B Lab is Building a New Sector of the
Economy: But Can We Trust Who is
Behind the Wheel?
By: Stacy Magdaluyo

Graduate School of International Relations and Pacific Studies
University of California, San Diego
Prepared for Professor Peter Gourevitch
Corporate Social Responsibility
Winter 2012
	
  

	
  

Table of Contents
Introduction

3

B Lab
Overview of Organization
Target Audience
GovernanceFunding

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3
5
6
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B Lab Certification
Certification Process
Monitoring Process778Analyzing Integrity of B Lab
What is the Point?
Governance Issues
Funding Issues
Certification Issues
Methodology Issues
Incentives to Mislead

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10
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12
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Conclusions

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References

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Appendix
Appendix A: Top 12 Reasons to Become a B Corp
Appendix B: List of Funders
Appendix C: Annual Certification Fees
Appendix D: Sample B Impact Assessment

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Introduction
Triple-bottom-line is a topic of increasing importance in public and private
debate, yet the monitoring of businesses’ performance in this regard remains unclear. For
socially responsible investors and conscientious consumers, the challenge ofdifferentiating between a good company and good marketing remains. B Lab, a nonprofit
organization headquartered in Philadelphia, addresses the challenge of triple-bottom-lineby rating companies on performance related to governance, workers, community andenvironment, and providing a certification. Launched in 2006, B Lab certifies B
Corporations the same way Fair Trade USA certifies Fair Trade coffee or the U.S. Green
Building Council certifies LEED buildings. To date, there are 517 Certified B
Corporations in 60 industries, ranging from Patagonia in the apparel industry to Bamboo
Sushi in the restaurant industry. Through its efforts, B Lab aims to build a new sector of
the economy. This paper seeks to answer the following questions: Is B Lab’s certification
method reliable for investors and consumers? What makes the organization credible?
B Lab
Overview of Organization
B Lab is a nonprofit, 501(c)3 organization whose mission is to use the power ofbusiness to solve the world’s most pressing challenges. B Lab began in 2006 when three
long-time friends and college mates, Joey Coen Gilbert, Bart Houlahan and Andrew
Kassoy, decided to create a foundation for businesses that wanted to do more than makemoney. According to Kassoy, “We realized that there is a huge marketplace of companies
and their consumers and investors who are interested in creating value for all
stakeholders, not just shareholders1.”

	
  

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Developing this marketplace requires addressing systematic problems in thecurrent one. These problems include: (a) a lack of standards to distinguish between goodcompanies and good marketing, and (b) a bias in existing corporate law towardmaximizing profit, and therefore, shareholder value. B Lab addresses these problems
through their major initiatives: designing a rating system, certifying businesses as“Certified B Corporations” who pass the assessment, and promoting a new corporate
form called the “B Corp” that takes into account stakeholders, not just shareholders.
It is important to distinguish between a “Certified B Corporation” and a “B Corp,”
as these are not considered to be the same label. The former is a certification from B Lab
granted to a for-profit business that voluntarily takes the B Lab assessment, receives apassing score, and changes its governing documents to reflect consideration of
stakeholders. The latter is a legal status administered by the state granted to a for-profit
business that changes its corporate charter and files the appropriate documents with theState Department of Assessments and Taxation. Benefit corporations, or B Corps, arerequired to have a corporate purpose to create a material positive impact on society andthe environment; expand fiduciary duty to require consideration of the interests ofworkers, community and the environment; and publicly report annually on overall socialand environmental performance against a comprehensive, credible, independent, andtransparent third party standard2. Though they share similar names, they are administeredby entirely different entities. B Lab, however, plays a direct role in deeming companies
as Certified B Corporations, yet also plays an indirect role in convincing states across the
U.S. to adopt B Corp as a legal form. B Lab will not necessarily be the third party
standard for the annual reports of benefit corporations.

	
  

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Aside from providing certification, B Lab is determined to create a supportive
community for Certified B Corporations. B Lab facilitates direct financial benefits,
including product and service discounts with other Certified B Corporations and B Lab
partners. They claim to save Certified B Corporations over $1 million annually throughdiscounts on Salesforce.com, B2B services and loan forgiveness programs. B Lab also
promises growing attention from the media, but more interestingly, from impact
investors. Certified B Corporations receive a free GIIRS rating—a measurement used by
the impact investment industry to guide the flow of socially responsible capital.
Target Audience
B Lab appears to have many audiences, ranging from conscientious consumers tosocial investors to the social enterprises themselves. The certification signals to theconscientious consumers and investors that a company is worth supporting because it
meets rigorous standards of social and environmental performance, accountability andtransparency. In this regard, B Lab appears to affect the marketplace demand by making
it easier for triple-bottom-line consumers and investors to assess where to put theirmoney. B Lab also appears to affect the marketplace supply by encouraging social
enterprises to acquire certification, by providing direct financial and professional benefits(see Appendix A). However the more prioritized target audience is actually the statelegislators. B Lab strives for systematic change to the existing marketplace. They
understand that a benefit corporation is the corporate structure that best affects change.
Therefore, the consumers, investors and enterprises form the community of Certified B
Corps, form the constituency through which B Lab can persuade states to adopt the newlegislation.

