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Do We Need Corporate Purpose to Improve Corporate Governance?
by Professor Jordi Canals
The debate on corporate purpose is extremely heated. The recent IESE Corporate Governance Conference –in cooperation with ECGI- on this theme helped explain why. Purpose or mission are not new concepts, neither in management, nor in governance. Over the past decades, leading scholars have considered them as useful pillars for designing better organizations.
In recent years, the debate on purpose has re-emerged, as business leaders, scholars and asset managers are considering ways to improve how companies can have net positive impact on society, beyond financial performance. The evidence on the environmental impact of companies, the role of some boards of directors on executive pay and its impact on social inequality, or the need to fix some of capitalism’s negative effects and reinvent it are, among other factors, forces driving the debate on purpose. As Harvard Professor Rebecca Henderson highlighted in the IESE Conference, society is facing serious challenges. Companies are part of the solution and purposeful companies can help drive change.
The IESE Conference covered many of these themes. I will highlight three of them which are relevant for management and governance. The first is that purpose can be truly effective when it offers a clear explanation on why a company exists and does what it does. It should express the intention to solve or tackle some customers’ needs or problems. In doing so, it offers a unifying reason for the cooperative action of the different parties -employees, shareholders, and other stakeholders-, as well as clarity on the strategy adopted and commitment on how to do things. Purpose is not a technical solution to some corporate problems. Professor Claudine Gartenberg (Wharton) explained well how purpose can help employees find meaning through their work and show a stronger commitment. As Professor Patrick Bolton (Columbia) put it during the IESE Conference, purpose is a call for ethical behavior, starting at the top of the firm.
Purpose summarizes some shared beliefs and values, and expresses the willingness to offer solutions to problems, as Professor Colin Mayer (Oxford) pointed out. If it is authentic, it commits the company and its management to take responsibility for the actions of the firm and their effects, including the costs of the externalities in which it incurs –such as its environmental impact. But purpose needs to project some ethical values that the top management team believes in.
The second theme is how to implement purpose -the “how” of purpose. This is probably the most difficult part of it. The contribution of some CEOs and board members to this discussion in the Conference was extremely relevant. As Paul Polman (former CEO of Unilever) said, purpose needs to reflect the aspiration that the company has to create net positive value for society, not only for shareholders. Each company should do this in its own way. There is not a one size fits all solution. Besides, each company’s idiosyncrasies and particular governance structure should facilitate innovation. The experience of companies that are implementing purpose well suggests that purpose should influence corporate culture, should be integrated in the firm’s strategy, should influence the choice of indicators of performance, should be a main criterion in people’s hiring, and should be taken into account in the compensation system.
Purpose implementation is the responsibility of senior managers. However, boards of directors should debate on corporate purpose, should formally approve or refine the firm’s purpose, should make sure that the board’s major decisions are consistent with purpose, and that the CEO and top managers work in coherence with it.
The third theme is the role of shareholders in purpose. Institutional investors and asset managers also have a very relevant function. If investors only pay attention to short-term financial performance, companies will have a hard time moving towards becoming more purposeful and effective organizations. Asset managers need to consider that companies are essential for both wealth creation and social prosperity. Companies that thrive long-term are the backbone of dynamic societies. Investors need to make sure that companies cover the costs of their own externalities. Moreover, they should trust companies that show stronger long-term orientation and a clear sense of purpose, well-integrated in their business models and that deliver results.
Some institutional investors are increasingly paying more attention to purpose, often through the perspective of ESG (Environmental, Social and Governance) factors. Nevertheless, there still is a long way to go. If investors want to improve the quality of their stewardship, paying attention to purpose is an indispensable way to do so. They can also work with companies to define their main indicators of performance -beyond financial profitability. As Nobel Laureate and MIT Professor Bengt Holmstrom expressed in the Conference, reinforcing the importance of accountability is a most relevant contribution that asset managers and rating agencies should make.
Purpose is not the final solution to make companies more effective and responsible for their impact on people, society and the planet. But purpose expresses an ethical commitment in decision-making, can be an effective driver of positive change in some companies, inspires better behavior and performance, and helps understand what a company wants to do, beyond trying to create economic value. For these reasons, purpose can help management engage the firm’s people better, offer a better customer proposition and eventually improve governance and performance. It is not an easy journey, but its benefits can be truly great. It is worthwhile that companies seriously consider the adoption of purpose and its integration with strategy.
Jordi Canals
President
IESE Center for Corporate Governance
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