Issue #21                                                                                           October 2020
Purpose with a Soul
by Professor John Almandoz

Woke capitalism is on the rise. This term, coined by Ross Douthat of The New York Times, refers to business leaders becoming politically active on social and political issues, ceremonially supporting trendy causes. This may be a sign of the times, as companies are scrutinized more closely and fear the impact of social media. Woke capitalism is frequently no more than greenwashing, empty virtue-signaling and inexpensive talk: smokescreens to please, distract, or even buy noisy activists so companies are left alone, undisturbed, and ultimately attentive to the usual bottom line. For example, for all their talk about social and environmental good, fast-food companies are still junk food providers, contributing to obesity problems and healthcare costs often borne by taxpayers.

If incense tossing to progressive causes is all that the movement on purpose capitalism is about, it would be a sad state of affairs. The needs of society are as great and urgent as can be, and many governments are ill-equipped to address them. In her recent book Reimagining Capitalism in a World on Fire, Rebecca Henderson argues that businesses must play their part in addressing the world’s problems, which are many. Environmental degradation from the burning of fossil fuels, for example, is likely to “substantially reduce GDP, flood the great coastal cities and force millions of people to migrate in search of food.” Growing inequality is also a critical concern, especially as robotics and artificial intelligence, (and now the COVID-19 pandemic) are leaving so many unemployed. Capitalism has made the world richer but shareholder supremacy—the belief that a company’s focus should be only on its shareholders—has introduced a great deal of social inequality, environmental degradation, and systemic risks. Remember the financial crisis.

But how can businesses take on all these global challenges? Prof. Henderson offers as a solution that we change how we think about the purpose of firms and their role in society. Each individual company can have a social purpose to make a difference and become one more pebble “in an avalanche of change.” It all begins with finding their own purpose. Yours. The movement has acquired momentum with trailblazers like Paul Polman at Unilever, who have illuminated a new path into the soul of business, and now there are many companies with a purpose greater than simply maximizing profits. When the global movement takes off, Henderson argues, the social and political systems will follow. There are signs of hope that this revolution is already happening, driven by transparency and social media, by millennials truly caring about their impact in the world, and by the role of impact investing and “universal investors” such as Blackrock, who have thrown their hat on the side of purpose.

Yet, the success of the purpose revolution in changing the world could be undermined from within by cheap woke capitalism. The problem is that companies simply report the good things they do and hide the bad ones. This can give rise to skepticism. A solution to this problem of fake compliance may be what Colin Meyer argues in his book Prosperity. The legal system in different countries should be revised so that cheap talk is not permitted. Corporate law should be built around the purpose freely chosen by firms, rather than around profits alone. The law should facilitate “the adoption of ownership, governance, and measurement systems that lend credibility to the promises that it makes to other parties.” Meyer also argues that existing corporate accounting should be reformed to reflect the impact of the company on intangible, human, natural, and social capital. One particular solution he praises is the “benefit corporation” in the United States, by which a company freely enshrines a public purpose into the organization’s articles of association, and is thus legally required to act upon it. This is certainly much more than cheap talk.

Another part of the solution for greater transparency may be independent certification for meeting a high standard of transparency, accountability, sustainability, and performance. B Corp certification (“B” standing for Beneficial) is one of the more rigorous tests certifying that a company ultimately creates value in society. Interestingly, benefit corporations and B Corp certification have the same source: B Lab. Chris Marquis of Cornell University has recently documented in Better Business, How the B Corp Movement is Remaking Capitalism how this silent purpose revolution—privately certified— is transforming the extent to which companies are embracing corporate social responsibility, seriously. Of course, much will depend on the independence and trustworthiness of organizations like B Lab, or government agencies for that matter, doing the assessments.

But even if measurement and legal framework are certainly critical for this remaking of capitalism, for purpose to be compelling, authentic and impactful, it needs to be freely chosen and driven from within, rather than externally imposed.

IESE Center for Corporate Governance will host, together with ECGI, an online conference on October 28-30, 2020 to explore these topics alongside Rebecca Henderson, Colin Meyer, and Paul Polman, mentioned here, among others.

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

IESE CCG-ECGI Corporate Governance Conference (ONLINE)

In the context of the pressing shareholder vs. stakeholder debate, the IESE Center for Corporate Governance (IESE CCG) and the European Corporate Governance Institute (ECGI) will hold the Annual Conference on Corporate Governance October 28-30, 2020, via online (for the health safety of all the speakers and attendees). 

