Throwback Thursday: Can Wall Street Embrace a Company Attempting to Serve Two Masters?
On April 17th, 2015, The Sustainable Investor published: "Can Wall Street Embrace a Company Attempting to Serve Two Masters?", examining the IPO of online retailer and benefit corporation, Etsy, and more broadly, the likelihood of benefit corporations to trade at a discount to intrinsic value, evolving in a similar manner as dual-voting classes of shares."The loss of shareholder voice is an instant destructor of shareholder value. Yesterday, online retailer Etsy went down in the books as the second-ever for-profit benefit corporation to make its Nasdaq debut, closing at $30/share, an 87.5% increase from its $16/share offering price. The vital question that must be asked for both benefit corporations and companies with two classes of stock is whether the entire firm is destined to underperform..." - The Sustainable Investor, 04-17-2015.
When Etsy (Nasdaq: ETSY) went public on April 16th, 2015, wide debate ensued regarding the ability of a publicly traded company with a duty to shareholders to simultaneously exist as a socially responsible business.Etsy is not just any socially responsible business; rather, the company is a benefit corporation: a hybrid corporate structure pledging to engender positive social and environmental impact - essentially, attempting to serve both shareholders and society. Benefit corporations are required to meet specific social, environmental, accountability, and transparency standards. Analogous to non-voting shareholders, benefit corporation shareholders have ceded decisions to management. The major impediment to shareholders of a benefit corporation is that the governing documents are overly broad, such that shareholders essentially grant management a blank check, consequently relinquishing their control and vote. As such, benefit corporations are vulnerable to failing to maximize shareholder value.Yet, there is nothing prima facie faulty with benefit corporations, rather it is the corporate structure itself that is flawed. As such, an overwhelming majority of benefit corporations are private companies, shielded from public shareholder demands (e.g. renowned "do-gooders" Warby Parker, Patagonia, and Seventh Generation, to name a few).It must not go unnoted that Etsy never once wavered from its desire to be a benefit corporation. In fact, when the company went public, the filing stated the following: "Our reputation could be harmed if we lose our status as a Certified B Corporation, whether by our choice or by our failure to meet B Lab's certification requirements, if that change in status were to create a perception that we are more focused on financial performance and are no longer as committed to the values shared by Certified B Corporations".The benefit corporation debate still persists. Investors, shareholders, environmentalists, and the like have been watching Etsy since its IPO last year.
"It's like a beautiful test in a way to see if its possible to have a mission beyond money. You see these situations all the time where even when management is doing their best to take every penny off the table - regardless of what it does to the widows and orphans - you often see fund managers saying, 'You're not doing enough to make money.'"
- Rett Wallace, CEO, Triton Research.
POST IPO:Etsy investors were at first excited, and then hesitant: ETSY stock skyrocketed 86% on its first day of trading, but just five weeks post-IPO, ETSY had plunged 42%, nearly half of the decline attributed to quarterly performance far inferior to expectations (Marketwatch). Etsy had made it clear from the onset that it would not offer quarterly/annual earnings outlooks, because the pressure to hit a quarterly financial target could impede the company from fulfilling its "larger mission over the long-term", and might influence the company "too heavily to seek near-term gains."As shown above, ETSY stock price stabilized around 4Q 2015, exhibiting minor peaks and valleys, closing yesterday at 9.79 (Yahoo Finance).
Despite its lows, on Tuesday, February 2nd, 2016, Etsy became the first-ever U.S. company to be recertified as a benefit corporation after going public.
"Etsy showed Tuesday that a public company, beholden to shareholders craving short-term financial gains, can still hold to its principles." - Huffington Post, February 2016
When Etsy went public, the company was faced with two choices: let its benefit corporation certification run out (two years) or seek recertification from B Lab, the third party verifying entity that administers the Impact Assessment, assigns scores, and certifies organizations as benefit corporations.By seeking the latter route, recertifying as a benefit corporation even as a publicly traded company beholden to public shareholders, Etsy is in essence, contending: despite stock performance, which we anticipate to be positive in the long-term, we hold the benefit corporation values to be embedded in the DNA of our business. A recent call I conducted with Etsy's investor relations confirmed Etsy's intention to remain a benefit corporation for the foreseeable future, because "we believe in this".
"We're in an era of great innovation when it comes to social responsibility and business, and we believe that all companies, no matter their size or what type of corporate structure they employ, can and should use the power of business to create social good. When Etsy went public last year, there was a lot of discussion about whether we could be both a public company and a socially responsible business. As I wrote at the time, 'we reject the premise that there is a choice to make between the two. Etsy's strength as a business and community comes from its uniqueness in the world and we intend to preserve it.' This remains true today."
- Chad Dickerson, CEO, Etsy.
While advocates for socially responsible business were cheering at the recertification, a multitude of critics looked on with a weary eye. ETSY stock price declined 4% the day after the company announced it had been recertified. Moreover, ETSY shares have declined 34% over the past three months, as compared to a dip in the S&P 500 of only 9%.
Moreover, the Wall Street Journal accused Etsy of selling intellectual property to a Dublin subsidiary as a means to dodge taxes. Etsy responded with a robust tax disclosure, "Etsy: Global Business, Global Tax Structure", contending that the growth of the Dublin office has nothing to do with avoiding taxes, rather is a vital part of the company's operations.
"We seek to pay the appropriate amount of taxes in every jurisdiction where we have operations, and to align our tax liabilities with the economic value created by our operations," the company contended.
The B Lab concluded that "Etsy's tax practices did not violate the spirit of the B Corp community", but mandated Etsy to publicly disclose more information "to allow other interested parties to arrive at their own independent judgment."
Etsy should be applauded as the second benefit corporation to go public and the largest benefit corporation to do so (raising $267 million in its IPO versus benefit corporation Rally Software Development Corp, which raised $84 million in a 2013 IPO.) Etsy is also the first U.S. company to recertify as a benefit corporation subsequent to IPO.As Chelsea Mozen, Etsy's Senior Sustainability Strategist explains: "The bigger picture here is that we've been very outspoken about how social good and business can go hand-in-hand - they're not at odds with each other. A lot of people on both sides want to say 'If you do social good, then you don't care about profit.' We're really trying to hold them in equal balance. They don't have to be either/or."