Issue #20                                                                                        September 2020
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
IESE Center for Corporate Governance
(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
(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

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 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

Vivendi and Amber to go to court over Lagardère's EGM refusal
According to Reuters, French media conglomerate Vivendi and activist fund Amber Capital - the two biggest shareholders in French company Lagardère - said they would go to court over Lagardère’s refusal to hold an Extraordinary General Meeting (EGM)… read more 
Activist Edward Bramson increases pressure on Barclays’ investment bank
Activist investor Edward Bramson has emailed shareholders in his investment vehicle, Sherborne Investors (which owns 5.9% of Barclays shares), with some suggestions about Barclays' future strategy. Mostly, Bramson thinks Barclays should copy Deutsche Bank in slashing its sales and trading operations… read more 
Shareholder Rights Directive (SRD II) comes into effect
The International Financial Law Review (IFLR) analyzes the fundamentals of the regulation and explains what will change for market participants in September… read more
Proxy adviser ISS to push ahead with lawsuit against SEC over new rule
According to Reuters, Institutional Shareholder Services (ISS) is pressing ahead with a lawsuit against the Securities Exchange Commission after the securities regulator last month issued a new rule that dictates how proxy advisers like ISS advise clients in corporate votes… read more 
Bloomberg to offer ESG scores
Bloomberg has launched a set of proprietary ESG scores, with the initial offering providing environmental and social scores for 252 companies in the oil and gas sector, and board composition scores for more than 4,300 companies across multiple industries… read more 
Covid crisis could lead employees to ‘compromise ethical standards’
According to Board Agenda’s contributor Gavin Hinks, there is enough evidence to expect a surge in ethical transgressions as a result of the “extraordinary” changes forced by the pandemic… read more 

In Case You're Interested...

The role of the corporation in society

Corporate behavior has changed out of necessity during the coronavirus pandemic. When life in developed economies returns to something close to normal, will the corporation have been transformed for good? To explore these issues, the Financial Times hosted its second Future Forum think-tank event under the title “The Role of the Corporation in Society”. This report examines which aspects of corporate behavior could be changed forever as a result of the pandemic, and which are unlikely to be affected… read more 

Friedman’s Principle, 50 years later

In the mid-1980s, Milton Friedman’s view that the only social responsibility of a business is to increase its profits became dominant in business and academia. Since the Great Financial Crisis, his views have increasingly been challenged. To mark the 50-year anniversary of Friedman’s influential NYT piece, University of Chicago professor Luigi Zingales wrote this article on the shareholder-stakeholder debate… read more 

Can stakeholder capitalism save capitalism? First, we must define it

In this Forbes article, London Business School professor Alex Edmans argues that stakeholder capitalism is often interpreted as redistributing value away from shareholders and towards stakeholders. But the best way to repurpose capitalism is to ensure that it serves both… read more 

Putting purpose into practice: the enacting purpose initiative

Oxford professor Robert Eccles writes about the Enacting Purpose Initiative, which in Prof. Eccles’ own words, “will fill an important gap when it comes to the vital question of how purpose is governed.” According to Prof. Eccles, to date this initiative has done some very good work on the value of purpose and on the need to link it to solving the problems of humanity and our planet… read more 

Purpose: shifting from “why” to “how”

How do we deliver a sense of purpose across a wide range of environmental, social, and governance (ESG) priorities? Doing so means moving from business as usual to a less traveled path, that may feel like “painting outside the lines.” Are we going too far beyond our core mandate? Does it mean we’ll lose focus on bottom-line results? Will transparency expose painful tensions which are better left unexamined? Will our boards, management teams, employees, and stakeholders want to follow us, or will they think we have “lost the plot”? There are no easy answers to these questions. McKinsey presents a sort of “how to” playbook emerging from McKinsey’s engagement with a growing number of companies leading in this matter… read more 

Study on directors’ duties and sustainable corporate governance

This study authored by the European Commission and EY focuses on issues contributing to “short-termism” in company law and corporate governance, which have been grouped around seven key problem drivers, covering aspects such as directors’ duties and their enforcement, board remuneration and composition, sustainability in the business strategy, and stakeholder involvement. The study suggests that a possible future EU action in the area of company law and corporate governance should pursue the general objective of fostering more sustainable corporate governance and contributing to more accountability for companies' sustainable value creation… read more 

Family-owned businesses show resilience through pandemic

Credit Suisse Research Institute (CSRI) has published its latest report on family-owned companies. The “Credit Suisse Family 1000: Post the Pandemic” shows continued outperformance of family-owned businesses to non-family-owned peers in every n and sector, as well as showing signs of greater resilience amidst the COVID-19 pandemic… read more 

2020 Proxy Season Review

Sullivan & Cromwell has published its review of the 2020 proxy season, analyzing significant trends and developments relating to the 2020 U.S. annual meeting proxy season and highlighting implications for the 2021 proxy season, as companies navigate the post-COVID-19 environment. This review addresses issues that U.S. public companies and their boards should consider as they engage with investors, regulators, employees, and other stakeholders, who continue to be increasingly focused on long-term sustainability, diversity and inclusion, and social capital… read more 

IESE's Recent Research on Corporate Governance 

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

Working paper (July 2020)

“Understanding the impact of symbolic and substantive environmental actions on organizational reputation”

Journal article (May 2020)

Journal: Industrial Marketing Management
Authors: Truong, Yann; Mazloomi, Hamid; Berrone, Pascual
Read summary

“The Common Ownership Trilemma”

Journal article (May 2020)

Journal: The University of Chicago Law Review
Author: Azar, José
Read article

Upcoming Programs

Executive Program: “Value Creation Through Effective Boards”

Date: September 21-24, 2020

Location: IESE, Barcelona Campus

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Executive Program: “Consejos de Administración Responsables”

Date: March 16-18, 2021

Location: IESE, Madrid Campus

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Executive Program: “Mujeres en Consejos de Administración”

Date: April 12-13 and May 10-11, 2021

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