An important recent development in institutional design and corporate governance
On June 3, 2011, Climate Progress reported on the development of a new type of corporation, the B-corp, “which modifies governance so that managers respond to long-term interests of investors, stakeholders, and the environment, rather than just focusing on short-term profits.” This is an important development because it changes the "rules of the game", as B Lab co-founder Coen Gilbert explained in a Harvard Business School case study of his company.
Many people forget that the economy can’t exist without a government to define property rights, enforce contracts, charter corporations, regulate socially destructive corporate behavior, and determine the rules of the game. When government doesn’t take these responsibilities seriously enough we end up with lead in children’s toys, e coli in food, global financial crises, and rivers that catch on fire, and no one should find that to be a particularly good outcome.
I’m excited about this idea because it does what some of us have advocated for a long time: change the charter of corporations to redefine property rights, and add some responsibilities while we’re at it. Corporations are socially constructed entities and we get to choose how their governance and underlying incentives should be structured. By changing the assumptions behind their design it’s possible to set a new course for the economy, one where private profit can be more closely aligned with public good.
Of course, changing the charter for existing corporations would be difficult, but there may be other ways to accomplish the same goal for those institutions. In any case, creating a new type of corporation that deals explicitly with issues of standards, transparency, legal status, and incentives is a good first step, and I applaud the B Lab folks for starting down this path.
And this development is also a reminder that the innovations we’ll need to truly face the climate challenge are not just technical, though we’ll need plenty of those to get to the greenhouse gas emissions reductions that will be required to stabilize the climate. Social and institutional innovations will play an important role as well, given the rate, scale, and scope of changes that are required.
