Issue #23                                                                                        December 2020
"2nd Special Edition on Corporate Purpose" 
Should Corporate Governance Enter into a New Era with Purpose? A Business Model Perspective
by Professor Joan Enric Ricart

Social preferences on social and environmental issues are changing. Well-known recent studies are showing that investors have an increasing interest in ESG (Environmental, Social and Governance) issues, consumers are using this criterion in their choices, and employees are showing interest in understanding the social and environmental impact of their work and the whole firm. The launch of the Sustainable Development Goals (SDGs) by the UN in 2015 is perhaps the best indicator of a planetary move to change the way we live for the wellbeing of all. Purpose is a good instrument to leverage this social pressure into the organization. Purpose is not a new concept in Strategy; it has long been useful in providing direction and motivation to the whole organization, but it is more relevant today because of all these social changes. 

Inducing Management to “Do Good” via Purpose
Evidence, both anecdotal and rigorous, has started showing that, overcoming some information-related issues, firms will adapt their business models and organizational structures to respond to social and environmental concerns to maximize firm value. They show that, in many cases, “doing good” is profitable and corporate governance has the capacity to adapt to the new preferences of Society. In these cases, tradeoffs do not exist or they are easy to overcome and, therefore, doing well by doing good is feasible.

I think one can go a bit further thanks to this purpose-driven movement. Societal and technological changes, amplified by other trends, are opening up increasing opportunities for business model innovation (BMI), for doing things in a radically different way; new ways to overcome tradeoffs implicit in ESG dimensions are rapidly emerging.

The Business Model identifies the logic for value creation and value capture of a given business and can be understood by the dynamic created by the strategic choices made by management and their consequences related to value creation and capture. BMI tries to change this dynamic, and therefore, the logic of value creation and capture. For instance, Unilever competed in the business of tea, which was characterized by a logic of commoditization, price reduction, cost reduction… that is, an unsustainable business both from an environmental and social perspective. Unilever pushed to move this business into a differentiation and sustainable logic based on growing only sustainable, certified tea, paying higher salaries and selling a differentiated product at a higher price. A risky BMI that ended up being successful and profitable for Unilever, and also consistent with their deep Purpose.

Therefore, Purpose helps boards to induce management into an innovation exercise to develop new share-value business models, overcoming traditional tradeoffs between ESG factors and profitability. In today’s highly volatile environment, Purpose can show the way to developing a competitive advantage through BMI and, ultimately, doing better by doing good in ways which before were impossible or difficult to imagine.
Coalitions of Purpose-driven Investors
But even adding BMI to Purpose may not be enough to overcome all tradeoffs; perhaps it is too hard to develop a business model that overcomes all tradeoffs (especially because many of the needed “solutions” may require some form of collective action). In these cases, one may think about some possible coalitions of investors or forms of ownership that can help build such coalitions. For instance, private firms, family firms or other forms of concentration may make it feasible to get a coalition of investors (and therefore, of boards of directors) that are willing to accept some level of reduction in profitability to implement a more social business. Legally speaking it could take the form of a B-Corp organization, or any other entity. Overall, given the great dispersion in investor preferences, new legislation allowing a variety of corporate governance/ ownership forms is required to provide a better balance between social, environmental, and economic value.

Dealing with Large Global Challenges
Is this enough to solve the great challenges of Society? Perhaps no. In previous cases, firms were able to develop a shared-value business model on their own, with a corporate governance change when necessary. However, there are situations where a company on its own, even with the right corporate structure, cannot solve the problem, given the complex and systemic nature of the problem -which may be illustrated in the tragedy of the commons; collective action is complicated but not impossible and Society tries to develop institutions to help orchestrate this necessary coordination. We also need the collaboration of well-functioning governments to develop such institutions and to create the regulatory environments conducive to solving these great challenges. Therefore, we will need a strong public intervention, in collaboration with businesses.

Global rules and collaborations are difficult to develop and enforce. The way ahead to overcome such difficult problems will depend on a greater reliance on local solutions. If global challenges can be localized, it would be easier to build collaborations among different stakeholders and address more effectively some of the most pressing commons problems. We may need to develop new instruments of public-private collaborations and new institutions for true local cooperation.

The Way Forward
The agenda for Corporate Governance reforms requires different mechanisms to adapt to the new realities of today. More than a radical change in corporate governance, we need flexibility in the use of corporate governance mechanisms, including creative ways for public-private collaborations. In this way, we can adapt corporate governance to the needs of the strategic tradeoffs on a case-by-case basis. We need to move fast on this agenda if we want to accomplish the SDGs, or at least get closer to achieving them, by 2030.

