The online marketplace Etsy is planning an initial public offering which could raise more than $300 million. It’s also a “Certified B Corporation” which means that in addition to focusing on building shareholder value, the company must maintain certain standards of social and environmental performance, accountability, and transparency. From a valuation perspective, what does this mean?
Legislation recognizing a “benefit corporation” as a legal corporate structure currently exists in 27 states. Such a structure only affects requirements of corporate purpose, accountability, and transparency; it does not affect a company’s tax status. A “Certified B Corporation” like Etsy is a company that has been certified by B Lab, an independent nonprofit organization. A company can be a “B Corp” without legally being a benefit corporation. However, both types bring a new set of implications for investors and other stakeholders.
B Corps reside in an area between nonprofits and for-profit organizations. While B Corps may still pursue profitability and growth, they are not singularly beholden to profit motives of their investors. B Corps must have stated social or environmental missions that they pursue in addition to generating earnings. When necessary, B Corps may place the welfare of certain stakeholders ahead of shareholders’ interests. Firms opting for the legal designation have a legally binding fiduciary responsibility to workers, the community, the environment, and shareholders.
While this is all well and good for the social beneficiaries, is it bad news for B Corp investors? Not necessarily. Some startups going through high growth phases may be reluctant to secure private equity funding for fear of losing control of the business’s strategy and corporate culture. B Corps may be able to attract investors with goals that match their own and raise capital without the fear of giving up a long-term vision. The B Corp status does not appear to be hindering interest in Etsy’s IPO.
As in the case of ice cream maker Ben & Jerry’s, B Corp status may also allow a company to defend itself from unwanted takeovers. Ben & Jerry’s (a public company at the time) was acquired by Unilever in 2000, reportedly against the wishes of its cofounders and various directors. Legal B Corp status may have allowed the company to remain independent by citing its responsibilities to employees and the environment. Obviously investors would have missed out on a payday, but for entrepreneurs seeking to retain control, B Corp status could allow a company to expand ownership while maintaining operating practices and activities that may not be aligned with short-term profitability.
How might B Corp status impact fair value for financial reporting? The concept of the market participant is central to the definition of fair value, whether in reference to the value of an asset or value of a business interest. If that asset or business is encumbered by certain ownership and/or usage restrictions, does this change the pool of likely market participants? In turn, does that narrower view of market participants influence fair value? These are evolving issues that accountants, valuation professionals, and standards-setters will need to address.
B Corps are a relatively new concept and only time will tell what risks and benefits they will ultimately confer to investors. For the time being, however, they offer business owners an alternative perspective on corporate mission and offer investors the opportunity to invest in companies whose social mission aligns with their own.
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