must also adopt a certain measure of transparency concerning their public impact.  

Benefit corporations

By contrast, a benefit corporation is a legal status, at any rate in jurisdictions that have passed the legislation. As of the most recent update to the Wikipedia article, forty-one American states plus the District of Columbia allow for-profit businesses to incorporate as benefit corporations. Outside the United States, benefit corporation status (or something similar) is recognized in the province of British Columbia, and in the nations of Colombia, Israel, Italy, and the United Kingdom.

This special legal status was created to offer some protection from the normal presumption in American law that a corporation exists for the financial benefit of the shareholders. Because of this presumption, directors sometimes conclude that their fiduciary duty to shareholders requires them to ignore the claims of any other stakeholders or beneficiaries, and to make decisions on the basis of profitability alone. Therefore benefit corporations explicitly define the fiduciary duty of the directors so that they are required to consider the interests of other stakeholders. Wikipedia explains:

The benefit corporation legislation ensures that a director is required to consider other public benefits in addition to profit, preventing shareholders from using a drop in stock value as evidence for dismissal or a lawsuit against the corporation. Transparency provisions require benefit corporations to publish annual benefit reports of their social and environmental performance using a comprehensive, credible, independent, and transparent third-party standard.      

What is the difference between a benefit corporation and a B-certified corporation? They overlap, and some companies are both. The biggest difference is that establishing your company as a benefit corporation gives it a legal status, while seeking B-certification does not. Other than that, there are detailed differences in the exact requirements around transparency and other topics. 

Steward-ownership

The third approach, steward-ownership, is rather different. It requires no special legislation, and no external certification. But it does require some planning in advance, and it's not really compatible with selling shares in the stock market. To use this approach, you have to restructure the ownership of your company in a special way.

I first encountered this model when I worked for Bosch, and for a long time I assumed they were the only company that used it. Bosch's governance structure is no secret, and they discuss it in some detail on their website. The basic idea is that they issue shares of stock, like other companies, although those shares aren't sold on the open market. But they distinguish sharply between voting shares and paying shares. Normally, if you own stock in a company then you have a right to vote those shares at shareholder meetings (though it might be impractical to do so in person), and you can also expect the payment of dividends on a certain frequency as long as the company is making a profit. But Bosch separated those two functions. Voting shares give you the right to vote on the company's governance. Paying shares pay dividends. And they are not the same.

With that distinction as background, the global corporation Robert Bosch GmbH has three shareholders:

• Robert Bosch Industrietreuhand KG is a steering committee that makes general governance decisions (the way a "shareholder's meeting" would for some other company). They hold 93% of the voting shares and no paying shares.
• Robert Bosch Stiftung GmbH is a non-profit charitable foundation that funds the Robert Bosch Hospital, schools and daycare centers, and peaceful social initiatives around the world. They hold 94% of the paying shares and no voting shares.
• The Bosch family (the descendants of Robert Bosch) own the remaining shares: 7% of voting, and 6% of paying. This way they are not forgotten, but neither can they wrest control of the company to do something crazy.

As I say, for a long time I assumed this structure was unique to Bosch. But when I began researching this article, I discovered that a few other companies do the same thing. In September of 2022, Patagonia reorganized around a similar model.*** IKEA uses another variant of foundation-ownership, including benefits to a charitable foundation, although the IKEA governance structure is much more complicated than that of Bosch or Patagonia. And there are other examples as well. 

Again, for a small company with a single owner, these tools are probably more than you need to think about. But if you want to build a legacy, or if you want your company to support a beneficiary or a cause, these are among the ways to do it.   

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* See, for example, the discussions here and here. 

** ISO 9001:2015, clause 4.2. 

*** This article in Medium goes into some detail.