	
  

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Governance
B Lab is governed not only by a Board of Directors, but also by two independentStandards Advisory Councils that oversee the certification ratings and auditing
requirements. The Board still has ultimate authority on recommendations coming fromthe Standards Advisory Councils. Current members of the Board include Debra Dunn,
Director of the Skoll Foundation; Bart Houlahan, Co-Founder of B Lab; Lorene Arey,
President of the Clara Fund; Dave Chen, Founder and Managing Director of Equilibrium
Capital Group LLC; and Don Shaffer, President and CEO of RSF Social Finance. In theircurrent endeavors, they support social ventures. The Skoll Foundation awards social
entrepreneurs; the Clara Fund supports global organizations that grant economic
opportunities for women; Equilibrium Capital Group invests across a platform of asset
managers that focus on sustainability of water, distributed energy, agriculture, integrated
land management, and low carbon transportation; and RSF Social Finance lends capital
to social enterprises that focus on Food and Agriculture, Education and the Arts, andEcological Stewardship. Across all members, they bring a long history of understanding
and working with the types of businesses that B Lab aims to support.
The Standards Advisory Councils (SACs) are independent bodies that oversee the
B Rating System. Nine members comprise the Developed Markets SAC, and ten
members comprise the Emerging Markets SAC. Recommendations from the SACs canonly be rejected with a 2/3-majority vote by the Board of Directors. Current members of
the SACs include Rhonda Evans, Science Advisor for GoodGuide; Genevieve Edens,
Impact Assessment Manager for Aspen Network of Development Entrepreneurs; Rafi
Manachem, Metrics Manager for Grassroots Business Fund; and Hewson Baltzell, Head

	
  

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of the Sustainable Solutions Team for Risk Metrics. Many of these members came fromprivate sector backgrounds in which they focused on corporate accountability andsustainable behavior.
Funding
Providing the monetary support to B Lab are several foundations (Rockerfeller
Foundation, Halloran Philanthropies, Prudential Foundation, Clara Fund, Good Energies
Foundation, Annie E. Casey Foundation, and Calvert Foundation), board of directors(Debra Dunn and David Chen), wealthy individuals (Stuart Davidson and otheranonymous donors), private sector companies (Deloitte LLP and RSF Social Finance), as
well as the United States Agency for International Development (USAID). Each of these
funders has expressed a belief in B Lab’s mission and efforts, and seven of the major
funders pledged a multi-year contribution (see Appendix B).
B Lab collects annual certification fees from its over 517 Certified B Corporations(see Appendix C). These fees are charged on a sliding scale based on the corporations’annual net sales. A smaller business making less than $1 million in net annual sales will
pay a $500 annual certification fee, whereas a larger business making more than $100
million will pay $25,000.
B Lab Certification
Certification Process
Any business may take a free online B Impact Assessment, regardless of whether
the business is looking to become certified. A business seeking certification mustcomplete a series of steps: (1) earn a minimum score of 80 out of 200 possible points on
the B Impact Assessment, (2) engage in a phone interview with a B Lab staff member, (3)

	
  

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provide documentation as proof to eight to ten randomly selected questions from theassessment, (4) amend the bylaws to require consideration of stakeholders not justshareholders, and (5) sign the B Corp Declaration of Interdependence.
Monitoring Process
Any Certified B Corporation is eligible for an on-site review every two years.
Specifically, B Lab randomly selects 20% of all Certified B Corporations, meaning all
corporations have a one in five chance of being audited. The goal of the audit is for B
Lab to verify the accuracy of each response to the B Impact Assessment.
The review process is quite transparent, with the steps and timeline available on
the B Lab website. B Lab informs selected companies several months before the review,
and provides guidelines for what will be required. If the on-site review results in theirscore going below an 80, the company has a 90-day “cure period” to bring its score backup. If the on-site review proves that the company misrepresented itself on the assessment,
the company fails the review.
Three rounds of on-site reviews have taken place, with over 49 corporations
visited. Of these, 43 corporations passed their review with two corporations still underreview from the 2010 audit.
Analyzing Integrity of B Lab
Are They Pointless?
B Lab’s certification concept has received copious amounts of praise from private
and public entities alike. According to Esquire magazine, “B Corps may be like civilrights for blacks or voting rights for women—eccentric, unpopular ideas that took holdand changed the world.” However, also in the limelight is the notion of passing