The theme of the conference is “Can Purpose Deliver Better Corporate Governance?”. Leading scholars from law and business, including Nobel Laurate and MIT Professor Bengt Holmström, along with prominent business executives, corporate lawyers, asset managers, and board directors will delve into some of the pressing issues surrounding corporate purpose and governance. 

Check out the conference program and, if you’re interested, don’t forget to register. There is no attendance fee.

Corporate Governance News

ESG surges as investors search for better corporate citizens
According to the Financial Times, while ESG investment has gained steam and there is enough evidence that ESG does not hurt performance, how we define ESG factors as well as standardized measurements remain a challenge. And that even if companies disclose the same information, there is still a problem in how that information is interpreted… read more
New framework for ESG corporate reporting
The World Economic Forum (WEF) and the International Business Council (IBC), together with the “Big Four” accounting firms, have announced a new reporting framework for ESG standards… read more
Vanguard and BlackRock add new climate-focused ETFs 
According to Reuters, the new exchange-traded funds exclude oil companies, coal producers and other industries such as alcohol or civilian firearms companies, which a growing number of investors want to avoid... read more
Germany holds a full parliamentary inquiry on Wirecard collapse
A full parliamentary inquiry seeks answers on how Wirecard, a German payment service-providing company, was able to operate without any inquiry into its actions, despite numerous signs of fraud, market manipulation and doubts about its accounting practices. Berlin plans to toughen up oversight and auditing rules both internally and at the EU level… read more
The unusual case of the LVMH Letter
The New York Times reports on the unusual request Chairman and CEO of LVMH Bernard Arnault has received from the French government. Mr. Arnault has been asked to postpone the acquisition of Tiffany & Co. in response to the American additional customs duty on certain French goods, particularly those goods in the luxury sector… read more
EU seeks new powers to penalise tech giants
According to the Financial Times, the proposed plan includes forcing tech giants to break up or sell some of their European operations if their market dominance is deemed to threaten the interests of customers and smaller rivals… read more

In Case You're Interested...

The Broadening Basis for Business Judgment

In the context of the US’s SEC amendments to the description of business, legal proceedings, and risk factor disclosures pursuant to Regulation S-K, David A. Katz and Laura A. McIntosh (Wachtell, Lipton, Rosen & Katz) reflect on the implications of this reform. Katz and McIntosh argue the amendment is part of a trend in the United States and Europe toward increasing the scope of board and management discretion. For most of their history, public corporations have been widely understood to be profit-driven enterprises governed by a corporate law regime designed to protect and advance the financial interests of shareholders. There is now a growing transatlantic view that corporations should be better understood as purpose-driven entities working toward “sustainable profitability, guided by ethics, social responsibility, and values… read more

What Stakeholder Capitalism Can Learn from Milton Friedman

This article underlines why the Friedman doctrine stresses that companies should invest in their stakeholders, contrary to popular belief, and the practical lessons it provides for responsible business and responsible investment… read more

Measuring Stakeholder Capitalism: A Move Towards Common Metrics and Consistent Reporting of Sustainable Value Creation

This project, developed within the International Business Council, a community of over 120 global CEOs, seeks to improve the ways that companies measure and demonstrate their contributions towards creating more prosperous, fulfilled societies, and more sustainable relationships with our planet. This report is a follow-up to the draft for consultation Towards Common Metrics and Consistent Reporting of Sustainable Value Creation, launched in January 2020 at the Annual Meeting of the World Economic Forum… read more

Capitalism Needs an Upgrade: On the 50th Anniversary of Milton Friedman's Landmark Essay, the Onus is on Stakeholder Capitalists to get Their Act Together

Martin Whittaker, CEO and cofounder of JUST Capital, (a non-profit that tracks and ranks corporations on stakeholder performance issues of greatest importance to the public) argues that C-suites, boards of directors, and investors should use the “total stakeholder return” framework to champion stakeholder capitalism. The total stakeholder return is an easily measurable way for companies to create value for their stakeholders — including workers, customers, communities, environment, and shareholders… read more 

Stakeholder Capitalism Gets a Report Card. It’s Not Good

The pandemic and the movement for racial justice have tested corporate pledges to elevate social concerns alongside shareholder interests. The New York Times European economics correspondent Peter S. Goodman provides evidence that indicates companies are failing to follow through… read more

IESE's Recent Research on Corporate Governance 

“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

“The Role of Corporate Purpose in Corporate Governance: A Framework for Boards of Directors and Senior Managers”

Working paper (July 2020)

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