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Opinion: Etsy IPO challenges company’s socially conscious reputation
Online marketplace must balance doing well and doing good
Etsy
SAN FRANCISCO (MarketWatch) — Etsy Inc., the online marketplace for unique and hand-crafted goods that is about to go public, is getting attention both for its social conscience and its unusual status as a so-called Certified B corporation.
But the online marketplace faces an eventual stiff hurdle to preserve that reputation.
As a Certified B company, Etsy ETSY, +0.00% belongs to a group of businesses that are socially conscious and, according to Etsy regulatory documents, “meet rigorous standards of social and environmental performance, accountability, and transparency,” similar to the Fair Trade certification on coffee. According to B Lab, the non-profit in charge of bestowing the Certified B qualification, which is not a legal entity, over 1,000 companies currently are Certified B corporations, including Ben & Jerry’s ice cream, now a unit of Unilever, and Rally Software RALY, +0.71%
Etsy, with 2014 annual revenue of $196 million, would become one of the largest Certified B companies to go public.
Etsy, which is still unprofitable, seems to have well-meaning intentions to be a good corporate citizen in its new life as a public company. Chief Executive Chad Dickerson states in Etsy’s regulatory filing that he believes the Brooklyn-based company “can be a public company that holistically integrates the concerns of people and the planet, the present and the future.” He also states that Etsy does not plan to give quarterly or annual earnings guidance, taking a page from Google Inc. GOOG, -0.55%
“The pressure to hit a quarterly financial target could incent us too heavily to seek near-term gains, which could diminish our ability to fulfill our larger mission over the long-term,” Dickerson noted in his letter that is part of the company’s S-1 filing with the Securities and Exchange Commission.
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One of the company’s stated core values is to use the power of business to create a better world, in keeping with its community-focused marketplace. For example, Etsy gives employees five work days a year to volunteer in their communities. Company staffers transport its compost matter by bicycle to local farms every week. Its offices in Brooklyn’s DUMBO neighborhood are full of quirky work areas and employees get a small budget to decorate their work spaces with items purchased on Etsy. The company also plans to use $300,000 in proceeds from the IPO to fund Etsy.org, a non-profit it founded this year.
But Etsy’s do-good certification comes with a catch. Because Etsy is incorporated in Delaware, in order to maintain its Certified B status it has to convert by 2017 to a so-called public benefit corporation, the legal equivalent of a Certified B corporation.
In its prospectus, Etsy warns investors that it could lose its Certified B status if it does not meet rigorous standards of social and environmental performance, accountability and transparency and that its reputation “could be harmed if we lose our status as a Certified B Corporation.”
But what Etsy does not clearly state in its prospectus is that in order to maintain the Certified B Corp. status after 2017, its next move would be to convert to a benefit corporation, according to the non-profit B Labs.
One critic of Etsy’s IPO process is John Montgomery, a former Silicon Valley corporate attorney and author of “Great From the Start,” a book about socially conscious companies. Montgomery says it is possible Etsy may not convert to a benefit corporation, and then it would lose its Certified B status.
Montgomery is proponent of benefit corporations, the corporate legal status granted by states. As it stands, he said, Etsy’s directors and shareholders will have to vote in favor of converting to a benefit corporation. The prospectus, meanwhile, only vaguely talks about a benefit corporation, saying it is an amendment to its certificate of incorporation that must be voted upon.
While there are some publicly traded Certified B companies, Etsy could have been the first publicly traded benefit corporation had its directors voted on this before the IPO, Montgomery said in a telephone interview.
“The odds of them being able to convert to a public benefit corporation in the next two years are slim,” Montgomery said. “They have to get shareholder approval now.”
Montgomery suspects that the company’s investment bankers, led by Goldman Sachs, and its lawyers, may have advised Etsy against becoming a benefit corporation before the IPO. Said Montgomery: “Nobody wants to be first, they don’t want to make mistakes, there is no precedent, they don’t want financial exposure.” Moreover, he added, a company committed to the social good in addition to profits is often viewed unfavorably by stock investors.
“Etsy just blew being one of the top business stories of the year,” Montgomery said. “They could have been the global thought leader in business as a force for good.”
Will life as a public company change Etsy? We’ll know by 2017.
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