This week, Jessica Alba’s The Honest Company announced it has raised $70 million at a nearly $1 billion valuation and is preparing to go public.
The Honest Company is one of more than a thousand “B corporations” — firms with a for-profit head and a nonprofit heart, among them Warby Parker, Patagonia, Etsy, and Seventh Generation. Such companies are open about the fact that they will not maximize profits at the expense of their social or environmental missions.
Right now, nearly all B corps are privately held, obscuring their finances and value relative to other firms. But with its initial stock offering, The Honest Company might provide an early test of the market’s true feelings about companies on a mission. Will investors punish them for failing to make as much money as possible? Or might they reward them for considering the greater good?
B corps are a new thing. As of a few years ago, firms like The Honest Company would have just been regular, old for-profits or, in some cases, straight-up nonprofits. Maryland pioneered the B corps designation in 2010 to help companies better balance their mission to make money with their mission to make the world a better place. Since then, more than two dozen states have followed suit.
“Milton Friedman would have loved this," said Andrew Kassoy of B Lab, the nonprofit that certifies many B corps, when the Maryland legislation passed. “For the first time, we have a market-based solution supporting investors and entrepreneurs who want to make money and make a difference."
Under the traditional corporate designations, that is not always so easy. Take the infamous case of Ben & Jerry’s. In 2000, the publicly traded ice-cream-maker sold out to Unilever, the Anglo-Dutch food and home-goods conglomerate. Even though there were provisions to maintain the company’s hippie ethos, the deal troubled its Wavy Gravy-loving customers. But the firm did not have much of a choice: The sale maximized shareholder value, and the company needed to maximize shareholder value.
As a B corp — as Ben & Jerry’s is now, though it remains a Unilever subsidiary — its joint mission to make money and do some good is explicit, clear to shareholders, and entrenched in a corporate framework. Had Ben & Jerry’s been a B corp back in 2000, it seems unlikely it would have gotten sold in the first place.
Alba’s The Honest Company won’t have to contemplate a Unilever nightmare scenario as it contemplates its IPO, given that it is already a B corp. It sells eco-chic diapers and other products, but it privileges environmentally responsible products and purchases its energy from renewable sources. Its B corp status would shield it from certain shareholder lawsuits or the pressure to sell out to a bigger firm without a social mission.
“We believe being a public company is the best path for us going forward, and it’s good to get that validation early on,” its chief executive, Brian Lee, told The Wall Street Journal. “I can’t say when that will be, but we are definitely starting to think and act like a public company.”
As such, it promises a fascinating market test: Is the public going to want to invest in a firm that openly declines to maximize profits?
I imagine the company will end up with a smaller market capitalization than it would if it were incorporated differently. It will likely have thinner profit margins or greater losses than it would if it were willing to slash its overhead or benefits for its workers, for instance.
Moreover, B corps have some murkiness baked into their corporate structure, murkiness that might make many shareholders wary and thus less likely to put money in. What if the firm’s shareholders do not agree with the company’s strategy to fulfill its social mission, for instance? What if the firm is losing money and makes uncomfortable concessions to stop shareholders from dumping its stock?
Such questions are why the California bar objected to the state’s B corp law in the first place: It poses “a fundamental change to the fiduciary duties of corporate directors and will pose a consequent risk to shareholder protections,” it argued.
Even so, I think there’s reason to believe that plenty of investors might want to bet on B corps, even in exchange for lower returns. Traditional for-profit companies’ obsessive focus on short-term profits comes with its own downsides, both in terms of longer-term returns and in terms of the state of the world we all live in, after all. (Just think of Lehman Brothers or Blackwater.) On top of that, firms like The Honest Company might also come with social cachet that increases sales or even, in some cases, tax breaks to help offset business costs, drawing investors in.
They might not be the most profitable, highest value, or biggest companies, in other words. But that seems to be just fine with them in the first place.