	
  

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legislation to make B Corporations a legal form. According to the former president of theAmerican Bar Association, the concept of the benefit corporation is “the first real,
original, constructive thought anyone has had in the corporate governance world in about
25 years.” Co-founder Andrew Kassoy claims that “when we started, we decided weshouldn’t do anything that requires changing the law, so we should start with acertification5.” Such a statement raises the question of whether the certification is simply
the means to an end, rather than the end itself. Contrary to Fair Trade USA or USGBC,
which use certification to achieve their respective missions, B Lab also plans to affectlegislation. Currently, the benefit corporation laws have been enacted in seven states.
Provided that the legislation is passed by all states, the role of certifications becomes
meaningless. At most, it offers businesses with a measurement tool prior to applying for
benefit corporation legal status. However, a legal B Corp does not need to be a Certified
B Corp. Certification seems to be a low-risk alternative for a business, given there are no
legal implications and the certification is voluntary. In fact, Benchmark Asset Managers
decertified in 2011 immediately after its on-site review. Decertification does not require
much effort; it requires simply the removal of the certification seal from the website andother marketing materials.
The fact that 517 corporations have been certified by B Lab is impressive, but isoverwhelmed by the 5,767,306 registered U.S. businesses that have not been assessed3.
Additionally, the assessments seem more geared toward U.S. businesses as opposed tointernational ones, with just a handful of certified businesses in Canada and in theEuropean Union. The relatively small and U.S.-based presence of Certified B

	
  

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Corporations reinforces the use of certification as a tool for affecting legal change. B Lab
is focusing on the U.S. as part of its strategy to target U.S. legislators.
Governance Issues
B Lab has overall strong governance, as seen by independence of the Standard
Advisory Councils from the Board of Directors as well as the staff members carrying out
the certification. However, as more social businesses become Certified B Corporations,
there is the potential for a conflict of interest as the decision-makers also have “day jobs”
in organizations linked with Certified B Corporations. RSF Social Finance owns a fundthat invests with New Resource Bank, a Certified B Corporation. Equilibrium Groupinvests in asset managers whose focus is sustainable energy businesses. While theircurrent portfolio does not contain Certified B Corporations, these businesses appear as
good candidates for certification. If the assumed goal of B Lab is to increase the numberof certified businesses, the potential for conflict of interest can be assumed to increase as
well.
Funding Issues
The team of funders is transparent on the B Lab website, and a majority of thefunders are philanthropic foundations concerned with defining standards andaccountability. They are not concerned with the performance of individual businesses,
therefore are less likely to influence the board or standard-setting councils toward lenient
standards. The reputation of the funders also aids B Lab’s credibility, with key names
such as the Rockefeller Foundation and USAID.
Although many of the funders have made multi-year contributions, B Lab plans tosustain itself through annual certification fees. While this may present an incentive for B

	
  

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Lab to ease its standards in order to attract and retain businesses, it is common practiceamong certification authorities such as Fair Trade USA and USGBC to charge a
registration or annual fee.
Certification Issues
One red flag arises in the first step of the certification process. A business mustearn a minimum score of 80 out of 200 possible points on the B Impact Assessment.
However a passing score of 40% seems low by most grading standards. It means that a
Certified B Corporation must earn less than half of the possible points. A low standard
could signify that B Lab hopes to encourage businesses to become certified, possibly tobroaden their constituency in order to pass legislation.
Another red flag appears in the second step of the certification process. A
business must pass a phone interview with a member of the B Lab standards team. Theinterview ranges from one hour to longer, depending on the size of the company. The
questions are meant to clarify the responses on the initial assessment. However there islittle transparency as far as who is asking the questions—volunteer interns or full-time
experts—as well what are the rigor, quality and consistency of the questions.
Looking at the list of certified companies is one way to judge the rigor of thecertification process. 72% of the certified companies are in the service or retail industry,
16% are in manufacturing, and 12% are in wholesale. A majority of the certified
companies provide information services, with only a small percentage involved in
manufacturing or wholesale. Therefore they are likely to do well on the environment
component of the assessment, by nature of their operations. Additionally, the certified
companies are mainly small, start-up businesses that are little known to the public. Large,

	
  

