Corporate Purpose

There are divergent views on what the purpose of business is or should be the purpose of business and, while discussions have been in progress for a long time, their intensity and significance are increasing. The reasons for this are that there is growing recognition of mounting problems in relation to the environmental, human, and social impacts of companies but little consensus about their causes and even less about their appropriate remedies. To some these problems reflect a deficiency of the design and enforcement of traditional tools of antitrust, regulation, and taxation. To others, conventional tools are not adequate, sufficient, or efficient means of dealing with the problems.

The ECGI Purpose Programme is built on the premise that the purpose of business is the reason why it has been created and its reason for being. It is therefore a fundamental concept but raises many key questions:

• What precisely is meant by the purpose of business?
• Is it a business tool, a reconceptualization of business, or a policy agenda?
• Is it, or should be, legally relevant and, if so, how?
• How does it relate to such topics as sustainability, responsibility, inclusivity, and ESG?

Purpose has become a central focus of business practice, policy, and academic research. There is a need for a substantial body of research that evaluates the relationship between purpose and performance of firms in not just financial terms but also in relation to impact. The ECGI Purpose Programme is directed by Jennifer Hill (Bob Baxt AO Professor of Corporate and Commercial Law, Monash University Faculty of Law) and co-chaired by Colin Mayer (Professor of Finance, Blavatnik School of Government, University of Oxford) and Jordi Canals (Fundación IESE Chair in Corporate Governance, IESE Business School). Learn more about the project here.

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

CONTEXT

While an old topic, corporate purpose has risen to prominence over the last few years. The reason is a growing disquiet in many quarters about the single-minded focus of business on profit and financial value as the predominant objective of firms.

The renowned business school professor, Sumantra Ghoshal led the revival of interest in corporate purpose when, in 1994, together with Christopher Bartlett, he wrote that:

Purpose is the embodiment of an organization’s recognition that its relationships with its diverse stakeholders are interdependent. In short, purpose is the statement of a company’s moral response to its broadly defined responsibilities, not an amoral plan for exploiting commercial opportunity…..If corporate ambition begins to focus on the company’s narrow self-interest, it eventually loses the excitement, support, and commitment that emerge when objectives are linked to broader human aspirations. When organizational values become merely self-serving, companies quickly lose the sense of identification and pride that makes them attractive not only to employees but also to customers and others. And when management’s respect for and attention to its employees’ ideas and inputs is diluted, motivation and commitment fade. Purpose – not strategy – is the reason an organization exists. Its definition and articulation must be top management’s first responsibility.[1]

Corporate purpose has therefore featured prominently in business and management studies literature in relation to such topics as organizational behaviour, strategy, and business ethics. It is central to debates in corporate law around questions of corporate personhood, the fiduciary responsibilities of directors, the accountability of boards to stakeholders as well as shareholders, and the regulation of companies. It is closely related to issues about corporate ownership, governance, and the financing of firms. And it bears directly on the role of the financial sector; environmental, social and governance factors; activism; and engagement.

Purpose is therefore at the heart of many of the debates that are currently in progress in ECGI and academies around the world. However, there are divergent views on what is or should be the purpose of business and, while there is growing recognition of mounting problems in relation to environmental, human, and social impacts of companies, there is little consensus about their causes and even less about their appropriate remedies. 

To some, these problems reflect a deficiency of the design and enforcement of traditional tools of anti-trust, regulation, and taxation, and a need for more effective anti-trust policy, tougher regulation, and more effective use of tax to address market failures. 

To others, conventional tools are not adequate, sufficient, or efficient means of dealing with the problems. Instead, the failures stem from fundamental defects of the way in which corporate and financial sectors operate. This is where questions about corporate purpose, and its traditional focus on the success of business for the benefit of its shareholders, come in.

Whatever one might think of the merits or otherwise of contending views on corporate purpose, one thing is clear. There is a pressing need for better understanding of the issue and more evidence to evaluate contending hypotheses. Until recently a major limitation on empirical research on corporate purpose has been the paucity of available data. But this is changing and, as the interest of financial and business communities as well as academics, policymakers and regulators in corporate purpose and non-financial indicators of performance grows, the availability of alternative sources of data is expanding.

There are three areas in which there is a particular need for more academic analysis. The first is in relation to the role of business purpose in promoting business performance. It is frequently asserted that corporate purpose is associated with enhanced corporate performance but there are few studies providing rigorous empirical evidence. Furthermore, to the extent that they do exist, most studies evaluate performance in traditional, predominantly short-term, financial terms and do not establish the degree to which purposeful companies confer benefits on other parties in the long-term. 

The second area relates to corporate law and purpose. There is much discussion on whether effective implementation of corporate purpose requires changes in corporate law or whether existing law is sufficiently flexible and permissive to allow companies to adopt and enact their chosen purposes. Related to this are questions about the accountability of boards of directors to external parties, in particular employees and other stakeholders as well as shareholders, for delivery of and deviations from corporate purpose.

The third area concerns the relation of corporate purpose and responsible investment. There has been an explosion of analyses of environmental, social and governance (ESG) factors and attempts to provide international standardization of reporting on sustainability. However, the relation between these and measures of corporate purpose are often unclear and confused. This gives rise to concerns about “greenwashing” and a lack of authenticity regarding the degree to which companies are really committed to deliver on outcomes that reflect a broader range of interests than short-term financial performance.

Underpinning all three areas are questions about precisely what is meant by corporate purpose. Christopher Bartlett and Sumantra Ghoshal correctly stated in the above quote that corporate purpose is the reason why a company exists and is fundamental to its strategy. But how precisely it should be defined, determined, implemented, measured, and rewarded and how it relates to the ownership, governance and financing of firms are still questions that, nearly thirty years after Bartlett and Ghoshal wrote about it, remain to be adequately researched and resolved. 

[1] Bartlett, C. and Ghoshal, S. (1994). “Changing the role of top management: Beyond strategy to purpose”. Harvard Business Review, 11–12, p. 88.