Evolution through innovation: a new way to define company size
Innovation is as much about having an idea as having an opportunity. Fortunately for us, the process of evolving our standards for B Corp Certification presents many opportunities. In addition to shifting from an 80-point scoring system to specific performance requirements across Impact Topics, we’re also changing how we define company size. This is to account for the effects of outsourcing and automation, which sometimes lead to size ‘mismatches’ - when the workforce size remains as is or even reduces whilst other size measures increase.
This is now up for change. Join Susmita Kamath, Project Manager Standards, and Bernard Gouw, Senior Social Standards Manager, in exploring why the size definition matters, and how a new table sits at the heart of this innovation.
What are the proposed changes?
Currently, the B Impact Assessment (Version 6) defines the size of a company by using the number of workers. Within the draft standards, we propose changing this to the number of workers or revenue, whichever is higher. We also propose adding two size categories: X Large and XX Large. The table below shows these changes and the cut-offs for each category.
Size is determined by the number of workers or revenue, whichever is higher (mn = million, bn = billion, FTE = full-time equivalent: more information)
Examples:
A company with 65 workers and USD 100 million in revenue would be large.
A company with 55 workers and USD 9 million in revenue would be medium.
Why does this matter?
Our standards consider a company’s size because it’s a shorthand for their ability, potential impacts, and responsibility for global challenges. For example, we expect more from larger companies. But what does “larger” mean? What determines a company’s size?
In the first public consultation in 2022, several stakeholders asked if other measures, like revenue or profit, had been considered. We also received feedback from the Standards Advisory Council and B Lab verifiers about the size ‘mismatch’ that outsourcing labor causes. In short, outsourcing can reduce the number of workers without decreasing other size measures, resulting in perceived mismatches.
We see across the B Corp community, and beyond, that the type and likelihood of said outsourcing varies by industry. In the clothing industry, manufacturing is nowadays almost always outsourced to countries with lower labor costs; a clothing brand rarely owns a factory. In the food and beverage industry, it’s slightly more common for brands to own their factories, whilst the growing of ingredients is still usually outsourced. Across all industries, it’s common to outsource business services, like cleaning, security, and marketing. Crucially, as we enter into a new era of technological innovation, many parts of a business, like customer services, administration, and sales will change with artificial intelligence (AI). In this context, AI has the same effect as outsourcing. It’s a move that will see worker numbers decrease without revenue necessarily decreasing.
Standards that tailor requirements based only on the number of workers are vulnerable to size ‘mismatches’. More importantly, this mismatch means that standards can inadvertently reward companies that outsource or use automation with easier requirements.
We don’t see outsourcing or automation as inherently bad. However, we do believe standards should account for their potential to distort company size measures.
What do other standards do?
Surprisingly, tailoring requirements to company size is not common. For example, GRI, Fairtrade International’s Trader Standard, Future-Fit, UN Global Compact’s Communication on Progress, Workforce Disclosure Initiative are all size-agnostic. And where it does exist, size is almost always defined by the number of workers (e.g. Ecovadis) or revenue (e.g. UK Modern Slavery reporting).
One model stands out for combining measures. In the EU, agreed size categories determine the scope of regulations. For example, the European Sustainability Reporting Standards apply to “large” companies, defined as meeting two of three thresholds across the number of workers, turnover (i.e. revenue), and balance sheet (i.e. assets). Some other standards, like SBTi, have aligned with this approach.
Crucially, despite considering multiple measures, the EU approach doesn’t address outsourcing or automation. A company that outsources all manufacturing, for example, will have fewer workers and fewer assets, meaning they are reallocated to a smaller category. Or to put it differently, outsourcing and automation could lower a company’s reporting requirements.
What did we do?
To develop the new approach, we adapted the above EU model in two ways. First, we removed ‘assets’ because our stakeholders felt they were less indicative than revenue, and because their verification can be very complex. Second, we kept revenue as a second measure and introduced a ‘whichever is higher’ logic so that it reallocates upwards. This new table should better capture a company’s ‘true’ size, especially for those that use significant outsourcing or automation.
Where do our figures come from?
The current standards for B Corp Certification define the size of a company solely based on the number of FTE workers they employ. The size categories are:
0 worker (or sole proprietor)
1-9
10-49
50-249
250-999
1000+
Note: The current standards treat large multinational companies with over US$5billion in revenue distinctly.
To define the revenue thresholds, we first reviewed the B Corp community’s revenue data for each size category above. We were looking for revenue ranges that most closely reflect the typical company revenues for the above number of workers on an FTE basis.
For each revenue data set, we reviewed the statistical outliers. We used these outliers to inform revenue thresholds that correspond to each FTE-based size category. Through this analysis, we also observed that roughly 10% of companies in the B Corp community could get allocated upwards in size due to this proposed size definition change.
While we used data analysis and statistical tools to frame the revenue thresholds, we recognize that these might need refining based on stakeholder input and company experiences. And so, we’d love to hear from you what you think about this proposed update and the specific thresholds. Share your input during the ongoing second consultation, by clicking here.
By taking this innovative approach to the new standards, we tackle challenges from outsourcing and automation head-on; in considering both worker count and revenue our size assessments become sharper, fostering better alignment between size and expectations.