B Lab & Finding Humanity Podcast — Episode 4: The Urgent Case for Stakeholder Governance

How to change the rules of a broken economic system.
By B Lab Global
February 8, 2022

In 1970, the New York Times published Milton Friedman's seminal essay, "The Social Responsibility of Business Is to Increase Its Profits." For more than half a century, Friedman’s doctrine of profit maximization helped accelerate the racial, economic, and environmental injustice we see today. In our final episode of this special series, we discuss corporate solutions to our broken economic system. We examine stakeholder governance and its role in transforming the business community into a driver of positive change for people and the planet. 

Featured guests include: 

  • Massimiliano Pogliani - former CEO, Illycaffé 

  • Leo Strine - Senior Fellow of the Harvard Program on Corporate Governance and former Chief Justice of the Delaware Supreme Court

  • Jessica Yinka Thomas - Professor, Poole College of Management, North Carolina State University; President and Board Chair, B Academics

  • Holly Ensign-Barstow - Director of Stakeholder Governance and Policy, B Lab

Listen at findinghumanitypodcast.com, or wherever you stream your podcasts.

TRANSCRIPT: Episode Four — The Urgent Case for Stakeholder Governance

Holly Ensign-Barstow, Director of Stakeholder Governance and Policy, B Lab: Capitalism has contributed to economic inequality and wage stagnation and the degradation of our environment. As companies have been forced by culture and by law to prioritize short term financial returns, they have by definition basically ignored the impact that they have on all their stakeholders. And this has led to them having a negative impact on those stakeholder groups, whether that's their own workers, or the communities in which they operate, or the environment in which they are extracting resources. 

Hazami Barmada, host, Finding Humanity podcast: “The Social Responsibility of Business is to Increase its Profits.” That’s the title of the seminal New York Times essay written by American economist Milton Friedman in 1970. His theory became known as shareholder primacy.

Leo Strine, Senior Fellow of the Harvard Program on Corporate Governance and former Chief Justice of the Delaware Supreme Court: What is the end of a corporation, right? Like what is the objective of a corporation and those people who believe in stockholder primacy would say that, within the bounds of the law, the people who run a corporation have to run it solely for the best interests of investors.

Hazami: This idea that generating profits outweighs all other reasons for a corporation to exist and operate came with a price. From exacerbating inequality to causing catastrophic damage to the environment, businesses have been known to accelerate the problems we see today.

Jessica Yinka Thomas, Professor, Poole College of Management, North Carolina State University; President and Board Chair, B Academics: I don't think, the argument is that companies should no longer focus on profitability. 

Jessica: I think the argument increasingly has been that, you know, companies really need to broaden their aperture and really consider and focus on the impact of their business models, on employees, on the communities in which they operate, on the environment. 

Hazami: Can businesses help solve the greatest societal challenges we face? You’re listening to a Finding Humanity special series with B Lab, the nonprofit behind the B Corp movement. B Lab is transforming the global economy to benefit all people, communities, and the planet. In this series, we will explore how businesses can step up to shape a future that benefits us all.

I’m your host Hazami Barmada.

Holly: Shareholder primacy is something that's actually built into corporate law. 

Holly: It basically states that the one duty of a director is to maximize value for their shareholders and any other consideration, any other stakeholder can be easily forced aside, especially when the rubber hits the road, like if a company starts doing poorly financially, then the shareholders will force the company to give up its, you know, sustainability mission 

Hazami: That’s Holly Ensign-Barstow, Director of Stakeholder Governance and Policy for B Lab US and Canada. If you’re not familiar with the term, a shareholder is a person, company, or institution that owns stock in a company. A shareholder is also referred to as a stockholder. 

Holly: That's not to say that companies under shareholder primacy don't do good things, because they do right? We have lots of companies that give money to various initiatives or they do one-for-one models or all of these types of things. But all of those different projects and different initiatives have to be justified as being in the interests of shareholders. So they have to contribute to, you know, profit for shareholders either in the short term or the long term. 

Holly: And we see wage stagnation because of shareholder primacy. They pollute the environment because it's cheaper and they're able to create more profit for shareholders. They lobby against additional regulations because those potential regulations would cost them money. So shareholder primacy creates a system where companies act against the interests of many stakeholders, except their shareholders, and they are a giant roadblock for good policy solutions. 

