Social Responsibility Could Cost You

Every manufacturing company has five constituencies: employees, suppliers, customers, investors, and the larger community. Recognizing the intrinsic value of all five, most leaders and executives have a broader vision than maximizing shareholder value. They realize that solo objective interferes with becoming the employer, customer, supplier, business of choice. For many of us, treating all five constituencies with respect is simply doing the right thing.

Yet, if yours is a typical publicly held company or a private company that may be looking at a change in ownership in the next few years, you may be constrained in making decisions that could be argued lessens “business valuation.”

Why? Legal systems. Even my small company has articles of incorporation. Not only does the United States legal system limit flexibility. In fact, much of the free world courts rule by the criteria of profit and/or valuation maximization. They are required to. Unless legal documents declare otherwise. That’s not as easy as it sounds.

There are legal for-profit business classifications that require “social good” decisions. These “benefit corporations,” called by a similar name in other nations, specifically require a positive impact on society. Not all 50 states offer benefit corporation registration, and most other countries do not yet recognize the designation nation-wide.

Social purpose corporations allow pursuit of public benefit, while benefit corporations require it. Certification as a “B company” is not a legal status, but does provide public indication of the philosophy. There are many ways to indicate and facilitate focus of a manufacturing company beyond financials. Sadly, we can’t assume that what is right is legal in the eyes of a court.

I firmly believe that manufacturers intentionally serving all five constituencies are more valuable to all of us. Unfortunately, a specific financial valuation that doesn’t back that belief can result in management overhaul and legal losses.

It behooves manufacturing company executives, board members and owners to understand valuation laws governing the business. Making the world a better place, now and in the future, seems like a goal no one can argue. Unfortunately, your brother, cousin or a public stockholder can sue you for that unless appropriate legal steps are taken.

This is NOT legal advice; this is business advice. Contact your lawyer to discuss your vision, what it means for each of the five constituencies, and what impact it may have on profitability or valuation in general. She can help you consider legal options to support your efforts.

Capitalism at its finest.

As published in AME’s Target Online