B Lab's Bart Houlahan: Building More Socially Responsible CorporationsPublished: November 07, 2012 in Knowledge@Wharton
AND 1, a sporting shoe and apparel company Bart Houlahan helped lead during the 1990s, was in many ways a socially responsible business before the concept was popular. "It is not that we intended it that way," said Houlahan during a recent Wharton Social Impact Lecture. "Our customers didn't care. After all, we were selling basketball kicks to 18-year-olds."
But AND 1 had high employee retention rates, Houlahan noted, presumably because workers at the then-Paoli, Pa.-based firm loved coming to work and were treated well. "We had a basketball court at the office, and we had runs nearly every lunchtime," he recalled. "We had yoga classes, a mother's room and a real familial workplace."
Today, Houlahan helps to oversee B Lab, an organization he co-founded which focuses on helping private companies become more socially responsible, in the mold of companies like AND 1. "[At AND 1], we made our shoes in China, just like Nike and Reebok, but we paid the workers a living wage and made sure they were in a safe environment. We gave 10% of our profits to local charities, most specifically to urban education, which we felt was appropriate given our market."
A former investment banker, he joined AND 1 in the early 1990s during the company's second year in business. Revenues were just $4 million. Over time, he said, it became apparent that in order to scale up, AND 1 had to go public. But the move prompted a rapid change in the firm's corporate culture. "It was not easy back then -- and it is only getting better now -- to both make profits and be socially responsible, especially as a public company," Houlahan said.
His experience with AND 1, where he worked for 13 years in various roles including CFO, COO and president, led directly to his current efforts at B Lab, which he launched with partners Jay Gilbert and Andrew Kassoy in 2006. According to the organization's motto, B Lab works to create "a new kind of company for a new sector of the economy." "Businesses can be an incredible force for good," Houlahan said. "We can effect real change for business and for the world by being socially and environmentally responsible. But as you scale, it just gets more and more challenging, and there have been no real standards to go by. B Lab decided to do something about that."
Houlahan learned about this challenge firsthand at AND 1, which by 2001 had seen its revenue grow to more than $200 million and had product distribution in more than 80 countries. When the company became the number two basketball shoe brand in the United States in 2000, "that got us on the radar screen for everyone," Houlahan noted, "but that also brought a brutal gross-margin battle with Nike," which forced the company to put itself up for sale.
In 2005, the firm was sold to American Sporting Goods, a private footwear company based in Anaheim, Calif. (It is currently owned by brand management company Galaxy International.) "When you get to the point where you are ready to sell a company ... legally, the only thing you can consider is maximum shareholder value," he said. "This is not a lament. We were paid full value. But it felt like I lost a limb to watch all of our commitments to employees, to the environment and to the community be stripped from the company within six weeks of the sale."
There had to be a way, Houlahan thought, that a company "could scale, raise capital, have a liquidity event and still hold onto a mission. That is where B Lab comes in."
Shining a Light
Though B Lab itself is a non-profit, the companies it works with are all for-profit businesses. The organization is designed to set standards and provide certification for companies that both "want to do good and be good investments," Houlahan said. The government and nonprofit sectors are necessary for combating the world's social problems, but alone, "they are insufficient. Business is where the action is, and considering the great challenges in the world that are in front of all of us, we have to harness the ... structure that is most scalable, which is the for-profit business."
To do that, though, there needed to be different rules in place governing for-profit businesses, Houlahan stated. To that end, B Lab has lobbied state legislatures to ease regulations surrounding public companies. "If the 20th century was a time for shareholder equity, then the 21st century has to be one [for] stakeholder equity," he said.
So far, 11 states -- ranging from more conservative Louisiana and South Carolina to more liberal states including New York, California and New Jersey -- have passed legislation creating benefit or "B" corporations. Such firms operate in the same way as a traditional corporation, but must meet higher standards of purpose, accountability and transparency, according to B Lab's website. Businesses with this designation are also given legal protection to work toward creating value for community stakeholders in addition to shareholders.
B Lab serves for-profits interested in becoming more socially responsible through three primary initiatives, according to Houlahan. First, he said, it is necessary to "shine a light on the best of the best," by encouraging firms to become certified "B" corporations. Similar to the LEED certification for green buildings or fair trade designations for coffee, B Lab awards this accreditation to businesses that show they are meeting set standards for social and environmental performance.
The nonprofit has also created the Global Impact Investment Rating System (GIIRS), which rates companies in various categories, from environmental sensitivity to social responsibility. The system is overseen by an independent board of experts, scholars, investors and regulators. At least 8,000 companies have requested ratings, and more than 600 companies in 60 different industries have earned "B" certification, Houlahan noted.
B Lab's second initiative revolves around lobbying states to change laws to benefit corporations. Finally, and perhaps most important for the long-term survival of such firms, the organization works to drive money to these companies. "Capital is the life blood of any corporation, 'B' or not," Houlahan said. In this case, he added, it is not just an investment, but a commitment to a combination of values and profits that is important for the new "B" corporations. "Some people think that investing in social-impact firms is a world of unicorns and rainbows. People still want numbers and quantitative results."
Saving the world, he noted, means little if a company is not profitable. Houlahan gathered representatives from big investment houses, including Goldman Sachs and JP Morgan Chase, to talk about what information those firms needed to invest in "B" corporations. B Lab incorporated those suggestions into the GIIRS ratings system.
According to Houlahan, B Lab aims to prove that socially responsible brands can succeed in all types of markets while using a variety of strategies. The method brand of soap products, for example, wants to become competitive with Procter & Gamble and other major players in the sector. To do that, it is not enough to just have customers who will buy the products because they are environmentally friendly, Houlahan noted. The company also has to present goods with bright, attractive packaging and a competitive price, and get those products on the shelves at major stores such as Walmart and Target, where the average consumer can find them easily.
On the other hand, Houlahan added, there are also "B" corporations like consumer goods company Seventh Generation, which is focused on selling in specialty stores like Whole Foods and pricing its products at a premium.
Asking More from Business
Just as B Lab was getting in gear, a fortuitous thing happened for the organization and the corporations it is trying to promote -- the 2008 economic downturn. "Suddenly, asking something more from our business world was no longer crazy," Houlahan noted. "There was Bill Gates running a foundation, Muhammad Yunus winning the Nobel Peace Prize [in 2006] for microfinance in impoverished nations and Thomas Friedman writing about the sustainable world almost every week. The wind turned to our backs," he said. "It was truly an historic moment."
But it is still unclear how sustainable that momentum will be. Consumer ire against Wall Street greed, and growing buzz over movements like solar energy or buying organic, may only last for so long, Houlahan noted. "On the other hand, it is no longer just a [sticker] on the side of a coffee bag telling you about free trade and organic and the like. There is evidence wherever I look that it could be the foundation of a new sector of the economy, marrying public and private concerns.
"It is a matter of who is walking the walk, and striving to make profits while doing good," he continued. "If we are collectively successful, we will restore communities and make great places to work, and it will all be profitable."