Hazami: In a traditional corporate setting, shareholders hold significant power.

Leo: The stockholders are the ones who vote and elect the directors. 

Hazami: That’s Leo Strine, former Chief Justice of the Delaware Supreme Court. Leo is also a Senior Fellow of the Harvard Program on Corporate Governance.

Leo: But when you have very aggressive stockholders, with much more power than they're pushing much more on the profit point, particularly the immediate profit point, there is not as much legal and other protection for the other stakeholders. So it's quite natural to see that the share, for example, that American workers have gotten out of corporate profits has markedly declined in favor of what's gone to stockholders in top management. And that's been a huge driver of inequality and a huge driver of discontent and the desire for people to reform corporate law itself. 

Hazami: As both Leo and Holly alluded to, stakeholders are not protected under the principle of shareholder primacy. And the meaning of stakeholder might vary in different jurisdictions. In the state of Delaware, stakeholders are defined as “those materially affected by the corporation’s conduct.” 

I asked Leo how companies determine who their stakeholders are.

Leo: I think one way to think about it is — Who do you rub up against? Right? Who do you as a business when you conduct business, who do you affect? Almost every business affects the workers, right? Are your workers getting quality wages and benefits and economic security so they can create a better life for themselves and their families? Are they safe? Is it a tolerant workplace? Is it an inclusive workplace where everybody has equal opportunity, right? That's pretty fundamental. That's not external to the corporation. That's how the company is affecting that stakeholder. Same with their contracted workers, right? I never want to forget that — the people who, if you regularly work with them, if you have a living wage policy, are you applying it to them? And you have a group of people, you sell services to them. Are those services non-deceptive or are you overselling? Are you selling them services they don't need? Are the services you're doing useful and do they make their lives better? And so that it's a win-win proposition. You profit when they buy the services, but they're getting something useful. If it's a product and they're using it, if they put it into their body — it's food or pharmaceutical — Is it making them better? Is it healthy? 

Hazami: History has shown us that businesses have aggressively chased profits, at the expense of human rights and our planet.

Jessica: What shareholder primacy has meant has been that businesses have operated by and large in a way that as long as they're meeting the minimum legal requirements of the countries in which they're operating, you know, their focus has been on essentially creating bottom line profitability at the expense of the employees who work across the value chain, the communities and the environment that they work in. 

Hazami: That’s Jessica Thomas, Jessica is a faculty member at North Carolina State University. She is also the president and board chair of B Academics, a nonprofit academic community that’s focused on studying business as a force for good.

Jessica: We've seen the results of shareholder primacy be really millions of people across the global supply chain working in really horrific conditions. We’ve seen the results be the collapse of Rana Plaza. 

Hazami: In April 2013, Rana Plaza, a building in Bangladesh, which housed five garment factories, collapsed. This and similar disasters have exposed the hazardous labor conditions faced by workers in different parts of the world.

Jessica: We've seen the results of shareholder primacy be essentially that businesses have externalized those social and environmental costs of doing business and, communities having to take on the cost of providing health care for people who are, you know, dealing with the health impacts of pollution. Right? And communities have to take on the costs associated with trying to address pollution in our airways, in our waterways. And, all the while businesses, right, being able to drive more and more profitability to their shareholders. 

Hazami: Over the past decade, we’ve seen more demand to shift to a new way of doing business.

Leo: So I think we're talking about a movement towards rationality. And you can't oversell it. But the point about the benefit corporation, I think, is to give — primarily to give — people who want to do the right thing more space to do it. 

Hazami: What is a benefit corporation? 

Leo: It's an odd name because it — I’ve actually had colleagues sometimes who say, “Is that even a for profit corporation?” So I think the idea is pretty simple, which is rather than having a situation where the stockholders are really the end of corporate governance. And the other stakeholders are just instrumentalities that you can consider towards that end. Is that you have a model where all important stakeholders are proper ends of corporate governance and that when you seek to make money because it is a for profit corporation, these are not charities, they are supposed to seek a profit in it and a solid return for their investors. But they also have a duty to treat their workers with respect the communities that they operate in, with respect, and the environment with respect and their consumers, with respect. And so there's a “shall” duty towards all stakeholders.

