Who cares about corporate purpose?

Who Cares About Corporate Purpose?

Corporate purpose is not a new topic. It has been a subject of discussion, in different shapes and forms, since the formation of the modern corporation.
Strands of corporate purpose can be traced to the feudal guild system in Europe through to the 19^th Century and early 20^th Century industrialists and philanthropists. I recommend this excellent video by Professors Solomon and Miazad at Berkeley Law which provides a snappy 3 minute history.

Historical perspectives

A similarly simplified, albeit incomplete, history of corporate purpose starting in the early 20^th Century features the case of Dodge v Ford in 1919 in the US— a landmark ruling in which the Michigan Supreme Court held that the primary purpose of a corporation is to benefit its shareholders, and that returns to shareholders are to be prioritised over other social objectives. This case is often cited by scholars in establishing the orthodoxy of shareholder primacy in the US and thereby shaping corporate purpose linked to shareholder interests. In the post-World War II era this shareholder ethos remained in place, famously articulated in Milton Friedman’s widely cited New York Times Magazine article in 1970 that ‘the social responsibility of business is to increase its profits’ (qualified, to Friedman’s credit, by the need for business to work within legal and ethical norms).
 
Outside the realm of law and finance, the issue of corporate purpose was flagged in the 1950s by the influential management thinker Peter Drucker, who is attributed with the quote that ‘the purpose of a business is to create and keep a customer’— looking at company purpose through a marketing lens.  Moving on to the 1990s, the management scholars Christopher Bartlett and Sumantra Ghoshal published an article in Harvard Business Review titled ‘Beyond Strategy to Purpose’ in which they argue that organisations must have a compelling purpose that goes beyond financial goals, and that this purpose must drive management and the formation of company strategy.
 
In the 1990s and early 2000s considerable attention was devoted by law and finance scholars to corporate governance, but not to corporate purpose per se (at least in Anglo American jurisdictions). And much of the early scholarship about corporate governance was rooted in the conventional grounding of shareholder primacy. But in the early 21^st Century, things began to change.

From shareholder primacy to stakeholderism

The formation of the Principles of Responsible Investment (PRI) in 2006 helped to catalyse institutional investor thinking around the consideration of environmental, social and governance (ESG) factors as part of the investment process. The Financial Crisis of 2008 soon followed, giving rise to renewed broader social concerns about the impact of companies (particularly banks) on society. At the same time, the growing general awareness of profound systemic risks, most notably climate change, has triggered social concerns about company impacts (including externalities) that are increasingly shared by company stakeholders, institutional investors and the general public.
 
While the foundations of stakeholder theory had been articulated in 1984 by the University of Virginia business academic and ethicist R. Edward Freeman, these growing concerns about the potential ills of shareholder primacy led to a renewed stakeholder focus in the US in the 2010s. This culminated in the (seemingly improbable) US Business Roundtable letter of 2019 endorsing the concept ‘stakeholder capitalism’, which was in turn embraced in the World Economic Forum’s Davos Manifesto of 2020 as an alternative to shareholder primacy.
 
Current academic discourse

So, did the pendulum simply swing from shareholder primacy to stakeholderism? Perhaps so, to some observers. But a renewal of scholarship and thinking about corporate purpose in recent years has begun to present a more nuanced approach to a simplistic and binary shareholder versus stakeholder debate. Led by ECGI Fellow and Oxford academic Colin Mayer, the British Academy published ‘Principles for Purposeful Business’ in late 2019. It makes the case for revisiting the contract between business and society and establishing the primacy of purpose over profit, supported by eight principles ranging from law and regulation, ownership, corporate governance, measurement and performance and finance and investment. Importantly, this approach to corporate purpose does not reject the fundamental role that shareholders play in company governance in favour of stakeholders. But it does challenge the premise that company purpose is defined by shareholder value maximisation.
 
