By Lauren A. Cooper & Jill Weber

Sustainable, responsible, and impact investing (SRI) has become more prevalent in the U.S., with one out of every three dollars under professional management as of 2019, or $17.1 trillion, being managed based on SRI strategies. This shift to SRI in the U.S. has led to a demand for information to help investors assess companies’ corporate social responsibility (CSR). In a study recently published in Business & Society, we explored how investors responded to a new form of CSR-related information: a company’s decision to organize as a benefit corporation (BC).

A BC is a new type of business organization. A BC has the same characteristics as a traditional C corporation; however, it also must meet significant CSR requirements. These CSR requirements include providing a specified benefit to the public, balancing the interests of shareholders with those of other company stakeholders, such as employees, customers, suppliers, and the greater community, and preparing an annual report assessing its CSR impact against an independent, third-party standard. To date, BC legislation has been adopted in 37 states and is pending in four states. Well-known BCs include Patagonia and Kickstarter. Publicly traded BCs are also present on U.S. stock exchanges, including Laureate Education, Lemonade, and Vital Farms.

In our study, we examined investors’ perceptions of publicly traded BCs and found that investors expected BCs to have higher future CSR performance than other publicly traded companies (i.e., traditional C corporations), even when both types of companies had similar CSR ratings. CSR ratings have commonly been used to assess and benchmark companies’ CSR performance; however, they have been criticized for lacking credibility and transparency. Our findings suggest that a company’s decision to organize as a BC provides additional credibility to high CSR ratings.

We also investigated investors’ preferences for investing in BCs compared to traditional C corporations. We observed that investors preferred to invest in BCs when BCs have similar financial returns to other publicly traded companies. However, investors generally preferred to invest in traditional C corporations when they offer greater financial returns than BCs. Interestingly, we documented that approximately one-third of our sampled investors still preferred to invest in BCs even when they have lower financial returns than traditional C corporations.

Our findings speak to the viability of BCs to raise capital on U.S. stock exchanges. If BCs can provide similar financial returns as other publicly traded companies, then investors view BCs as attractive investments. Even if BCs are unable to earn equivalent financial returns, we observe that certain investors are willing to sacrifice economic gain to invest in these companies. As publicly traded BCs become more prevalent in the U.S., they will likely play a larger role in SRI strategies.

References:

Cooper, L.A. and J. Weber. 2021. Does benefit corporation status matter to investors? An

exploratory study of investor perceptions and decisions. Business & Society, 60(4): 979-

1008.

Hiller, J.S. 2013. The benefit corporation and corporate social responsibility. Journal of Business

Ethics, 118(2): 287-301.

Windolph, S.E. 2011. Assessing corporate sustainability through ratings: Challenges and their

causes. Journal of Environmental Sustainability, 1(1): 37-57.