Etsy is one of a growing number of companies, called B Corps, that pledge to adhere to social and environmental accountability guidelines set by a nonprofit organization called B Lab. And Etsy on Thursday became only the second for-profit company to go public out of more than 1,000 companies that have that certification.
Etsy shares closed on Thursday at $30, almost twice their initial public offering price, in one of the most closely watched market debuts this year.
Ringing the opening bell at Nasdaq’s headquarters in Times Square, amid cheers and confetti and Etsy ads flashing on the screens outside, Etsy’s chief executive, Chad Dickerson, called the debut “an important milestone.” Selected Etsy vendors held a bazaar of their wares in one corner of the square, including a Brooklyn-based vintage clothes seller, an Israeli jewelry designer and a Somerset, Mass., store that sells superhero capes for children.
Overnight, Etsy priced its public offering at $16 a share, at the top end of the company’s proposed range, valuing the company at $1.78 billion. And in a nod to its small-business roots, it capped the amount of stock retail investors had access to in the offering to $2,500, to get as many individuals as possible to participate, including its vendors.
“The success of our business model is based on the success of our sellers,” Mr. Dickerson said in an interview. “That means we don’t have to make a choice between people and profit.”
Etsy’s initial public offering is indeed a milestone for a quirky online marketplace born a decade ago in a Brooklyn loft as a way for one of its founders to peddle handmade wooden goods.
It is also an experiment in corporate governance, a test of whether Wall Street will embrace a company that puts doing social and environmental good on the same pedestal with, if not ahead of, maximizing profits.
Etsy declares in its public offering prospectus that it wants to change the decades-old conventional retail model of valuing profits over community. It states that its reputation depends on maintaining its B Corp status by continuing to offer employees stock options and paid time for volunteering, paying all part-time and temporary workers 40 percent above local living wages, teaching local women and minorities programming skills, and composting its food waste.
And though Etsy has become a significant business, with sales jumping 56 percent last year from the previous year to $195.6 million, it still booked a loss of $15 million. Etsy said that at the end of 2014, the site had 19.8 million active buyers, or shoppers that made at least one purchase in the previous 12 months.
If Etsy eventually reincorporates as a full-fledged benefit corporation, as required to do under B Lab rules, it could potentially become vulnerable to lawsuits from shareholders over any failure to achieve its social mission, in addition to the risk of potential litigation by shareholders over its fiduciary duties.
Still, “B Corps are reaching a tipping point in market acceptance,” said Jay Coen Gilbert, co-founder of B Lab, which assesses and certifies companies along social and environmental accountability standards. “The current shareholder model doesn’t meet the needs of entrepreneurs, business leaders and investors who want to make money and make a difference.”
Depending on whom you ask, B Corp companies like Etsy are a panacea to the ills of shareholder capitalism, a sure money-losing proposition or a tricky and untested scheme that opens a legal can of worms.
Etsy is giving small business owners, like the woodworkers Shelli and Seth Worley of South Carolina, the opportunity to sell to retailers through a wholesale website.
The movement itself grew out of a basketball apparel start-up that Mr. Gilbert helped found in the early 1990s, making sure its suppliers paid their workers fair wages and donating as much as 10 percent of corporate profits to charity. But after selling the company in 2005, Mr. Gilbert and his team found that its new owners swiftly swept aside the company’s social endeavors. Haunted by that experience, the team set out to devise a system that could allow a company to formally commit to social and environmental goals.
B Lab has certified more than 1,000 companies in the United States as B Corps, including Patagonia, Warby Parker and Method. In addition, 27 states have adopted laws that can award companies status as “public benefit corporations,” letting them emphasize social or environmental concerns over profits, and more than a dozen others have introduced similar legislation.
“If you look at the history of American business, I would say that’s how we started,” said Leslie A. Keil, a partner at Hanson Bridgett, law firm in San Francisco that has been a leading proponent of the B Corp movement. “But somewhere along the way, it became just about the bottom line, what your dividends are to shareholders, and what executives are taking home, rather than building a long-lasting business that enriches the community.”
Adam Lowry, chief of Method, which makes natural soaps, said that his company’s experience showed that returns and sustainability were not necessarily at odds. Method decided to power its new factory in Chicago, for example, with a 240-foot windmill and three large solar arrays, despite the presence of cheap, coal-fired energy from the local utility.
“If our only mandate was the cheapest costs now, we’d have made a decision to use coal-fired energy,” he said. “But climate change is the biggest environmental challenge we face, and financially, in seven to eight years, we’re going to be in a much better position because we’ll be getting cheaper energy.”
Most B Corp companies, including Method, have opted to stay private. As a public company, however, Etsy is expected to face scrutiny from investors on how much it prioritizes its noble pursuits over its bottom line. And though Etsy is likely to attract investors with a taste for sustainable investing, there is a lesser-known twist that investors are being warned to heed.
Under B Lab rules, companies incorporated in states with benefit corporation laws must eventually comply with their home states’ standards to maintain that benefit corporation status.
In Delaware, where Etsy is incorporated, even small shareholders of a public benefit corporation could sue the company, claiming it had failed to fulfill its social or environmental duties.
B Lab is giving companies four years from the date any relevant state legislation is passed to comply with the state law or risk losing B Corp certification. Since Delaware passed that law in August 2013, Etsy has until 2017 to become a benefit corporation.
“Etsy could be subject to challenges both from those who think there are not enough social objectives being fulfilled, and for those who think there are too many being fulfilled,” said Philip W. Peters, a business partner at the law firm Farella Braun & Martel.
Mr. Dickerson said that, for now, Etsy had no plans to transition to a benefit corporation. “Regardless of certification, we plan to focus on delivering a strong business that also generates social good,” he said.
The idea of companies taking on societal missions raises other intriguing concerns.
B Corp legislation could allow companies to adopt values some would find objectionable and discriminatory, like religious beliefs, said Kent Greenfield, a professor at Boston College Law School. The Supreme Court justice Samuel A. Alito Jr., in his argument for last year’s Hobby Lobby ruling, cites B Corps as evidence that corporations can be religious.
“If you let companies opt in to their own set of obligations, there’s no constraint from them opting in to their view of ethics as something from the Old Testament,” Mr. Greenfield said.
He also warned that an opt-in system like B Corp’s could divert attention from the need to strengthen corporate governance laws that apply to all firms.
Edward E. Lawler III, a business professor at the University of Southern California, said that regardless of whether the B Corp movement took off, Etsy’s offering had helped raise crucial questions about shareholder value.
“There’s a realization that corporations don’t actually have to put short-term shareholder gain above all else,” he said. “More people are saying: ‘We have a right to ask more of our corporations, and they should not exist simply to generate profit.’ ”