Public Benefit Corporations Explained
January of 2021, Veeva Systems (NYSE: VEEV) made history by becoming the first public company to convert to a public benefit corporation. Veeva is a leader in software for the life sciences industry – their software enables remote doctor’s appointment and is the infrastructure supporting ground-breaking clinical trials. Veeva’s conversion is the latest in a flurry of ESG-friendly trends gripping capital markets.
A public benefits corporation is an entity inscribing into its legal charter what the purpose of the company is. The Board of Directors is then held accountable towards advancing this stated purpose. This means black-and-white Milton Freedman profit maximisation is thrown out the window, paving way for a more considered approach to capitalism.
Public benefits corporations are still for-profit institutions. Directors maintain fiduciary duties to shareholders, there is now a balancing act introduced where the company must actively work towards its stated purpose.
Purpose
I’ve stayed relatively abstract so far, using the word purpose rather than vision, because there is nuance to what a PBC is. A PBC structure supports the notion of a public benefit purpose; the reason for existence. While a public benefit purpose can be used to introduce pledges towards environmental or societal issues, it does not explicitly call for such specificity. A PBC is a legal structure allowing for the fundamental reason the company exists to be advanced, by the company, using its resources.
Veeva, Kickstarter and Lemonades As Examples
Veeva’s stated public benefit purpose:
“to help the industries it serves be more productive and create high-quality employment opportunities”
It’s a well-intentioned statement that introduces more questions than answers. You can nod along to it and in a vacuum it is positive.
Let’s introduce two PBC-peers for some perspective on what a public benefit purpose can look like; the evangelist Kickstarter, and the hyper growing recently IPO’d insure-tech Lemonade (NYSE:LMND).
Kickstarter, the creative projects crowdfunding platform. They are one of the early successful adopters of the PBC. They converted in 2015, less than two years after the state of Delaware passed legislation allowing the PBC structure in 2013.
Kickstarter’s public benefit purpose, as stated in their company charter:
Kickstarter’s mission is to help bring creative projects to life
Kickstarter’s operations will reflect it’s values
Kickstarter supports a more creative and equitable world
Kickstarter is committed to the arts
Kickstarter is committed to fighting inequality
It’s a detailed measurable statement, the wider community can appreciate. #1 is actually also Kickstarter’s original mission statement, so their purpose is intrinsically linked to who they are.
Lemonade’s public benefit purpose S-1 filing
“Harness novel business models, technologies and private-non-profit partnerships to deliver insurance products where charitable giving is a core feature, for the benefit of communities and their common causes”
Doubling Down
A public benefits corporation is a company taking it’s values seriously. Incredibly successful enterprises have deep philosophical values at their core. Australia’s tech darling Atlassian (NASDAQ: TEAM) put the foot in the ground years ago by publishing their values; my favourite of them: open company, no bullshit. Having been a fanboy of their product for years as well as being interviewed by them; they walk the walk.
There’s no shortage of VC-backed SaaS businesses that have penned company values, adding it to their JIRA board months or years after their incorporation. A company mission statement is as common as a disaster recovery plan for business operations, but too often it’s symbolic at best. Becoming a public benefits corporation makes it inconceivable to exist without actively pushing your cause closer to its desired end-state.
Measuring Progress: Kickstarter
Kickstarter has a relatively long-track record of reporting, having reported four annual statements (since 2016) which are publicly available. Of note, Delaware registered PBCs (where Kickstarter is registered) are only required to provide an update every second year and only to shareholders (Kickstarter is not listed).
Kickstarter’s contributions to the wider public include a 2.5% pledge of after-tax profits to funding arts programs. They pledge a further 2.5% to fighting inequality.
What’s most interesting in Kickstarter’s section addressing their commitment to fighting inequality is their disclosure about executive and senior leadership pay.
Ratio of the CEO to non-CEO pay.
