Can Purpose Deliver Better Corporate Governance?

11 Nov 2020

Academics and practitioners came together in a three-day online event to discuss and debate not only whether purpose-driven companies can deliver better corporate governance, but also the role business should play in addressing some of the most pressing environmental and social challenges our world faces today.

The notion that companies should have a corporate purpose or mission that goes beyond financial performance has spanned the fields of management, organizational behavior, law and the economics of organizations for a while, gaining importance over time. Now, at this turbulent time, ‘Corporate Purpose’ has galvanized a global movement that promises to restore trust in companies, produce goods and services in a sustainable manner, provide a fair return for all stakeholders, and result in well-governed companies.

Many of the world’s most valuable companies already have a clear purpose. With a swelling of public discourse, the markets have joined the movement, calling on businesses to make a positive contribution to society and to refocus corporate governance around a multi-stakeholder perspective. As businesses, in turn, reflect on their purpose, they must also consider the questions that complicate the implementation of a vision or purpose and make it meaningful.

On October 28-30, 2020, the IESE Center for Corporate Governance (IESE CCG) and the European Corporate Governance Institute (ECGI), with financial support from STI, gathered leading scholars, CEOs and board members to explore vital questions on the interplay between corporate purpose and governance.

The first presenter, The University of Oxford’s Colin Mayer, addressed the question “Are Corporate Purpose Statements “Verbiage?”. Mayer asserted that corporate purpose statements are generally verbiage based on a vague understanding of purpose. To arrive at a more concrete concept, he explored four alternatives to the prevailing underlying paradigm – the Friedman Doctrine –, which holds that business’ sole social purpose is to increase profits, within the legal “rules of the game.” The four alternatives discussed were: enlightened shareholder value, stakeholder theory, shareholder welfare and corporate purpose.

Patrick Bolton, of Columbia Business School next spoke on “Company Valuation and the Effects of ESG Factors” (ESG factors are environmental, social and governance). Bolton explained his recent research with Marcin Kacperczyk of Imperial College. Their analysis of the interplay between carbon risk and investment performance explored questions as to whether material risk is reflected in stock price, and whether socially responsible investors can “do well by doing good.”

MIT’s Bengt Holmström and Paul Polman, Co-founder and Chair of IMAGINE, went on to explore "Corporate Purpose and the Theory of the Firm.” In the “post-Friedman” era, CEOs and boards must ask themselves what responsibilities they have - beyond increasing profits - and how these should be carried out.

In Holmström’s view, most firms today have statements that affirm social and environmental concerns. They recognize the value of creating these, in great part due to the pressure that comes from consumers and social media. Firms have responded to these pressures and most are genuine, despite accusations of verbiage. Investors are concerned because they see potential risk, especially in the age of social media, which can upend even large corporations. They understand that commitment to social concerns is a win-win.

Polman was less optimistic, asserting that today’s system is focused on profit, rather than a purpose-driven system generating profit. These are fundamental differences in moral leadership and standards in how companies should be run. Yet, he claimed, the system can be improved through governance, policies and frameworks A higher level of change is needed to ensure that corporate governance codes bend toward moral leadership. Placing purpose at the center of a company is effective because it is anchored in values and beliefs. Companies that do this will succeed, while those that neglect to do so will find themselves obsolete.

Wharton’s Claudine Gartenberg led the next presentation, entitled “Corporate Purpose, Ownership and Performance.” She began with her own definition of corporate purpose. Her research frames it as “a set of beliefs about the meaning of a firm’s work beyond quantitative measures of financial performance.” In this definition, prosocial components are deliberately eschewed, as “prosocial” will mean different things to different groups.

Gartenberg’s latest study revealed that companies with “purpose-clarity” (in which employees find a high sense of meaning in their work, believe that management has a clear view, and have a clear view themselves of what they need to do to be successful”) improve their performance in many measureable outcomes. A larger study compared public and private companies, concluding that higher owner commitment is associated with a stronger sense of purpose among employees.

In the fifth session, “Unpacking the Purpose of the Corporation,” Harvard Business School’s Rebecca Henderson claimed that purpose-driven businesses have a role to play in effecting the broad systemic changes that the current environment requires of the capitalist model.

Henderson asserted that prosperous societies rest on three pillars: absolutely free markets counterbalanced by accountable and capable governments and a strong civil society. In the context of extensive global unrest and institutions under stress, she said, business must also step up and address these social and public problems.  Individual firms with purpose-driven strategies and operations can make an important impact by inspiring positive change for companies both in and outside their industries, while improving performance in terms of financial results, creativity and productivity, she said. Yet cooperation is needed to achieve systemic change. She recommended solid economic incentives for cooperation, the monitoring of corporate behavior, and sanctions for non-compliance.

The final session was a roundtable discussion from a practitioner-focused perspective. Business leaders Baroness Denise Kingsmill, non-executive director of Inditex and AIG; Juvencio Maeztu, deputy CEO and CFO of IKEA; and José Viñals, chairman of Standard Chartered, discussed how conference insights could be applied in the corporate context. With Jordi Canals moderating, they debated questions such as: Should statements of purpose be integrated into corporate law? How can business leaders and investors strike a balance between shareholder and stakeholder primacy? And, what steps are necessary to better measure and standardize the impact of non-financial performance?

For a more extensive and detailed recounting of the event, several options are available: A longer summary, including respondent comments; 12 complete session videos on IESE’s YouTube channel; and links to downloadable versions of the papers and presentations on the conference website.