Bart Houlahan is not your typical do-gooder.

One of the founders of B Lab, Houlahan (pictured below) is on an important mission — to transform how we define the concept of success in business.

Having begun his career in investment banking, Houlahan joined AND1 — a fledgling basketball footwear, apparel, and entertainment company that was started by his college roommate — as the company’s CFO, COO and president.

During his 12-year tenure at the company, he and his partners grew the business to more than $250 million in brand revenues, with distribution in 85 countries. AND1 achieved all this while pursuing a strong focus on social responsibility which was, in many ways, ahead of its time, including offering employee benefits like yoga classes and a maternity room; stringent standards for working conditions and pay of overseas workers; and a program of donating 10 percent of profits to urban education and other charities:

“We didn’t do these things because our customers were demanding it. After all, we were selling sneakers to 18-year-old kids. We did all this because that’s how we wanted to run our business, and because we believed it made sense. We proved that doing the right thing can be a tremendously profitable way of doing business.”

Scaling up values becomes impossible

In 2005, following what Houlahan describes as a brutal gross margin battle with Nike, he and his partners sold AND1 to American Sporting Goods. The process of that sale revealed to Houlahan how the legal structure of the American corporation makes planning for long-term social responsibility problematic:

“We watched the new owner strip out any commitments we had left to environment, society and workers, and in many ways that’s just what the system encourages, because shareholder value is all that matters legally. It’s really easy to be responsible when there are seven of you. It’s harder when you get bigger. It’s even harder when you bring in investors, or when you are in a market battle with your competitors, and at the moment of liquidity it becomes downright impossible. Business was not set up to scale both profits and purpose. Maintaining mission over time is often impossible.”

Building a new economic force

This experience led Houlahan to form a fundamental conviction – that there had to be a better way of doing things. Working with his former partner at AND1, Jay Coen Gilbert, and another college buddy, Andrew Kassoy, the trio envisioned a fundamental cultural and legal shift in how business operates. The result was B Lab — an organization whose mission is to change the playing field for values-lead businesses:

“We’re an unusual organization in that we are not a change agent ourselves — we’re a nonprofit providing services to high impact for-profit entrepreneurs. There had already been countless pioneers in the social and environmental responsibility space for decades, long before we turned up. From organic food to micro-finance to renewable energy, people had already proven that values and business do not have to be mutually exclusive. We’re truly standing on the shoulders of giants in that regard. But these pioneers were all working in their separate sectors of the economy. We envisioned a platform that could bring them together to create a real driving movement for change across the entire economy.”

From this starting point, B Lab has evolved into a three-prong mission of interrelated activities, looking to both drive market demand for change from the bottom up, and simultaneously create the kinds of structural changes which advocates for socially and environmentally responsible business argue are essential in order for there to be a level playing field.

Rigorous certification of entire businesses

Perhaps the best known of all of B Lab’s programs, the movement of certified B Corporations, or “B Corps”, was designed to offer consumers a simple, recognizable certification that addresses all aspects of a company’s operations — from sourcing to governance to environmental responsibility and workers’ rights.

Would-be B Corporations go through a demanding online assessment, and are awarded points for everything from energy-efficient offices through worker benefits to sourcing locally. If they achieve a passing score (the bar for which raises every two years) and meet the certification’s legal requirement, they earn the right to display the B Corporation logo, and become part of a community of businesses offering each other mutual support:

“We wanted to shine a light on the good guys, and to make it easy for consumers to shop with their values. But we’re not like the other certifications that were already out there. Of the existing 300 eco- or socially-conscious labels, the vast majority focus on a specific products or practices. We’re about the whole company. We set a bar for what’s good enough. And by setting that bar high, and by shining a light on best-in-class, we hope to bring everyone else along for the ride. We’re like LEED-certification for business. [Leadership in Energy and Environmental Design – a program of the US Green Building Council]”

Advocating for systemic change

While market demand is important, Houlahan and his co-founders knew from painful experience that bottom-up change was not enough. If businesses really wanted to integrate values into the heart of their operations, there had to be a change to the rulebooks too:

“Once we had started building a movement of like-minded businesses, we then asked them to advocate for Benefit Corporations as a new, legally recognized corporate form that changes the rules for business, and frees them from the myopic notion that shareholder value is their only responsibility. We wanted to give visionary businesses permission and protection to create shareholder value and stakeholder value at the same time.”

At the time of writing, 18 different jurisdictions (17 states plus Washington, D.C.) have passed legislation that identifies Benefit Corporations as a legally recognized corporate form, and Houlahan and his colleagues are confident that Delaware — which is considered the home of the American corporation — will be next on that list, with Benefit Corporation legislation looking likely to pass there sometime in July.

Driving investment

A healthy customer base and a fair, transparent rule book are prerequisites for the success of values-driven businesses — but so too is access to capital. Having addressed market demand through the certification process, and addressed corporate structure and governance through Benefit Corporation legislation, the third part of the puzzle for B Lab was to demonstrate to investors that there is real long-term value in thinking beyond the simplistic metric of shareholder returns at all costs:

“We work with the impact investing community to identify the highest impact businesses through GIIRS, which is kind of like the Morningstar for impact. It gives investors the tools they need to analyze the social and environmental impact of their investments, just as they would analyze their financial risks and returns. The more that we can drive investors to businesses who share their values, the more likelihood there is of success for these pioneers.“

Ultimately, says Houlahan, the drive behind B Lab is not to create a larger niche of organic, fair trade or otherwise “ethical” businesses for a certain segment of the consumer market. In light of the recent financial crisis and our ongoing environmental challenges, he argues, a fundamental paradigm shift is now required:

“We’re not about compliance or ‘not being bad.’ We’re about reimagining what business can achieve. If we can demonstrate that there is a robust market of entrepreneurs, investors, consumers and employees — shopping, working, investing, making money and creating change — and they are doing so not in spite of their values-driven model, but because of it, it will redefine the standard for success in business. We really do envision a time when all companies have to demonstrate that they are creating value beyond profits.”

Building momentum

Speaking on the role of business in society at Oxford University in the summer of 2012, former President Bill Clinton unexpectedly singled out Benefit Corporations as an example of a different way of doing things. But Houlahan is reticent when it’s suggested that this might have been some kind of defining moment:

“There have been many great moments in the evolution of our movement — many of which were achieved by sustainable business pioneers long before B Lab even existed. There’s no doubt that President Clinton’s speech was a highlight for us — but then so too was the moment that Patagonia became a Benefit Corporation; so too was each occasion that a state passed the legislation; or each time we welcome a new certified B Corp into the family. Now we’re looking at the strong likelihood of Delaware recognizing Benefit Corporations, and we’re building our movement in South America, there’s a sense of momentum that can’t be tied down to any one event or person anymore.”

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