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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
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