After the sad news that longstanding UK B Corp Pukka Herbs is not able to maintain its certification beyond acquisition by Lipton Teas & Infusions, we reflect on the increasingly frequent question of how organisations can scale whilst maintaining impact.
Certified B Corporations (B Corps) are businesses that meet rigorous standards of social and environmental responsibility. B Lab, a non-profit organisation, awards this certification after a comprehensive assessment of a company’s practices across five key areas: Governance, Workers, Community, Environment, and Customers.
As B Corp is a company-level certification, it requires companies to be stand-alone businesses. This means that the whole company is certified, not just parts. In order for a company to be considered truly independent they need to be separated legally, have independent leadership, have control over their product and supply chain and have separate financial reporting.
But B Corp is also exclusively a certification for for-profit companies, meaning that – like all others – they are subject to the pressures of the market and go through the normal business lifecycle, including mergers and acquisitions.
Indeed, B Corp was originally started after two founders saw their carefully built company values stripped away after selling the brand; its premise therefore was to protect those values in perpetuity and ensure a company’s ability to scale-with-impact. This is therefore a story as old as the movement itself.
The Lipton acquisition is not Pukka’s first change of ownership: the original founders sold it to Unilever in 2017 who sold it to private equity in 2021. We should take a moment to celebrate the fact that between 2017 and 2021 Pukka’s impact grew in line with its founding values and it remained a deeply committed member of the UK B Corp community.
While we can’t assume Pukka will lose its founding values and identity completely on the loss of B Corp status, it’s a good time to explore the dynamics of these situations.
Why do multinational companies acquire small B Corps and what happens when they do?
One reason multinationals purchase small B Corp brands is to leverage their high brand equity – both their reputation with end-users and to attract talent or investors. They likely do this whilst aiming to learn from best practice and then translate that into group practices. Small companies with B Corp values in their DNA, like Pukka, are often regarded as sector innovators and they bring fresh thinking into their much larger partners.
But let’s make no mistake; these are still commercial moves: founders have sweated capital, blood and tears to create value in their business, often with little or no reward as they’ve done so. They will reach a point where they need to realise value for their work and repay those who have backed them along the way. Larger companies offer them liquidity plus efficiency and scaleability to take such brands to the next level. The drivers towards M&A activity are well established and apply as much to B Corps as any other company.
But of course once the deal is done, control is passed to the buyer who will often need to find the most efficient way possible to integrate its new company into its structure. If the company being bought is not financially sustainable (a key prerequisite to creating positive value for all stakeholders) the acquirer is likely to take more drastic action to integrate. Witness what happened to another beloved friend and B Corp, The Body Shop, recently.
So while small B Corps thrive on their sense of independence, that’s not always compatible with a streamlined integration process. “They left us alone after they bought us” is something you do hear…but not always.
What does that affect their B Corp status?
What we’ve seen with Pukka is a drastic integration process that has removed so much independence from Pukka that it’s simply unable to continue as a B Corp.
This explanation from B Lab, which we summarise below, shows why that’s incompatible with continued certification.
These are B Lab’s Complete and Distinct Criteria and are crucial for maintaining their certification:
Legal Accountability: Distinct legal entity that can meet the B Corp Legal Requirement
-> Making sure the legal entity is maintained with operations, not only a shell non-operational entity.
Executive Accountability: Have an independent executive team who are accountable for all of the operations in the scope and who are reflected on the P&L
-> The executive team accountable for the operations should be employed by the legal entity, not on the payroll of the new parent company.
Control over Product Purchasing and Supply Chain Impact: Control over what the company sells (product or service) in its market, with visibility into and influence over the company’s supply chain
-> The executive accountable for product & supply chain should be employed within the operational entity wishing to gain B Corp certification to ensure the entity maintains independent control of their product & supply chain impact.
Reporting Accountability: Separate/distinct P&L that matches the scope of the operations being certified
-> The certifying company P&L should be distinct from the parent company. The P&L should match the financial accounts of the company in scope of certification. All revenue associated with the company going for B Corp certification should go through the legal entity(ies) in scope of certification, there should not be brand related revenue out of scope such as at the parent level.
What should targets and buyers think about?
- Integration plans need to balance increased operational efficiency and loss of independence. In particular, how can a post-deal model preserve values-based decision making and preservation of B Lab’s Complete and Distinct criteria above?
- Advisors, particularly for an acquirer, should ensure they have full clarity/understanding about what is required to maintain B Corp status post deal, ensuring that their clients are aware of the requirements to maintain the status.
- Critically, sellers need confidence that the chosen acquirer has a really good grounding in sustainability and impact before selling – or appreciate the possible fallout for their lovingly-nurtured brand.
We totally accept that the trading environment over the last few years has been particularly tough for small brands. They often do not have the choice they’d wish for when seeking external partners. In a ‘life or death’ situation for a small B Corp, what cost should a seller not be willing to pay to keep its brand alive. After all, if it lives to see another new, more enlightened, owner who knows what could happen?
A final thought
The main issue with Pukka is that efficient post-acquisition integration was not compatible with B Lab’s Complete and Distinct criteria. While we understand that B Lab needs a robust way to ensure that impact is not being watered down by a new parent company, we can’t help asking if there’s another way of doing so whilst allowing for the sort of integration that could (in the most extreme cases) be needed to keep a brand alive?
In some cases it makes no sense for a scaling business to be complete and distinct from its parent. Should B Lab create a more pragmatic route forward for these situations? More integration could inspire the parent to take more action across the whole portfolio, not only keeping the impact box ticked in the B Corp entity but creating a positive ripple effect across the whole portfolio.
We are a partner for companies on both sides of acquisitions like this. To pick up the conversation email contact@greenheartbusiness.com