Hazami: In the last decade, benefit corporation statutes have been enacted in 44 jurisdictions in the United States. And the movement is growing internationally as well, with statutes passed in Colombia, British Columbia Canada, France, Peru, Rwanda, Uruguay, and Ecuador. In 2016, Italy became the first country outside of the U.S. to pass benefit corporation legislation.

Massimiliano: If we want to have a better world, a better society for the next generations, we need to start from being better companies ourselves.

Hazami: That’s Massimiliano Pogliani, former CEO of Italian coffee company illycaffè, a Certified B Corp. 

Massimiliano: We start from the dream of the founder. So the founder of the company in 1933, he had a dream that was, “I want to offer the greatest coffee to the world.” 

Massimiliano: But since the very beginning it was very, very clear that there is no such thing as high quality if this quality is not also sustainable. And for us, sustainability has always been not only environmental sustainability, but economic sustainability at the same time. 

Hazami: In 2020, illycaffè gained benefit corporation status, further strengthening its commitment to the interests of people and the environment.

Massimiliano: Since the beginning, since before it was you know, fashionable to talk about sustainability — today, everybody is talking about sustainability — it's really part of the DNA of the company, of the vision, of the family. 

Massimiliano: And my role is also to make sure that leading this company, we take all these sustainability aspects into consideration across the whole value chain and in the entire company. So embedding these values in everything we do.

Hazami: So for the average listener, what does it mean when you say we want to create and maintain a sustainable business model?

Massimiliano: To create and maintain a sustainable business model, you know, it goes beyond the traditional sustainability. Business sustainability means what you're doing is to be sustainable, so you need to, you know, keep on growing year after year and make profits, reinvest, et cetera. This allows the company to prosper and to continue to be there. For us, it means also something else. So a sustainable business model, it means that you always have to consider that, along the whole supply chain, along the whole value chain, that everything you do has an impact. 

Massimiliano: In managing the business, in dealing with the suppliers, in dealing, in this case, with the growers, with the humans, with the individual, with the natural resources, you have to behave in an ethical way. 

Hazami: As a Certified B Corp, Illycaffe is committed to stakeholder governance.

Holly: Stakeholder governance is the idea that you are integrating stakeholder decision consideration into your decision making process. 

Hazami: That’s Holly of B Lab again.

There are lots of ways to achieve stakeholder governance using different types of legal entities like a benefit corporation or, you know, a limited liability company or a co-op or whatever. But it's the idea that you are building this stakeholder consideration into your legal DNA. So it's a fundamental component of how you make decisions as a business. 

Hazami: I asked Holly how stakeholder governance and benefit corporations are interrelated.

Holly: Benefit corporations enable companies to achieve stakeholder governance. But it's not the only way that a company can achieve stakeholder governance. You can be a limited liability company and build stakeholder governance considerations into your operating agreement. Right? Stakeholder governance is kind of the umbrella term for the idea that you want to integrate consideration for stakeholders into your legal DNA. Benefit corporation is just one option for companies about how to achieve stakeholder governance. 

Hazami: What are some arguments for and against stakeholder governance? 

Holly: One that we hear often again, stakeholder governance is that companies can already do this, it's not needed. You know, we already consider stakeholders. We don't need some statute or some law to tell us what to do. And there are lots of companies and lots of people out there who think that. But the experience that I've had just kind of watching the way our economy and the way capitalism operates, that's just not true, right? You, as a traditional corporation functioning under shareholder primacy, you are always obligated to justify your actions as being in the long term or short term value of shareholders. And if you are constantly having to make that argument that any stakeholder consideration, any sort of sustainability focus or any sort of kind of operation of your company as a good company contributes to value, that greatly limits what you are able to do. And I think it really hamstrings companies who would like to do more good things. [00:35:39][89.4]

Hazami: At the heart of stakeholder governance is accountability.

