Issue #7                                                                                                         June 2019
On purpose and governance
by Professor John Almandoz
Companies are still trying to make sense of the Larry Fink’s letter to CEOs in January 2019: “Society is demanding that companies serve a social purpose. To prosper every company must not only deliver financial performance, but also show how it makes a positive contribution to society.” Fink is the CEO of BlackRock, asset manager of a significant portion ($6.5 trillion) of the entire economy. Social purpose? How does purpose matter for a corporation’s prosperity? And how does one infuse corporations with a greater purpose? 
Companies are indeed talking more about purpose, in part because societies’ expectations on them are rising. Investors and CEOs are increasingly worried about their reputation and are wearied of voters and activists imposing new societal purposes on them. The emphasis on purpose is good, but is all that talk just impression management or is there a genuine business case for purpose? Some scholars think there is, but purpose should come from within (specifically from the very top) not be externally imposed from activist shareholders or governments—otherwise, it will be a box to be ticked, a game on the side, or plain window-dressing. 
How we contribute to society, the purpose of the organization, is central to its identity: who we are and why we exist. It gives coherence to the company’s core values and culture. To be effective, it should be tightly coupled with the company’s daily business operations, rather than be relegated to the corporate social responsibility, or to the public relations department. When it is genuine and pervasive, purpose can have a powerful motivational impact on those working for the organization: they do something that matters, with people they respect, and for people they care about. A purpose can be the glue unifying otherwise disconnected siloes within the organization, who come to share the same mission differently. A purpose can also drive the commitment of existing and new customers, and enhance the company’s social reputation. 
If purpose is missing, the only forces keeping an organization together will be roles, policies, shared incentives, and other formal mechanisms without a soul. When that happens, organizations rely on alignment structures that diminish intrinsic and transcendent motivations and, not surprisingly, ethical lapses follow. 
For all those reasons, boards of directors should not just monitor how management addresses the issue of purpose. Purpose is too essential and permanent to be left in the hands of a passing CEO. The board must work together with management so that the purpose is clear, consistent, and engaging, and so that it is broadly understood and lived, reflecting the mind and heart of the owners, and the daily operations of the company. 

Professor John Almandoz
Professor of Managing People in Organizations
IESE Center for Corporate Governance

Corporate Governance News

Thyssenkrupp’s CEO left with a Solomonic conundrum

The CEO of Thyssenkrupp is trapped between differing demands from activist investors and the company’s shareholder and workers…​​​​​ read more
Church of England’s investment fund determined to defy fossil fuels

Although it is a moderate actor in terms of assets’ volume, the Church of England exerts a great influence on Climate Action 100+, a coalition of 300 investors with more than $33 billion in assets under their collective administration… read more
Nissan and French government intervene and Fiat Chrysler and Renault merger collapses

The Fiat-Chrysler Automobiles Group (FCA) announced on Wednesday the withdrawal of its merger proposal with Renault. FCA believes there are no adequate political conditions in France for the merger to proceed. According to Renault, the board was unable to make a decision because the French government (largest shareholder) asked to postpone the vote… read more
New Shareholders Rights Directive enters into effect in the E.U.

The new Shareholders Rights Directive (SRD II) came into force last June. The directive aims to strengthen the position of shareholders, to ensure that decisions are made for the long-term stability of the company, to increase transparency in the voting process, and to improve issuer-investor dialogue… read more
Amazon’s shareholder meeting shows investors’ discontent on numerous issues

Last May 22 Amazon’s shareholders expressed strong criticism regarding how the company’s leadership handles climate change, workers’ pay gap, working conditions at warehouses and the sale of products that promote hate speech and racism… read more
U.K.’s Labour party to delist U.K. companies that fail to comply with climate agenda

U.K.’s Labour party proposed new regulations by which companies bidding for public sector contracts will be forced to take radical steps to help tackle the climate crisis. Failure to comply would result in U.K. companies being delisted from the London Stock Exchange, among other measures… read more

In Case You're Interested...

Why Do Boards Need To Know Their Company’s Culture? Hint: To Make Sure It’s An Asset, Not A Liability

In this summary report, PwC’s Governance Insights Center provides evidence on how boards approach culture based on the findings from its Annual Corporate Directors Survey and its Global Culture Survey. The report also offers practical guidance on how boards can assess, track and monitor corporate culture… read more

Revisiting The Board’s Core Responsibilities

Historically, board responsibilities were focused on two areas: corporate strategy and CEO succession planning. However, the fast-changing landscape in which companies operate today and the emerging risks associated with technological disruptions require these responsibilities to constantly evole. In this interview Les Brun, the lead director for both Merck & Co. and Broadridge Financial Solutions, offers interesting thoughts on this issue… watch here

IESE's Recent Research on Corporate Governance 

“The Rise of Socially Responsible Investment Funds: The Paradoxical Role of the Financial Logic”

Journal article -refereed (June 2019)

Journal: Administrative Science Quarterly
Authors: Yan, S.; Ferraro, Fabrizio; Almandoz, John
Read summary

“The New Logic of Purpose Within the Organization” 

Chapter (August 2019)

Book: Carlos Rey, Miquel Bastons, Phil Sotok. Purpose-driven Organizations: Management Ideas for a Better World
Authors: Rey, Carlos; San Cristobal, Jon; Almandoz, John
Read summary

Upcoming Events 

“The role of purpose in the  long-term development of a company”

Alumni Learning Program
Prof. Jordi Canals and Prof. Colin Mayer (Saïd Business School, University of Oxford) 

Date: June 27, 2019 (19:00-20:15)
Location: IESE, Madrid Campus
Register here

IESE CCG co-organizes with ECGI the conference “Corporate Governance and Ownership with Diverse Shareholders”

Date: October 25-26, 2019
Location: IESE, Barcelona Campus
Visit the event website

A Way to Learn. A Mark to Make. A World to Change
Barcelona    |     Madrid     |     New York     |     Munich     |     Sao Paulo