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household name businesses such as Wal-Mart or McDonalds4 are not found on the list.
The likelihood of these businesses applying for certification is very low, given they do
not need a certification to differentiate themselves in the marketplace. Therefore, itappears that the certification exists as a way for small businesses to compete against
larger competitors.
Monitoring Issues
Although companies are selected randomly for on-site review, the selectedcompanies are informed in advance. Not only that, B Lab provides them with guidelines
for what is expected during the on-site review. Companies have two to three months toprepare. This amount of time and preparation seems to favor the company in review.
Additionally, if the company’s on-site review results in a score lower than 80, thecompany has 90 days to redeem itself. Of the three on-site reviews conducted in 2008,2009 and 2010, nearly all of the companies passed the review. Rather than claim that twocompanies failed the review, B Lab states that they are still under review. This is far
beyond the 90-day cure period, and detracts from the credibility of the monitoringprocess.
Incentives to Mislead
B Lab has more incentives to certify companies than to reject them. First, they
aim to build a community of Certified B Corporations. Without such a community, theycannot pursue their other services, such as creating a network for social entrepreneurs, or
leading the way in passing legislation. Their 2012 Annual Report includes a section for B
Lab’s progress, and their key indicators include number of states that signed benefit
corporation laws, the number of Certified B Corporations, the number of businesses

	
  

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completing the assessment, and the number of articles featuring Certified B Corporations.
By setting these metrics, it appears that it is in B Lab’s best interest to assess and certify
as many businesses as possible.
They have little to no costs of being wrong; in fact, two of the companies thatwent through an on-site review were not deemed to have failed, but rather it appears B
Lab engages in a year-long process of helping the company reach a passing score. Even
the term “being wrong” is hard to define, since B Lab is the first and only organization todevelop a rating system for companies. Because they deal with many companies acrossover 60 industries, they tailor their assessment and interviews to whatever the industry
may be—construction, apparel, or financial services. B Lab has power over its definitionof a good company; therefore it is difficult for an outside observer to know when B Lab
is wrongly certifying a company.
B Lab has three approaches in its push for the adoption of benefit corporation
laws. First, B Lab partners with the American Sustainable Business Council to obtainpetition support from individual businesses and business associations. Second, B Lab
approaches individual citizens to write letters of support to their elected officials throughwww.care2.com. Third, B Lab has its most well-known or “marquee” supporters such as
Patagonia, Method and RSF Social Finance testify at the hearings. Therefore, it makes
sense for B Lab to spread awareness of the legislation by introducing a certification.
Once a company gets certified, it wants to share its success, thereby generating media
press about Certified B Corporations and the underlying fight toward legislation.
The biggest concern is what will happen to B Lab once the legislation is passed
and each state within the U.S. has adopted the benefit corporation as a legal form. B Lab

	
  

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will continue to offer a professional network and discounts for these social businesses,
thereby still fulfilling its initiative of supporting entrepreneurs that want to use theirbusiness for good. They will continue to provide certification for new start-ups who wish
to register as benefit corporations, but are not certain of how they measure up; as well as
for existing businesses who wish to re-incorporate, but want to test the feasibility of
doing so. They can also provide the B Impact Assessment for benefit corporations who
are required by law to publish their performance as measured by third party standards.
However, the benefit corporation is free to choose among a list of approved third party
standards, such as Good Guide, Green Seal Business Certification, and the Ceres
Roadmap to Sustainability. If a company already has its Certified B Corporation status,then it will likely continue to use B Lab for future annual reports.
Conclusion
After examining the organizational structure and certification process of B Lab, it
is time to return to the initial questions: Is B Lab’s certification method reliable forinvestors and consumers? What makes the organization credible?
B Lab’s certification process is not easy. A business must do more than simply
pay a registration fee. The business must engage with B Lab through a series of steps,
including amending its governing documents. B Lab has also made an effort to make its
standard-setters independent of the certifiers. Moreover, the rating system used in the B
Impact Assessment has been built upon to form GIIRS, which is used widely throughout
the impact investing industry. However, when it comes strictly to B Lab’s certification
process, there are many flaws to its reliability. The passing score is a meager 40%, thephone interview process is not transparent, and it is easy for information companies to

	
  

