Corporate Purpose: How the Board of Directors Can Achieve an Inclusive Corporate Governance Regime

Abstract

Large corporations are currently facing critical challenges after many financial crises and scandals, which led to a loss of public confidence. In addition, inequality, climate change, and new technologies create systemic risks for corporations. In that context, economic and legal scholars, as well as directors and regulators, extensively debate issues revolving around the “profit” of corporations as well as about the “purpose” of companies, a notion that is different from their mere “object.” In our view, the theory of the purpose-driven company could help overcome the never-ending dispute between the partisans of shareholders’ wealth maximization and the promoters of stakeholder governance. To materialize and implement the company’s purpose, missions, and core values, the board of directors (in engagement with shareholders) shall assess its impact on a broader social and economic environment. The identification and expression of the purpose will facilitate the company’s value creation and long-term business sustainability. The board of directors shall further take into consideration all stakeholders as well as define and identify the main purpose recipient (customers, employees, environment, etc.). Within this frame, the board of directors will act as both a corporate purpose guardian and a mediator of the various (potentially) conflicting interests held by the different constituencies.

The authors are grateful to Martin Lipton and Leo E. Strine Jr, Wachtell Lipton Rosen & Katz, New York, as well as to Benoît Fischer, LL.M NYU, Kasser Schlosser avocats, in Lausanne for valuable and constructive comments on an earlier draft of this contribution. In addition, we gratefully acknowledge the excellent review and assistance on the references of Adrien Duc, assistant at the University of Lausanne. Relevant legal literature taken into account until February 2022.

1 Challenging Times for Corporations and Capitalism

Since the 2000s but after the 2008 financial crisis at the latest, (large) corporations—and more broadly capitalism—which were seen as tools for progress as well as shareholders’ and investors’ profit centers, have been facing mistrust and criticism. In recent years, several major scandals, such as the flouted environmental tests at Volkswagen, the financial fraud at Wirecard, or the Archegos or Greensill debacle, have provided additional illustrations of strongly criticized illegal and unethical misbehaviors.¹

In that context, research and different surveys evidenced the increasing loss of confidence in business, especially in the USA² but also in Europe and more broadly in all industrial countries. In Switzerland, for example, several popular initiatives criticizing business practices obtained high vote scores, showing a part of the population’s loss of trust.³

In addition to the usual criticism related to high-level executives’ excessive remunerations or to short-termism in business, the numerous challenges posed by, among other causes, climate change, inequality, and new technologies raised numerous questions for the future of business and corporations.

Simultaneously, communities and people’s dependence on corporations as well as their impact on our lives have never been so important. As summarized by Professor Colin Mayer from Oxford University, “[t]he corporation is the creator of wealth, the source of employment, the deliverer of new technologies, the provider of our needs, the satisfier of our desires, and the means to our ends. […] It is the source of economic prosperity and the growth of nations around the world. At the same time, it is the source of inequality, deprivation, and environmental degradation, and the problems are getting worse.”⁴

Klaus Schwab, founder and executive chairman of the World Economic Forum, stated in 2019 that the defining question of our era is: “what kind of capitalism do we want?”⁵ For our purposes, this translates into the following question: What shall be corporations’ role and the place of profit in our society?

Obviously, this question—and its potential answers—have both public (public law) and private (private law) aspects. In that respect and even if mistrust in corporations has seriously increased over the last 20 years, the difficulties faced by regulators and political leaders to address the abovementioned challenges and the simultaneous loss of confidence toward political entities (e.g., due to electoral calculations) led several academics, economists, and media to consider that corporations and business leaders may be better suited than public action to act and deliver solutions for the entire society.⁶ In particular, when it comes to global issues concerning large corporations, a “one-size-fits-all approach,” as implemented by regulators, is not appropriate.⁷ In addition, we consider that an improvement of the corporate governance mechanisms and a change of the power dynamics within corporations are appropriate means to have companies acting with consideration for its stakeholders in order to create value over the long term.⁸

Finally, this view is clearly in line with the growing expectations of all stakeholders,⁹ which include the shareholders, employees, managers, customers, creditors, suppliers, as well as the communities in which those corporations operate. As The Economist observed, “A growing cohort – perhaps a majority – of citizens want corporations to be cuddlier, invest more at home, pay higher taxes and wages and employ more people…”¹⁰ Hence, as former Chief Justice and Chancellor of the State of Delaware Leo E. Strine, Jr., once wrote, it may be time “for all societally important business entities – not just public companies, but large private companies and money management firms as well – to have to use their power in a socially responsible manner.”¹¹

Since 2018 at the latest, a major shift has taken place with numerous debates and research made around the new theory of corporate purpose and its implication for lawmakers, economists, legal practitioners, and boardrooms. The COVID-19 pandemic further accelerated this shift toward corporate social responsibility, notably to minimize the economic impact of the pandemic.¹²

In our view, and despite cynical views that consider that this new approach will not improve the situation of stakeholders and could even harm them, (1) the definition and implementation of a “corporate purpose” by the board of directors after the involvement of all stakeholders, notably investors, as well as (2) the question that all directors and managers of large corporations should consider regarding the way the company is doing money and the impact of the business on its various stakeholders are the right tools to restore trust and let corporations do what they know best: innovate and create new solutions, products and services for customers and consequently generate shared value for society.