Joan Enric Ricart 
Professor of Strategic Management 
IESE Center for Corporate Governance

IESE CCG-ECGI Corporate Governance Conference (ONLINE)

In the context of the current shareholder vs. stakeholder debate, the IESE Center for Corporate Governance (IESE CCG) and the European Corporate Governance Institute (ECGI) organized the “Can Purpose Deliver Better Corporate Governance?” Conference, which took place on October 28-30, 2020

Leading scholars together with prominent CEOs and board directors, delved into some of the pressing issues surrounding corporate purpose and governance. Over 1,900 people participated in the conference. 

The conference sessions are now available for viewing and you can download the conference report. Find all the papers and presentations on the conference website under the tab "Program & Papers". 

Corporate Governance News

Deutsche Börse to acquire proxy advisory firm ISS 
Deutsche Börse has reached an agreement to acquire a majority stake of approximately 80% in the governance services firm Institutional Shareholder Services (ISS)… read more ​​
BlackRock launches software to help investors quantify climate risk in their portfolios
BlackRock has announced the launch of Aladdin Climate, a new service that provides climate change risk parameters in portfolios. The goal is to respond to the urgent needs of financial institutions and investors to quantify climate risk in their portfolios as the physical consequences of climate change intensify and the global transition to a net zero emissions model accelerates… read more
Nasdaq seeks to increase board diversity among its listed companies
The Nasdaq index has proposed that  United States SEC adopt rules conducive to knowing the board composition of listed companies and requiring them to include more women and people of diverse races and sexual orientations… read more ​​​​​
U.K. releases new review of its corporate governance code
The U.K. corporate watchdog Financial Reporting Council (FRC) recently released a review of the corporate governance reporting in the UK. FRC’s monitoring of how companies have been reporting in 2020 suggests that many companies are still concentrating on achieving a “box-ticking” compliance, at the expense of effective governance and reporting… read more ​​​​​

In Case You're Interested...

Can Purpose Deliver Better Corporate Governance?

IESE CCG and ECGI release conference report, gathering some of the key takeaways from a three-day conference that gathered leading scholars and practitioners on the matter… read more

Having a Clear Purpose Drives Performance

IESE Insight interviews Wharton professor Claudine Gartenberg on her recent research, which finds that corporate purpose beyond profit maximization is associated with better firm performance under certain conditions… read more ​​​​​

New Paradigms in Purpose, Ownership and Engagement

In light of the COVID-19 crisis, where do the governance models guiding our companies need to go next? This special report for IESE Business School Insight #155 explores the role of purpose to push beyond profits in a radically altered business environment… read more 

Purpose, or “Purpose- Washing”? A Crossroads for Business Leaders

How do you inject purpose into a business? And how do you distinguish true purpose from “purpose-washing”—a public relations veneer rather than a fundamental change in culture and operations? To try and answer these questions, and to begin to create a playbook for others interested in following a similar purpose path, Fortune and McKinsey & Co. convened 45 of the world’s leading CEOs for four virtual working sessions over the past six months. Their goal was to extract lessons that would help others embrace a model of business that leads to better results, both for their companies and for society… read more 

Annual Corporate Directors Survey

PwC’s 2020 Annual Corporate Directors Survey highlights particular ways directors are rising to the moment. From facing areas that institutional shareholders have emphasized in recent years, like environmental, social, and governance (ESG) issues and shareholder engagement, to tackling company culture and thinking more broadly about issues like company strategy and executive compensation, the crisis presents opportunities that many directors are embracing… read more 

Investing with Purpose: Placing Stewardship at the Heart of Sustainable Growth

U.K.’s Asset Management Task Force (Taskforce) -chaired by the Economic Secretary to the Treasury and comprised of CEOs from a diverse cross-section of the investment management industry, senior representatives of investor groups and the FCA- publishes a report with specific recommendations to improve stewardship in the U.K. and ensure the investment industry continues to deliver for consumers and the wider economy… read more 

IESE's Recent Research on Corporate Governance 

“The Big Three and Corporate Carbon Emissions Around the World”

Journal article (December 2020)

Authors: Azar, J., Duro, M., Kadach, I., Ormazabal, G. 
Journal: Journal of Financial Economics
Read more

“General Equilibrium Oligopoly and Ownership Structure”

Journal article (Forthcoming)

Authors: Vives, X., Azar, J.
Journal: Econometrica
Read more

“Alliance Governance Mechanisms in the Face of Disruption”

Journal article (Forthcoming)

Authors: Keller, A., Lumineau, F., Mellewigt, T., Ariño, A. 
Journal: Organization Science
Read more

“Payout Policy at eBay Inc.. Activist Investor Asks for Change”

Case (September 2020)

Authors: Sacchetto, S.; Vergara Alert, C. 
IESE, F-960-E.
Read more

“Calculating the cost of climate change”

Other publication (2020)

Author: Vergara, C. 
Reference: IESE Business School Insight (156), pp. 56-63.
Read more

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