Remaking Capitalism: The Strength of Weak Legislation in Mobilizing B Corporation Certification

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Author Information : David S. Lucas, Whitman School of Management, Syracuse University

Matthew G. Grimes, Cambridge Judge Business School, University of Cambridge

Joel Gehman, George Washington School of Business, George Washington University

Year of Publication : Academy of Management Journal (2022)

Summary of Findings : We find that state laws introducing the benefit corporation, a new legal form for sustainable business, effectively mobilizes firms to get and retain the B Corp certification—a prominent third-party certification; notably, this interdependence is due to the weakness of the laws.

Research Questions : How does the enactment of sustainability legislation affect companies’ adoption and retention of related, albeit voluntary certification?
How does this relationship depend on the cultural norms related to corporate sustainability in the region?

What we know : A growing chorus of activists, academics, entrepreneurs, investors and policymakers has expressed interest in remaking capitalism into a more just, sustainable and inclusive economic system. But while many agree that change is welcome, few agree on how this should be accomplished. For instance, highly diverse sets of governance initiatives have emerged in the hopes of encouraging systemic reform. Scholars have studied the passage of legislation ('top-down') and voluntary, emergent efforts ('bottom-up') but rarely have considered the interdependence among such initiatives. Understanding this interdependence is critical to evaluate the synergies that exist between legislation, certification, business and culture in efforts to reform economic organization.

Novel Findings : Even though the benefit corporation legislation is largely toothless, vague and unenforced, we found that it still pushed firms toward “stronger” alternatives in the private sector (here, B Corp certification). Our novel finding is that the legislation successfully mobilized certification, but not because it “forced” firms to “be good,” as one might expect or hope from such a policy; rather, it worked because truly authentic, sustainable organizations needed to distinguish themselves from those inauthentic firms that might take advantage of the law—using this legal structure to claim a set of values that they may not embody. In turn, our work affirms that private sector, “bottom up” solutions like the B Corp certification can be effective and even leveraged to facilitate policy goals in lieu of strong, “top down” prescription from the state about values-based economic reform. Finally, we found that the interdependence of legislation and certification was contingent on the region's corporate sustainability norms—suggesting the vital importance of business culture in systems change processes.

Implications for Policy: Many scholars who have considered the role of legislation in the context of sustainability have conceptualized it as either a successful outcome of institutional change or a strong, top-down, coercive force which might overcome the limitations of bottom-up governance. This is grounded in assumptions that new legislation is generally strong and well-enforced, whereas bottom-up efforts like certification are voluntary and thus prone to free-riding, adverse selection and moral hazard. Yet, we observe a case where top-down legislation manifests as much weaker than the related bottom-up certification. We found a “crowding in” effect when legislative changes are weak and expansive, as these laws increase demands for values-driven businesses to authenticate both their core values and their compliance efforts. Compared with a view of systems change as only possible through top-down mechanisms and mandatory prescriptions about what organizations must do, our study highlights the power of creating conditions under which organizations can enact their purpose-driven identities. This also provides a pathway to eliding the adversarial stance that often results when policy reforms clash with organizational autonomy. Instead, organizations can and do step up. Critically, though, there is a cultural component to these responses. Most simply, cultural context seeds the need to authenticate and enact values in organization.

Implications on Research: Our work breaks new ground in the study of the relatedness of public- and private-governance efforts, particularly in the context of sustainability. Our research invites further inquiry into the relative strength and scope of these initiatives, such that scholars can attend to the many layers of governance that organizations navigate in the economic system.

Full Citations : Lucas, D. S., Grimes, M. G., & Gehman, J. (2022). Remaking capitalism: the strength of weak legislation in mobilizing B corporation certification. Academy of Management Journal. https://doi.org/10.5465/amj.2020.1688

Abstract : Myriad cross-sector initiatives seek to remake capitalism into a more just, sustainable, and inclusive system. But how do these distributed efforts—which often vary in strength—interact? We contribute by attending to the interaction between weak and strong governance reforms. Drawing on longstanding research on organizational values and the sociology of law, we theorize how the enactment of weak and broad sustainability legislation is likely to increase pressure on values-driven businesses to pursue both values authentication and material authentication by way of strong third-party certification. We test our conceptual model by examining the effects of the frequently criticized benefit corporation legislation passed in 36 U.S. jurisdictions on the related B Corporation certification. We find that both new certifications and recertifications increase in states with such legislation, and that these effects are amplified or attenuated depending on corporate sustainability norms in the region. Taken together, our findings contribute to the intensifying societal conversation regarding the prospects for remaking capitalism by illustrating how even weak legislation can contribute to systems change not only by encouraging incremental sustainability reforms within a field, but also by triggering an authentication imperative that mobilizes values-driven businesses to pursue rigorous certifications.

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