Do public benefit corporations live up to the hype?

Greetings from New York, where the hottest ticket this weekend was for the sailing grand prix in the city’s harbour. Despite the threat of thunderstorms, 10 catamarans in the professional SailGP league whizzed past spectators on Governor’s Island.

It was within my lifetime that New York dumped sewage straight into its rivers. Now, the harbour is a “green space” (blue space, perhaps) that can be enjoyed as much as Central Park.

For today, I have something a bit more terrestrial. The public benefit corporation structure is a rare find on American stock markets; there are currently less than two dozen public PBCs. But some artificial intelligence companies are using it, and one eggs company has demonstrated the PBC model can thrive in the stock market.

Thanks for reading.

PUblic benefit corporations

Companies test PBC structure on the stock market, from eggs to AI

Texas-based Vital Farms’ sustainably-sourced eggs and butter products are not exactly feeding the stock market’s insatiable demand for artificial intelligence. But they do share something in common with AI start-ups Anthropic and Elon Musk’s x.AI.

Vital Farms, like its technologically advanced peers mentioned above, is one of only a handful of publicly traded benefit corporations in the US. It has also enjoyed a share price surge of nearly 220 per cent in the past 12 months, edging AI darling Nvidia’s 200 per cent gain in that time. As a PBC, the company’s board has a fiduciary obligation to its workers, communities and other stakeholders alongside shareholders. (This legal structure is distinct from the B Corp initiativea certification programme run by the non-profit network B Lab.)

The PBC model was especially popular in 2020 and 2021 amid strong stock market performance and enthusiasm for environmental, social and governance (ESG) investing. Some of the notable PBCs that went public that year included shoe brand AllBirds and eyewear business Warby Parker. Those companies have seen their share prices slump in the years since, but the structure is becoming popular again with AI start-ups. Despite fears over AI technologies, these companies have embraced the PBC model and the glow of sustainability that it carries.

Vital Farms struggled as well after its 2020 initial public offering. The company faced doubt that it could thrive after the Covid-19 pandemic as people started dining out again, Robert Moskow, a managing director at TD Cowen, told me. But now it is surging thanks to strong earnings growth.

Vital Farms’ revenue growth showed it was “more than a pandemic-driven growth story”, Moskow said. “They are just doing a great job at finding consumers who appreciate the quality of backyard-raised eggs.”

In an interview, Vital Farms chief executive Russell Diez-Canseco said two of the company’s early investors pushed for the PBC status: SJF Ventures and Arborview Capital.

As Vital Farms launched its initial public offering, the company’s bankers were intrigued by the PBC status due to the “massive amounts of capital waiting to find the right ESG investment”, he said.

But the allure of ESG was shortlived. As with most public companies, ESG can become a compliance headache. Giant companies with plenty of cash to throw around can afford to keep up with ESG scorecards that boost their rankings in ESG funds, he said. Like other small companies, Vital Farms was forced to spend money on ESG compliance rather than on investing in the business, Diez-Canseco said. The ESG market was ignoring Vital Farms’ PBC status.

Still, Vital Farms is not without ESG challenges of its own. In the eggs business, only hens are valuable. Male chicks are often slaughtered immediately. Animal rights group People for Ethical Treatment of Animals sued Vital Farms over mistreatment of chickens. The case settled out of court last year.

“We are trying to make the system better,” Diez-Canseco told me. Male chick culling “is still an area where there is a lot of room for improvement”. Alternatives are in the works but they are still in their infancy, he said. “It is still early days, unfortunately, to count on the really exciting prospective solutions on the horizon.”

As a stock market success, for the moment at least, Vital Farms is drawing renewed attention to the PBC model. As AI businesses continue to grow, their PBC status will become crucial in potential mergers and acquisitions in the next 12 to 18 months, Susan Mac Cormac, a partner at law firm Morrison Foerster, told me.

“At some point there will be a question: When a PBC is being sold, their board can — and in many cases must — say no to a higher bid if they believe the acquirer with the higher price will not maintain the higher benefit,” she said. “One of these AI companies is going to be sold and that issue is going to come under the microscope. How do you evaluate whether your acquirer is going to maintain the public benefit?”

Vital Farms has shown that PBC companies can survive and thrive in the spotlight of the public markets. But the model still faces uncertainty, especially as public concerns about AI’s threat to humanity increase.

Smart read

I recommend this shocking story from our colleague Harry Dempsey about the backlash to diversity, equity and inclusion in the mining industry — a so-called “Andrew Tate effect”.