Strategic Corporate Purpose

The purpose of a corporation is to advance solutions to problems and to create wealth along the way. As Colin Mayer puts it: “corporate purpose […] recognizes profit as being derivative of solving, not producing problems, and measurement that needs to account for the costs of rectifying and avoiding producing problems.”

In recent research, we propose that there are problems that firms in isolation cannot solve, but that the combined action of firms in an industry might. To put it in a game-theory context, the nature of these problems involves a prisoners’ dilemma. We view a solution to these problems as the manifestation of strategic corporate purpose.

Consider the problem of green-technology adoption. In many instances, adoption is ruled out because the financial gains are not there when a firm is the sole adopter. The outcome results in the preservation of the status quo. But suppose there is an externality associated with non-excludable learning by doing where production costs decrease with production volume and the knowledge acquired is available to all. Then, the production cost of an adopter is lower the greater the number of other firms that make the same choice. As an example, consider the move to electric vehicle production, and the associated investment in complementary assets such as charging stations or batteries. In this context, it makes a big difference whether only one firm moves to producing electric vehicles as opposed multiple firms in tandem. We show that, under mild conditions, this situation has the nature of a prisoners’ dilemma: adoption by one firm in isolation leaves that firm buried in losses — and the other firm, still operating the legacy technology, is better off by the disappearance of a competitor — and yet all firms would benefit if adoption was universal.

In our research, we discuss the implications of adding an initial game stage, a mission-statement stage. To continue with the previous example, firms would have the chance to commit to a green-friendly mission statement. Such mission statement commits the firm to pursue an objective function that, in addition to profitability, includes other goals such as adoption of environmentally-friendly technologies. We provide conditions such that, in the equilibrium of the two-stage game, all firms adopt a green mission statement, which in turn leads them to optimally adopt a green technology.

This result is significant because green mission statements may be adopted by profit-maximizing shareholders whose utility is not affected by the move to green technology. Basically, the mission statement stage effectively turns a prisoner’s dilemma into a coordination game. Firms are better off by adopting a green statement; sticking to the legacy technology is no longer a dominant strategy. In this way, firms coordinate in adopting a green technology, which in turn makes them better off — even from a purely financial point of view. In this sense, our two-stage framework provides a natural interpretation of the oft-repeated mantra “doing well by doing good.”

Our model suggests an additional perspective on corporate responsibility (CSR), namely that of strategic leadership. We provide conditions such that the mission statement ‘game’ is a pure coordination game: firms are better off by committing to CSR, but no firm has the incentive to unilaterally do so. By committing to CSR, a firm effectively pulls other industry participants along, thus achieving a more efficient equilibrium. In this sense, corporate purpose takes a strategic dimension: it advances the wellbeing of the firm by advancing the wellbeing of the whole industry.

There is ample and increasing evidence of firms departing from straight value maximization. There is also evidence of within-industry interdependence in such moves. For example, research shows that product-market peer firms appear to adopt CSR policies after a close-call vote approving a CSR proposal on a shareholder meeting by another firm in the industry. Similar patterns are discussed in other research. Our theory of Strategic Corporate Purpose provides an explanation for these patterns, one that goes beyond the traditional, partial equilibrium view of CSR.

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By Rui Albuquerque, Professor of Finance, Carroll School of Management, Boston College; Research Associate, ECGI; and Research Fellow, CEPR and Luís Cabral, Paganelli-Bull Professor of Economics, Stern School of Business New York University; and Research Fellow, CEPR

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