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Corporate Governance and Corporate Purpose: The Ongoing Debate
by Professor Jordi Canals
The debate on corporate purpose is resonating across boardrooms. A year after the presentation of the Business Roundtable Statement (signed by 181 CEOs), the public discussion on corporate purpose continues, with some regulators stepping in. At one end of the spectrum, the European Commission promoted the recent report on “Directors Duties and Sustainable Corporate Governance”, published in July 2020(1). This report includes some regulatory options that the EC can consider with the final goal of making multi-stakeholder management a goal for EU companies, in particular, listed companies. At the other end of the spectrum, and on the other side of the Atlantic, SEC (Security and Exchange Commission) commissioners have expressed their concern that changing the principle of shareholders’ financial returns as a priority for the management of a company may not be a good decision. Moreover, some of them claim that this orientation is not supported by many US states law(2).
In the academic world, the debate on the implications on whether firms should have a corporate purpose and include different stakeholders in it or, to the contrary, continue giving shareholders top priority is also alive. Lucian Bebchuk (Harvard) and Colin Mayer (Oxford) have recently published papers(3) that take different and opposite positions regarding the topic, feeding this debate. It is interesting to note that both attended IESE Center for Corporate Governance´s October 2019 conference.
What can board members and senior executives learn from these recent developments? Some companies’ real experiences can help shed light and clarity on the debate. The first observation is that there is growing empirical evidence that corporate purpose when adopted and implemented well does not go against shareholders’ interest or economic performance. Moreover, in the mid and long-term horizon, corporate purpose seems to enhance corporate performance. This empirical observation is consistent with the received wisdom that good companies that perform well over long periods of time do so by taking care of customers, employees and other key stakeholders. This was already a known fact, but aggregate data form diverse companies, industries and geographies confirm this intuition. It is also evident that simply having a good purpose cannot solve strategic or operational challenges that companies may encounter. Purpose may help integrate and motivate people, but it is not a cheap replacement for the hard work in strategic and operational effectiveness.
Companies that are operating effectively and have established a clear corporate purpose go much further than adopting a mere definition of a statement of purpose. Corporate law in France and the UK require that listed companies write one. There is a movement on the importance for companies that want to have a good reputation for good governance to have one. Nevertheless, when it comes to corporate purpose, the statement itself is the less interesting, less impactful part of it. What is truly relevant is that corporate purpose increases people’s engagement with a company. It offers employees and all stakeholders a reason as to why a firm exists, and the type of impact that it strives to achieve. Empirical evidence suggests that employees’ identity and engagement are two very powerful tools that become activated within companies grounded in purpose.
The experience of companies that we have observed at IESE(4) and written cases about (such as Unilever, Nestlé, Bertelsmann or Ingka Ikea, among others) is that corporate purpose becomes truly effective when it is well connected with the firm’s strategy and business model, including the major policies that the firm adopts and implements. Introducing corporate purpose at the heart of the firm’s government and management is complex. It requires enormous commitment and effort to put it into practice in an effective and sustainable way. But when it is done in a professional, comprehensive way, it does pay off.
A final experience that is relevant in the present debate on corporate purpose. Corporate purpose is different and much wider in scope than ESG dimensions (Environmental, Social and Governance factors). Nevertheless, the credibility of any corporate purpose is not only the degree of integration in the firm’s strategy, operations and policies. It is also in the so-called “S factor”, the social factor of the ESG scope. In other words, it is about how a company treats its own people, from compensation to promotions, to formation and assessment. The inclusion of the S factor does not only pertain to how a company deals with labor issues in poor countries; it also has to do with how well it treats its own employees, how it creates a positive culture that fosters personal growth, and how effective the company is in helping employees to remain employable by offering them the right education and development of the evolving professional capabilities that they may need in the future. The S factor is only a part of the firm’s purpose, but one that can give boards of directors and senior managers a great deal of credibility to their efforts in regards corporate purpose.
Corporate purpose can be a great transformational tool for companies and a driver of better corporate governance. But it is not a PR action with some marketing effects and should not be considered as such by the board of directors. Its impact on companies and wider society depends very much on how professionally boards of directors and senior managers work on it to make it operational and embedded in a firm’s strategy and operations.
To explore these topics in depth, IESE is launching the second annual conference on Corporate Governance. The theme of the 2020 IESE-ECGI Conference is “Can Purpose Deliver Better Corporate Governance?”. The conference will take place on October 28-30, 2020 and due to potential travel restrictions, it will be held online. For further details, please see below. We would be delighted to have you!
Jordi Canals
President
IESE Center for Corporate Governance
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(1) European Commission (2020): “Directors Duties and Sustainable Corporate Governance”, Brussels.
(2) See Hester M. Peirce: “Markets, Morality and Mobsters”, August 27, 2020. See on https://www.sec.gov/news/speech/peirce-markets-morality-mobsters-2020-08-27
(3) L. Bebchuk and R. Tallarita (2020): “The illusory promise of stakeholder governance”, ECGI, Working Paper,
and C. Mayer (2020): “Shareholderism versus stakeholderism. A misconceived contradiction”, ECGI, Working Paper.
(4) J. Canals (2020): “The Role of Corporate Purpose in Corporate Governance: A framework for Boards of Directors and Senior Managers”, IESE Working Paper.
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