At Etsy, Will Corporate Conscience and Profits Clash?

SMITH BRAIN TRUST — Etsy continues to test the compatibility of a commitment to social responsibility with the demands of Wall Street. Last week, the online shopping site for vintage and handmade goods became the first publicly traded company to be recertified as a "B Corporation" — a designation, bestowed by a nonprofit group, attesting that a company helps disadvantaged citizens, treats employees well, and is environmentally responsible.

Some advocates for socially responsible capitalism cheered the move. "Etsy showed Tuesday that a public company, beholden to shareholders craving short-term financial gains, can still hold to its principles," reported The Huffington Post. But other commentators suggest that the company could find itself in a tight spot if investors started demanding cost-cutting or other profit-boosting measures. Would benefits like paying employees to do volunteer work get tossed in pursuit of higher returns?

For the most part, those concerns are overblown, argues Christine Beckman, a professor at the University of Maryland's Robert H. Smith School of Business and director of the Center for Social Value Creation. "If there is a sense from Wall Street that Etsy isn't doing everything it can to make money, an activist shareholder could come in and take over, and force the company to exploit whatever profit-maximizing opportunity it is overlooking," Beckman says. "But Etsy would have to be leaving a lot of money on the table for that to happen."

"What matters most is whether the fundamental business model is sound," Beckman says. So long as that's the case, investors are unlikely to get involved in micro decisions about recycling policies and employee benefits, she adds, any more than Apple investors nitpick how much Apple engineers are paid.

Etsy is also less likely than some other kinds of corporations to experience conflict between B Corp values and its bottom line, Beckman thinks. That's because a large part of Etsy's claim to B Corp status rests on serving low-income craftspeople who might otherwise not have a market for their goods. Helping those sellers prosper ought to naturally benefit shareholders.

There's one way in which B Corp status could cause problems for Etsy and other public companies, Beckman says: They can be charged with hypocrisy. "Etsy's executives have put themselves on the spot, in that more people can criticize them, and the range of allegations can be wider," she says.

Etsy has already experienced this, when a group called Americans for Tax Fairness asked that Etsy be denied B Corp status because it had registered in Ireland as an unlimited liability company. That makes Etsy's foreign profits taxable at the low Irish rate and also reduces some financial reporting requirements. “Etsy’s tax dodge is standard operating procedure among our country’s giant multinational corporations,” wrote the executive director of Americans for Tax Fairness. "We hope it will not be acceptable as a B Corp standard."

Whether or not a charge like that has merit — B Lab, which conducts B Corp certification, found the tax arrangement reasonable — controversy can hurt stock prices. As it happens, Wall Street has not been kind to Etsy, whose shares are down more than 75 percent since the company went public. But that appears to largely reflect a judgment about Etsy's business model, not its commitment to social welfare.

In addition to B Corps, there's also a legal structure, "benefit corporation," recognized by some states, for companies that want to hold themselves to socially conscious values. The two categories overlap, and are often confused, but they differ in important ways. Rally Software is, like Etsy, a publicly traded B Corp, but it hasn't been recertified since going public. What's more, Rally was recently acquired by CA Technologies.