The Governance of Corporate Purpose

This paper was written for a Festschrift in honour of Rolf Skog.

Concepts of corporate purpose which have risen to the fore recently emphasize a point which Rolf Skog highlights in his writings about the importance of profits for the success and continuity of business. But they also question conventional notions of profits where they are earned at the expense of other parties and the methods by which we both measure profits and incentivize people to pursue them.

That leads to issues about the governance of corporate purpose which 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 this context, governance moves away from a focus on the agency problem of aligning managerial interests with those of their shareholders to one that seeks to promote the identification and implementation of corporate purposes.

The role of the board is then predominantly to oversee the determination of the corporate purpose, ensure that it is the overarching framework within which strategy is formulated, and establish an internal culture, measurement and incentive system that aligns corporate values and metrics with the delivery of purpose. The measurement and incentive systems relate not just to inputs and outputs of the firm in a conventional sense but the outcomes and impacts that they have on those whom the company both affects and depends.

The transition of governance and measurement described in this paper is well underway at both national and international levels. There is much work to be done before a new governance and measurement framework emerges but there is little doubt that we are now witnessing a profound shift in the nature of the corporate system.