Could Etsy Lose This Beneficial Competitive Advantage?

From the moment word got out that handmade crafts site Etsy planned to go public, the buzz commenced: Would an IPO shatter its socially responsible soul? Now that it is a public company and subject to tons of public scrutiny, some doings in Ireland have hit the headlines -- and aimed at the very heart of its business.

Source: Etsy.

Etsy is one of the tiny handful of registered, publicly traded B Corps. B Corps are companies that deliberately prioritize being beneficial to stakeholders like employees, communities, and the environment in their businesses. There's a reason so few are publicly traded: Many investors still believe that being "stakeholder-centric" and "shareholder-friendly" just don't go hand in hand, and such companies often don't want to be pressured by investors' often short-term demands.

Etsy is among the vanguard out to prove it can be done, and it's highly vocal about its socially responsible foundations. It's a big challenge, though, and given the fact that some believe Etsy's on a countdown to shareholder-driven corruption, it's subject to dramatic headlines about changing strategies.

One of the biggest so far is its Irish tax strategy. Some call it tax avoidance, others tax dodging, and think that it should lose its B Corp status -- a differentiator that gives it competitive advantage. Still others would simply characterize its move as "business as usual" or even "smart business."

The controversy certainly gives us another angle to ponder when it comes to social responsibility. Should such moves negate social responsibility? Some say so, but I say, not so fast.

The artful dodge?Ireland's rolling green countryside is attractive to visitors for sure, but 1,000+ international companies have found it an attractive destination to cultivate a different kind of green: tax reduction. Google, Apple, Microsoft, and Abbott Laboratories are some of the companies that have received quite a bit of negative press for utilizing a strategy that plants some subsidiaries there.

Etsy has joined the gang, planting some of its intellectual property in Dublin, the site of its European headquarters, and thereby reducing taxes associated with that intellectual property's income to Ireland's 12.5% rate versus the American 35% rate.

The non-profit group Americans for Tax Fairness has attacked Etsy, calling the company a tax dodger and hypocritical since the move will also reduce Etsy's transparency. It's garnered press by writing a letter to B Labs, which certifies companies as B Corps and is reassessing Etsy now that it's gone public. Americans for Tax Fairness would like to see B Labs strip Etsy of its B Corp status solely on that issue.

A complex web for goodThe criticism could be viewed as unfair to Etsy, though, and potentially to other stakeholder-friendly companies that are trying to prove profits and higher purpose can go hand in hand.

I can't predict what B Labs will do, but I think Etsy is probably fine. Its criteria for certifying B Corps weighs a whole variety of factors: environment, workers, customers, community, and governance. Each company has to illustrate its work on positive impacts and strategies for such stakeholders.

Etsy's overall B Score is 105, higher than the median score of 80. That score is quite competitive with those of other well-known B Corps like Warby Parker (109), Unilever's Ben & Jerry's (101), and Patagonia (116).

Who knows, B Labs may ding Etsy on this issue, but for us socially conscious investors, is it really a deal breaker? For starters, Etsy's stakeholder-centric policies include strategies like paying all part-time workers at least 43% more than local living wages and covering 80% of health insurance premiums for employees.

It's also got sustainability cred through programs like composting a monthly 600 pounds of food waste at a local community farm, undergoing third-party energy audits, encouraging its employees to bike to work, and utilizing waste reduction programs. More than 20% of its management comes from previously excluded populations.

And, of course, Etsy's core business itself encourages creativity and individual expression, not to mention entrepreneurship and a platform for budding small businesses, the lifeblood of our economy. Meanwhile, 86% of Etsy's sellers are female, a demographic that still needs support to more effectively enter the marketplace.

Skipping out on the billsEtsy is not the only company that Americans for Tax Fairness has called out for utilizing tax havens. For example, it has taken aim at big targets like Wal-Mart, which it accused of utilizing a network of havens across the globe. Meanwhile, Wal-Mart has been assailed with one of the oldest arguments: that it shifted a heck of a lot of financial burden onto the public sector, given its historical reputation for low pay and benefits that left many of its employees relying on public assistance.

That's the thing about companies that look after stakeholders -- they aren't externalizing costs like many other big corporations have tended to do.

Companies that skimp on employees' pay and benefits push those costs onto taxpayers, who foot the bills for food stamps and other forms of public assistance. Those that ravage the environment are likewise reducing their own costs and hoping somebody else will pay the price -- and probably passing on more future costs than we can even imagine right now.

Stakeholder-friendly companies like Etsy are trying to pave a more positive way to do business, one that takes responsibility for others into account. By doing so, they're actually reducing more costs than people often realize.

Nobody's perfectInvesting in a socially responsible manner is more art than science. For many, it's a highly qualitative method, and its very nature is extremely subjective. What's right or ethical for one person often isn't for another.

Personally, I believe in the power of socially responsible, stakeholder-friendly companies in both their potential to boost investors' portfolios and possibly even help change the world. I love to see the use of market-based strategies to push for big, positive changes for many stakeholders, including shareholders.

However, each investor has to weigh the factors that they really care about in their decisions of which stocks to buy, sell, or hold. Perfection in social responsibility is notoriously elusive.

Although Etsy's Irish move may sound disturbing, it's doing something more than 1,000 other multinational corporations have done. Although that may not be a great excuse -- Etsy has, after all, vowed to be a different kind of company than many others -- its official response is that its tax structure reflects its international business, and allows it to invest in services for its Etsy community.

Some might avoid investing in Etsy due to this taxing issue, and that, of course, is each investor's prerogative. However, as Voltaire once said, perfect is the enemy of the good. That adage is a fitting way to consider this phase of Etsy's publicly traded life.

Check back at for Alyce Lomax's columns on environmental, social, and governance topics.

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Alyce Lomax owns shares of Etsy. The Motley Fool owns and recommends Apple and Google (A and C shares). The Motley Fool owns shares of Etsy and Microsoft, and recommends Unilever. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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