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pass the environment component, but difficult for manufacturing and wholesalecompanies. Additionally the monitoring process is quite transparent, benefitting thecompanies coming under review; as well as lenient, offering a three-month cure period tocompanies that do not pass the review. That said, it is still difficult to measure whether
investors or consumers will change their behavior based on the certification. Investors
would rather see the GIIRS ratings when making their decisions, as this has become
standard in practice. Consumers may not be familiar with the certified companies, as they
are so new to the market.
The organization is, for the most part, credible. Its funders are reputableorganizations known for their stringent criteria, and its governance practices are mostly
free of conflicts of interest. But is B Lab credible as a certifier? The answer is no. The
certification, from B Lab’s perspective, is a means to an end. B Lab’s goal is to affectmeaningful, structural change to support businesses that want to do good. Even once thatgoal is achieved, in the form of each state adopting the benefit corporation laws, B Lab issetting itself up for continued revenue. By associating itself with the legislation
movement, and certifying as many companies as possible, it is in the best position tocontinue to be the third party standard for companies that legally become benefit
corporations.
B Lab has proven itself as a pioneer in making triple-bottom-line a moremeasurable concept. Its accomplishments in bringing accountability and standards tootherwise “good marketing” concepts are worth the praise it has received. However, as acertifier, it lacks credibility because of the incentive to certify more and more companies
to fulfill its other organizational goals. It claims to certify companies in the same way that

	
  

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Fair Trade USA and the U.S. Green Building Council certify coffee and LEED buildings,
respectively. Yet forming an independent organization focused on certification, andisolating the organization that seeks to drive policy changes would better serve its
credibility.

	
  

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References
1"The B Corporation: A Business Model for the New Economy." Capital Institute.
Web. 25 Mar. 2012. <http://capitalinstitute.org/node/171>.

2"2012 Annual Report." Certified B Corporation. B Lab, n.d. Web. 25 Mar 2012.
<http://www.bcorporation.net/2012-Annual-Report>.

3"The B Corporation – Hype or Hope?" The New Adventures of Horatio
Bootblack: Reflections on culture, politics and freedom. N.p., 27 Jan 2012. Web.
25 Mar. 2012.

4

Gunther, Marc. "B Corps and Fixing the Broken System of Shareholder
Capitalism." GreenBiz.com. N.p., 04 May 2011. Web. 25 Mar. 2012.
<http://www.greenbiz.com/blog/2011/05/04/b-corps-and-fixing-broken-systemshareholder-capitalism?page=0,1>.

5

Hessman, Kristy. "B Corp Basics: What It Is, And Who Does It Best." Earth
Techling. N.p., 19 Mar 2012. Web. 25 Mar. 2012.
<http://www.earthtechling.com/2012/03/b-corp-basics-what-it-is-and-who-doesit-best/2/>.

	
  

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Appendix A: Top 12 Reasons to Become a B Corp
(Source: Brochure from B Lab presentation in San Diego on March 6, 2012)12) Be recognized as a leader11) Differentiate your business
10) Participate in national ad campaign
9) Protect your mission8) Make employees proud7) Access technology, talent and expertise
6) Benchmark company performance5) Save money, increase profits
4) Partner with like-minded leaders
3) Pass legislation to advance sustainable business
2) Access mission aligned capitol
1) Lead a movement

	
  

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Appendix B: List of Funders(Source: http://www.bcorporation.net/funders)‡ Multi-year Contribution † Program Related Investment$5,000,000 - $2,500,000• The Rockefeller Foundation$2,499,999 – $1,000,000• B Lab Co-Founders † ‡• Deloitte LLP• Halloran Philanthropies ‡• The Prudential Foundation †• United States Agency for International Development (USAID)$999,999 – $100,000• The Clara Fund
• Good Energies Foundation• Panta Rhea Foundation• Pioneer Portfolio of the Robert Wood Johnson Foundation• RSF Social Finance ‡• Tom Bird Charitable Trust ‡ †$99,999 – $25,000• Anonymous• The Annie E. Casey Foundation• Calvert Foundation † ‡• Flora Foundation• Armonia LLC• Ruth Fuchs Charitable Trust ‡• Debra Dunn‡$24,999 – $10,000• Anonymous• Linklaters• Stuart Davidson• The John P. and Anne Welsh McNulty Foundation$9,999-1,000• Anonymous• David Chen
• John Fullerton• Solidago Foundation• Vertex

	
  

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Appendix C: Annual Certification Fees
(Source: http://www.bcorporation.net/become/official)

Annual Net Sales

Annual Fee$0 - $1,999,999$2 M - $4,999,999$5 M - $9,999,999$10 M - $19,999,999$20 M - $99,999,999$100 M +$500$1,000$2,500$5,000$10,000$25,000

Appendix D: Sample B Impact Assessment
	
  

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(Source: http://www.bcorporation.net/index.cfm/fuseaction/company.report/ID/3c0b54a8-a98846ea-ad59-c1557afe725b)

	
  

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