Holly: A few years ago, the Business Roundtable came out with a new purpose of a corporation. You know, our new purpose is to serve not just shareholders, but also other stakeholders. And everybody was like, “Yay! Business Roundtable.” And it was an important cultural milestone. But what we've seen since that announcement is that they really haven't changed their practices at all. They haven't increased their consideration of stakeholders. They haven't done anything differently than what they did before. So what this signals to me is that if you really want to prioritize stakeholders and operate in this kind of good for business way, you can't do it without changing your governance. You can't do it without adopting stakeholder governance because the kind of culture and norms and laws that make up shareholder primacy have so impacted the way companies operate that they can't consider stakeholders, they need to opt out in order to not be kind of hamstrung in terms of ow they want to operate and be good companies. 

Hazami: Since 2006, B Lab has helped advance benefit corporation legislation in the country. I asked Holly to elaborate on what B Lab’s mission is.

Holly: B Lab is a nonprofit. The story I always tell, and the story that I’ve heard the founders tell is, you know, it was founded by three college friends from the private sector. Two were founders of a company and one was an investor in that company. And they built up that company to have incredible worker practices and supply chain audits. A good company. And they sold that company eventually and post-sale, they watched all of those great practices completely disappear. And this left them with kind of a question about how a mission-driven entrepreneur could found a company and build mission into that company and values into the company's operations and then preserve that mission as it scales. And they also kind of wanted to figure out a way that customers and investors could really tell a good company apart from just good marketing. And so they founded B Lab to help provide the various tools and resources and standards to help answer those questions. And so, you know, historically, I've always thought about B Lab's mission as still being that mission that it was founded with many, many years ago. You know, it's changed over the years and expanded to be really very much about systems change. But I still think of it, in it's kind of like basic format, as figuring out ways to help business be a force for good. 

Hazami: B Lab has become pivotal in establishing a new paradigm for businesses.

Holly: The history of certified B corporations is following the creation of B Lab, there was a focus on on going out to recruit certified B corporations around the country, building the tools and resources that were needed to help companies measure, manage and improve their impact over time, meaning the B impact assessment. And slowly, through a lot of incredible work by the B lab team, that population started to grow and that population of certified B corporations was also instrumental in helping us pass Benefit Corporation legislation around the country. They were the most vocal advocates for change and were incredibly important to that process. 

Hazami: To date, the B Lab community includes over 4,300 Certified B corps in 76 countries. And B Corps employ around 370,000 workers across 150 industries.

Holly: So the legal requirement is a core component of B Corp certification, it's been part of the certification from the very, very beginning of B Lab. When we initially started the certification, it started off with just specific language that companies would add in to their articles or their charter because Benefit Corporations didn't exist. And so essentially, companies have this language, it's got purpose considerations, it's got stakeholder considerations. It basically enumerates the stakeholders that those directors would have to consider, you know, employees, customers, the environment, society, suppliers. And so Certified B Corporations have to take that language and actually put it into their legal DNA, their charter or their articles or their operating agreement. And that is a core component of B Corp certification. And if they actually don't meet that requirement, then they're risking losing their certification and being decertified. 

Hazami: When it comes to addressing the negative impacts that conventional businesses have created, Certified B Corps play an important role.

Holly: They have tremendously beneficial impact on stakeholders that provide quality jobs. They care about the environment. They have good supply chains and I think that this they serve both as kind of like an example for other companies and a pathway to follow. But then they also have tremendous kind of local impacts on their communities and societies and the environment in which they operate. I would say that they also have the potential to fill a giant gap in the politics arena as well. You have traditional business, which has been a historical voice that has been against change, transformative change in particular, and I think that certified B corporations can fill a pretty big gap in having kind of businesses be a voice for that change. I see the community as being having a real potential to speak out on those issues and be kind of vocal advocates for really important policy issues that can have beneficial impacts on our society and the environment and kind of the future of our country and the world. 

Hazami: For companies like illycaffe, it was critical for an external institution to put every single aspect of their business under a magnifying glass.

Massimiliano: Before doing the storytelling, you have to do a lot of story doing and have an ethical approach in everything you do. 

Massimiliano: So for us, becoming a B Corp is a kind of confirmation that what has always been our commitment to developing a business, which is based on creating a value for all the stakeholders, is something good. So we always wanted to have a positive impact on the people on the planet, while at the same time setting us economical targets for the company.