For 2020 the ratio was 2.98x (salary & equity)
Ratio of the Senior Team to the rest of the company
For 2020 it was 1.84x (salary & equity)
The ratio of CEO pay to the wider workforce has been rightfully capturing more media attention. Economic Policy Institute (Thinktank focused on low/middle income Americans) has studied CEO pay, showing it has grown from 58x the normal worker’s salary in 1989 to over 200x today.
Kickstarter’s proactive disclosure about Executive pay is a positive contributor to discussions about this area of inequality. What’s exciting over the longer-term is the movement towards the PBC-structure encouraging shareholder engagement beyond pecuniary considerations. In doing so the discussion around fairness will invariably occur more often, and at some point, the CEO pay disparity will be discussed. Or am I just an optimist?
Measuring Progress: Lemonade
In the case of Lemonade, they have built charitable giving into their business model. Lemonade is an insurance company. Most insurance companies then insure themselves against their risks, known as reinsurance. Lemonade have structured their business such that they have little direct exposure to losses arising from customer claims.
In bad years, where losses exceed an agreed level, the reinsurer’s bear the underlying claims cost. In good years, where losses are below a set level, those profits are used for charitable giving. In 2020 this figure was US $1,128,109.
It’s an elegant solution for such a financially orientated business model to integrate their public benefit purpose (charitable giving) via a rules-based approach. Unlike many other charitable pledges using after-tax profits, these donations at the gross margin level and more closely tied to industry fundamentals.
The Lucky Few
Cynics could point to the common traits among Public Benefit Corporations or for that matter, broadly companies that get the ESG-tick of approval. Technology (particularly software) and healthcare very often score the highest on ethical credentials but is this a matter of the super-rich giving back.
Microsoft is planning to be carbon-negative by 2040, Salesforce continually pushes for the 1% pledge, and Adidas this year is producing 60% of goods with renewable materials. All great initiatives – all presented by highly profitable companies earning excess returns on capital.
The other major consideration is sustainability washing. Has the flow of capital into ESG mandated funds reached a point where companies are rebranding themselves as sustainable to avoid exclusion from these portfolio strategies. There’s ever increasing ESG disclosures from all manner of companies about their credentials. Imperial Brands, a FTSE 100 cigarette producer, is launching an ESG Steering Committee with KPIs to be developed.
Only individualised analysis of each individual company will truly validate whether suggested ESG-considerations have been met. The trend towards sustainable investing is a tailwind to active asset managers in an otherwise challenging environment and an opportunity to add value.
B-Corp Certification
While PBC have every other year reporting obligations there is no formal validation of the accuracy of their statements. There is no formal audit for doing good. Many PBC voluntarily seek out a B-Corp certification from B Lab. B Lab is a not for profit “with a vision of an inclusive, equitable and regenerative economic system” build on the premise business can solve these problems.
B-Corp Certification is a deep dive into the company’s business considering employees, customers, supply chains, the environment and wider community. To meet certification, you lodge a B Impact Assessment, B Labs verify the score and validate the score with relevant documentation. The level of detail a nonprofit can afford to scrutinise is surely limited, however the emergence of some kind of certification is a sign of progress and growing interest for third-party validation. It will be interesting to see the development of third-party certifications and how entrenched auditors and management consultants respond. At this stage it is immaterial revenue, but the flow of funds will eventually drive actions.
Wrapping Up
Edelman’s 2021 Trust Barometer published in January showed that the only institution that is seen as both ethical and competent is business. People expect business to intervene when governments fall short.
The masses have spoken and have decided capitalism is going to solve the major issues of our society. We can no longer wait for elected officials to solve the problems of climate change; Australia has been scorched enough already by longer and longer bushfire seasons. The Great Barrier Reef people talk about as if they need to visit before it’s gone.
Investing in equities has been a proxy for owning collective wisdom and the continued advancement of society. The public benefit corporation is an advancement in capitalism pushing us closer towards something for good. Not every company will succeed in their purpose but the point is to try.