The British Academy publication and other related scholarship by Professor Mayer has helped to stimulate a fresh round of academic discussion on corporate purpose in recent years. From the network of ECGI Research Members, over 35 working papers have been published on corporate purpose since 2020. The majority of these are from legal scholars who collectively warn of tensions and the risk of superficiality/form over substance.
 
A review of these working papers shows different approaches to the study of corporate purpose, and that there is no consensus in the academic community on this question. For example, Harvard Law scholars Lucian Bebchuk, Kobi Kastiel and Roberto Tallarita challenge this alternative to shareholder primacy, and there is also a sharp, but entertaining(!), exchange of views between Colin Mayer and Oxford law professor Paul Davies on the purpose— and purposelessness— of mandatory corporate purpose statements. More recently, Cambridge law professor Brian Cheffins has taken an historical view of the current corporate purpose debate, suggesting that it has been cyclical in nature, with pendulum swings that alternatively favour shareholders vis-a-vis stakeholders, and that this is likely to continue into the future.

The multi-lens approach

The fact that the discussion of corporate purpose continues to crop up suggests that this topic may be perennial, or at least that it can be elusive— and is certainly far from resolved. And it can take shape differently when viewed through different lenses. This helps to explain why ECGI has identified corporate purpose as one of three core pillars (alongside family capitalism and responsible investment) in its multi-year Responsible Capitalism initiative, launched in 2022.
 
A key milestone of this initiative in 2023 is an ECGI conference in Copenhagen in September 2023, in conjunction with Copenhagen Business School. This seminar will bring together law and finance scholars, along with senior company executives and investment professionals, to discuss contemporary interpretations of corporate purpose through five lenses: leadership, management and governance; ownership; finance and investment; law and regulation; and measurement and performance.
 
Some of the parameters to this debate may include the following:

• Does prioritising purpose over profit imply tradeoffs in terms of shareholder value?
• Does investing in companies that prioritise purpose over profits conflict with the fiduciary duty of institutional investors owed to their beneficiaries?
• Can a corporation and its board prioritise its business purpose over shareholder value?
• Should shareholders care about purpose more than value?
• What sort of purpose should corporations embrace/adopt?  

As we work through these issues in Copenhagen, we do not anticipate to achieve universal agreement on all of these topics. But we do hope we can have success in continuing to shape the contours of the corporate purpose discussion and to build awareness of its implications for practitioners as well as academics. This includes identifying where there may be common ground with this re-imagining of corporate purpose, but also identifying where differences, open questions and practical challenges may lie.

Who cares?

To answer the titular question about who cares about the issue of corporate purpose: Economists care, investors care, corporate managers care, workers care, regulators care, politicians care, consumers care, civil groups care …and corporate law scholars really care! 

George Dallas,
Head of Content, ECGI

----------------------------------------

ACADEMIC PRESPECTIVES

Recent ECGI working papers on corporate purpose highlight a range of overlapping views informing us:

• that the 1980s takeover wave probably was a “critical juncture” that altered corporate purpose in a shareholder-oriented manner that may be unlikely to change for the foreseeable future. More
• that we need a more comprehensive vision of the corporation that encompasses both private and public aspects and expands the role of company directors in monitoring corporate integrity and social impact; More
• that firms can generate social value while increasing their long-term economic value by adopting organizational and technological innovations, promoting sustainability, adhering to ethical standards, and incorporating corporate governance practices that align with environmental and human rights concerns, suggesting that a narrow focus on economic value alone is insufficient in capturing the full potential of a firm's impact and success; More 
• that many large companies have embraced the concept and while legislative reforms in different countries have provided avenues for incorporating corporate purpose into company law, the demand for legally obligating companies to have a corporate purpose in their articles of association lacks support; More 
• that the interaction between industrial organization and purpose also carries political risks and can contribute to increased polarization and instability in society; More 
• that the presence of mission statements and green-activist investors is more likely in industries with prominent strategic complementarities; More 
• that stakeholder pressure can be influential in firms with significant economic rents; More 
• that relying on the discretion of corporate leaders to serve stakeholders can be an ineffective and counterproductive approach; More 
• that evidence shows limited detectable effects on corporate purpose and decision-making; More 
• that a switch from shareholder value to enlightened shareholder value could create a false impression of stakeholder protection and hinder meaningful reforms; More 
• that corporate leaders, despite expressing commitment to stakeholderism during the COVID-19 pandemic, failed to prioritize stakeholder interests in deal negotiations, demonstrating that their incentives primarily align with shareholder interests rather than broader stakeholder concerns; More 
• that the concept faces challenges of legitimacy and coherence in the corporate form; More 
• that corporate law should enable the construction of a zone of insulation to protect a company's mission-purpose from immediate shareholder pressures; More 
• that legally binding purpose statements for companies can enhance credibility and align objectives with shareholders. More 
• that a single change to corporate law, requiring companies to include a social or communal purpose alongside profit-making, is unlikely to transform corporate conduct without significant changes to shareholder-centric features of corporate law or a shift in how investors perceive their goals; More 
• that purpose proposals foster stakeholder engagement; More 
• that corporate purpose drives expectations, interests, transparency, accountability, through measures like charters and market forces' influence; More 
• that a periodic say-on-purpose vote could be debated with the integration of a more meaningful purpose report into CSR reporting, and the adoption of dual-purpose corporate forms could be considered in jurisdictions without benefit corporation models; More 
• that EU governance overlaps with benefit corporations' role; More 
• that it is important to recognise the diversity of corporate purpose models across jurisdictions, noting that Asia and Latin America’s economies have long embraced corporate purpose and stakeholderism; More 
• that the flexibility provided under law is effectively modified or constrained by the cultural, legal, and institutional environment that fiduciaries operate in; More 
• that enforcement including market discipline, self-regulation, codes of conduct, disclosure and auditing, and both public and private enforcement are crucial; More 
• that investment institutions cannot legitimately sacrifice their investors’ financial returns in connection with the installation of socially responsible business practices at operating companies; More 
• that there is no evidence suggesting that where they exist, broader fiduciary duties to stakeholders make much difference; More 
• that recent institutional interventions in the name of ESG do not herald a structural shift toward a welfarist corporation; More 
• that shareholder primacy cannot continue to provide a viable cornerstone for corporate legal theory. More 

JOIN US FOR THE NEXT VITAL DISCUSSION

Modern Capitalism and Corporate Purpose 2023 ECGI Annual Conference

hosted by The Center for Corporate Governance, Copenhagen Business School (CBS)

• Wednesday, 20 September 2023 | Young Scholars Workshop
• Thursday, 21 September 2023 | Perspectives on Corporate Purpose
• Friday, 22 September 2023 | 2023 Wallenberg Lecture, Prizes and more

Location:

Copenhagen Business School, Solbjerg Plads 3, DK-2000 Frederiksberg, Copenhagen

Registration Fees:

ECGI Members: No charge | Students and academics: No charge*| Practitioners: EUR 50*

*To attend the ECGI Annual Dinner, please consider becoming a member

Registration | Contact | Programme | Speakers

This is an in-person event only. Some sessions will be recorded and published afterwards.

About the Event

As part of the Corporate Purpose pillar of ECGI’s Responsible Capitalism initiative, this 3-day event will bring together academic scholars, and business leaders to address the central questions relating to corporate purpose and capitalism more broadly. Following a workshop on corporate purpose designed for young scholars on the first day, there will be a conference with five sessions to consider different perspectives of corporate purpose. The final day will include the ECGI General Assembly meeting, the 2023 Wallenberg Lecture, delivered by Professor Lucian Bebchuk (Harvard Law School and ECGI), the working paper prizes and a session on corporate purpose in practice.

We hope you will be able to join us.