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.     

    

The myth of the silver bullet

For the last few weeks we've been talking about corporate culture: in particular, about whether you can build a company's culture deliberately, and about how far that culture is implicated when things go well or badly. So it was through a delightful synchronicity that I recently ran across two very different sources which spoke to this topic in rather different ways.

The Patagonia case study

Building a culture ...

The first was a talk given by Carlos Conejo, LSSMBB, under the auspices of ASQ, about "The Patagonia Ethos." Conejo reviewed the outdoor clothing company Patagonia, and explained how they built a corporate culture deliberately and systematically. Back in the old days, when Yvon Chouinard (the founder) first started to make climbing equipment, he told customers they shouldn't expect quick responses during climbing or skiing seasons. Then, as the company grew, they introduced:

• Flexible work arrangements
• Casual dress code
• Flat organization
• No private offices
• Health food in the offices
• On-site daycare
• Transparent communications to employees
• Classes for employees on how to get involved in local, grassroots environmental causes 

100% of the electricity used by the company is from renewable resources. 

98% of the raw materials used by the company are recycled. 

If you have old gear from Patagonia, you can send it in and they will repair it. 

These principles make Patagonia's gear more expensive than that from their competitors, but customers gladly pay the higher prices because they support the company's mission.

Then in 2022, Patagonia transferred all its paying (but nonvoting) stock to the Holdfast Collective, "a nonprofit dedicated to fighting the environmental crisis and defending nature." The voting (but non-paying) stock went to the Patagonia Purpose Trust, "created to protect the company’s values." Chouinard described these transfers by saying, "Earth is now our only shareholder." (Interestingly, Robert Bosch GmbH has a very similar ownership structure.)

All of these steps have contributed to a clear and embedded corporate culture.

... but not a silver bullet

But it's not all roses. Conejo explained that one of the consequences of the company's pervasive informality was that for many years they were very weak when it came to formal planning, budgeting, and performance management. Then when it finally became clear that these activities were needed, they created a home-grown solution that lurched too far in the other direction. For a while, the business planning process took three whole months to plan each year. Partly this is because—in the name of transparency—it engaged all employees at all levels clear across the organization. But many of these employees had no previous experience in (or even exposure to) business planning or the rudiments of project management. So the value of their input was compromised, or else they had to take the time out to learn the subjects they were contributing to. 

Ultimately, Patagonia grew past these problems. They scaled back the planning process while continuing to emphasize openness and the development of their employees. But two overall messages were inescapable. 

First, culture is important but it is not a silver bullet. You need systems too. 

Second, every culture has its own failure mode. There is no "perfect culture"; each one has some strengths and some weaknesses. Which ones predominate is partly a matter of which circumstances the company faces.     

Boeing, again

All of which brings us back to Boeing.

In recent posts* I've suggested that Harry Stonecipher (Boeing President 1997-2001 and 2003-2005) deserves a measure of criticism for deliberately dragging the Boeing culture away from a focus on solid engineering and toward a focus on the economic bottom line. But the second source that I ran across a few days ago was a blog post that provided important insight into that transition. (See "The Myth Of Old Boeing," by Bill Sweetman.) 

What Sweetman makes clear is that Boeing, back in the days before Stonecipher took over, may well have had a solid culture; and the engineers were surely very smart. But their configuration-control system dated from World War Two! By any normal standards, Boeing should have been totally incapable of building airplanes for multiple customers** in the modern day. The only thing that saved them—for a while—is that they had low-ranking employees on the production floor who understood the archaic configuration system backwards and forwards, and who worked around it with heroic effort in order to get the planes built. But these were individual human beings. One by one they got old and retired. And we all know that any system which relies on heroes to get the job done will fail sooner or later.

This was the challenge that Stonecipher faced when he took over the company. Yes, he insisted that Boeing start thinking about the economics of profit and loss. And yes, in the end, it's possible that he went too far. But part of his motivation at the time was to drag Boeing—kicking and screaming—away from a configuration-control system that made factory production pointlessly expensive and mind-numbingly inefficient.

In other words: if it hadn't been Stonecipher, it would have been someone else. The only other alternative would have been for Boeing to collapse under the weight of its own inefficiency.

To repeat the two points above:

1. Culture is important but it is not a silver bullet. You need systems too.
2. Every culture has its own failure mode, and there is no "perfect culture."

For those of us in the Quality business, none of this should be controversial. In a sense, culture is about making sure that all your people are approaching their work in the right way. But Deming taught us years ago that "A bad system will beat a good person every time." That's why you need both. 

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* See specifically here and here.    

** A configuration-control system manages how changes or alternatives are introduced into a design. If you sell a single basic product to several customers, each of whom insists on their own unique package of options, you need a sophisticated configuration-control system to keep track of all the variations so that (for example) United gets airplanes tailored for United and not for American. By the early 1990's, Boeing's system for handling these variations was woefully out of date.