Massimiliano: So we believe that there is no contradiction between growing and creating values and doing good for us to get this certified by an official external institution, which has kind of looked at everything we do, is a confirmation that what we are doing is the right thing. But we don't see this as a kind of a prize or a target per se. It’s just the starting point of a journey, that is a continuous improvement journey because, you know, there are always things you can do to improve and your impact and you can measure this. And every year you are committed to to make some improvements in different areas of the company. 

Hazami: Explicitly operating in a responsible and sustainable way gives businesses a competitive advantage.

Jessica: When I talk with my students, you know, most of them are looking for jobs with companies that are in some way, right, sustainable. And that's,  different depending on your industry, kind of the customers you serve. But they want to work for businesses that are doing more than just creating innovative products and services. Businesses are doing more than just seeking to drive bottom line profitability. And so companies that want to employ the best and the brightest and that want to keep them engaged are being driven to ensure that their business models are sustainable so they can attract and retain those employees.

Jessica: Increasingly, we're seeing customers use their consumer buying power to really, you know, demonstrate to companies what issues they care about and that they want to do. Increasingly, customers want to do business with companies that share their values. 

Hazami: Throughout this special series of our podcast, we’ve talked about how businesses can help solve some of the biggest societal and environmental problems we face.

Leo: I think that the best way that a for profit business can help society is to create products and services that are genuinely useful, to do that by employing people at wages and with benefits and in working conditions where they can make their lives better, where their children have the prospect for a better life, where they can come to work and be themselves and be tolerated and be in a mutually supportive workforce and not worry about harassment and be safe. And where the company operates in a way that's environmentally responsible to its communities.

Hazami: Stakeholder governance, as a way to do business, can help drive the business sector to become a positive force for change.

Holly: There are giant global issues that are hard for individual countries to solve themselves, like climate change that requires global action and it requires significant action by the private sector and the private sector is resistant to actually engaging in that action today. We need the private sector to be a vocal voice for change. And I think stakeholder governance helps realign the private sector with the idea that there are these large societal issues that companies are going to have to help take on. 

To business leaders who have the opportunity to adopt stakeholder governance, here’s what Holly has to say.

Holly: You should do it. You want to operate this way. You want to operate this way. You know, many business leaders and many CEOs, this is how they would ideally run their business, but they're facing roadblocks from their shareholders to the laws that they're governed by, to the focus on short term is short termism that permeates the public markets. And I'd say that, like stakeholder governance is now mainstream. You can make this switch. Your investors will support it. Your customers will support it. Your employees will think it's amazing and wonderful. You should do it. 

Thank you for following our special series in collaboration with B Lab. 

We hope that this special series helped you understand the critical role businesses play in helping solve the catastrophic societal and environmental challenges we face today. While the responsibility is on businesses to do their part-- you too, have a role to play, as a consumer. To learn more about how you can make an impact, we invite you to listen to other episodes of the Finding Humanity podcast. Across our podcast, we cover issues like gender inequality, indigenous rights, and the refugee crisis. Visit our website at www.findinghumanitypodcast.com to learn more.

Please subscribe, rate, and review the podcast on Apple Podcasts, Spotify, or wherever you listen. Your ratings and reviews help Finding Humanity reach new audiences, so we thank you for your support. For more opportunities to engage with us, follow us on social media and subscribe to our newsletter! 

In our podcast, we cover pressing -- and at times controversial -- social and political issues. The views and opinions expressed are those of the interviewees and do not reflect the positions or opinions of the producers or any affiliated organizations.

Finding Humanity is a joint production of the Humanity Lab Foundation and Hueman Group Media, this series is produced in collaboration with B Lab. For this episode, we’d like to thank Hannah Munger and Rachel Lincoln Sarnoff. To learn more about B Lab and the B Corp movement, visit bcorporation.net.

Our Co-Executive Producers are Camille and Hazami Barmada, Associate Producers are Fernanda Uriegas and Tanny Jiraprapasuke, Policy and Background Research by Karolina Mendecka and Tanny Jiraprapasuke. Mixing, editing, and music by Maverick Aquino.

For this episode, I’d like to thank Leo Strine, Holly Ensign-Barstow, Jessica Thomas, Massimiliano Pogliani .

I’m your host, Hazami Barmada. Thanks for listening. And I look forward to seeing you in the next episode!

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