In this contribution, we will first summarize the origins of this debate before describing the most recent developments (Sect. 2). We will then present the major criticisms addressed to both shareholder welfare and stakeholder capitalism theories (Sect. 3) in order to discuss the limits of this debate, the erroneous rejection of profit, and the new approach proposed by the corporate purpose idea (Sect. 4). Finally, we will analyze and describe what is meant by corporate purpose and its implementation process by the board (Sect. 5) before concluding (Sect. 6).

2 Whose Interests Shall Prevail in a Corporation? A Never-Ending Debate

In corporate law scholarship, one of the most frequent questions is certainly whose interests shall prevail in a corporation or what are the corporation’s ends? To be sure, this constitutes one of the two major questions of any model of corporate governance alongside the question of control and decision-making.¹³

It is worth noting that the way this question is addressed as well as the answer(s) given have substantially evolved since the incorporation of the first, historical companies.

2.1 Origins and Evolution

Originally, corporations were created to develop and achieve a public purpose. Charitable, educational, or ecclesiastical companies were more common than corporations with a “business purpose” for most of corporate history.¹⁴ The Dutch East India Company, which was founded in the early 1600s, illustrates the historical public-private use of corporations. The preamble of its charter explicitly mentioned that the company shall “promote the interests and the wellbeing of the United Netherlands as well as the interests of all the inhabitants of the countries involved,” and one of its principal goals was to weaken the Spanish and Portuguese’s position overseas.¹⁵

Then for-profit corporations have developed, notably in the USA. In 1837, Connecticut enacted one of the earliest incorporation acts and required a description in the charter of a corporate object which was allowed “for the purpose of engaging in and carrying on any kind of manufacturing or mechanical or mining or quarrying or any other lawful business.”¹⁶ In 1874, Pennsylvania adopted a new act that distinguished three categories of corporations: religious corporations (exempted from property taxes), for-profit corporations (subject to taxes), and nonprofit corporations (tax exempted).

At that time, business corporations were usually under the influence and control of management. According to legal scholars, the “management corporation” caused American economic success in the late nineteenth century. This model focused on the managers’ duties, including the search for investors.¹⁷ “Underlying this arrangement was a ‘tacit societal consensus’ that corporate growth took priority over corporate profits”¹⁸ even if shareholders were obviously expecting dividends.¹⁹ As a consequence, there was clear managerial authority over the company with very little powers granted to shareholders.²⁰

In the 1930s, a quarrel opposed Professors Adolph Berle and Merrick Dodd, two prominent corporate law scholars.²¹ In short, Berle argues that “all powers granted to a corporation or to the management of a corporation, or to any group within the corporation […] [are] at all times exercisable only for the ratable benefit of all the shareholders as their interest appears.” Conversely, Dodd supports “a view of the business corporation as an economic institution which has a social service as well as a profit-making function.” In his opinion, the purpose of the corporation shall include, in addition to profitability in favor of shareholders, the creation of secure jobs for employees, the production of better quality products for clients, and, as far as possible, greater contributions to society as a whole.²² It would, however, be too reductive to consider Adolph Berle as a “blind advocate of shareholder primacy.” He was in fact skeptical that corporate managers could be good at protecting other corporate constituencies than shareholders.²³

Thereafter, and with a significant increase since the 1970s, the disaggregated ownership of shares by individual investors, which gave a lot of freedom to corporate directors and managers, was progressively replaced by concentrated ownership in the hands of large institutional investors.²⁴ This shift “created a class of shareholders singularly focused on shareholder value.”²⁵

As a consequence of this phenomenon coupled with the globalization of capital markets, which increases pressure on corporations to deliver short-term profits,²⁶ the shareholder primacy and wealth maximization model developed. The core principles of the shareholder primacy doctrine are generally awarded to Nobel laureate Milton Friedman, who wrote that “a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society […] Insofar as his actions in accord with his ‘social responsibility’ reduce return to stockholders, he is spending their money.”²⁷ It is worth noting that a similar concept was already expressed in 1776 by Adam Smith, who stated that “[t]he directors of such companies, however, being the managers rather of other people’s money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own.”²⁸

In 1976, Michael Jensen and William Meckling coauthored the article “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure,” which lays out a theory of the firm based on the agency theory. This theory justifies shareholder value maximization as the most effective tool for managing the agency relationship between shareholders and managers, notably in companies with dispersed ownership.

In that respect, it is worth mentioning that, conversely to the situation existing in the USA or the United Kingdom, an important number of listed companies in Europe (notably in France, Germany, or Switzerland) are under the control of one shareholder or of blockholders. Nevertheless, the analysis of the dynamics of corporate governance using the agency theory was (and still is) frequent among academics, even if it is not best adapted to the effective ownership structure.²⁹

In a famous article published in 2000, Professors Henry Hansmann and Reinier Kraakman declared the victory of shareholder primacy over other corporate theories, such as the stakeholder governance approach.³⁰ For them, a “consensus” was existing among the academic, business, and governmental elites in leading jurisdictions to consider that “ultimate control over the corporation should be in the hands of the shareholder class; that the managers of the corporation should be charged with the obligation to manage the corporation in the interests of its shareholders; that other corporate constituencies, such as creditors, employees, suppliers, and customers should have their interests protected by contractual and regulatory means […].” To the extent that such a consensus really existed at that time, this analysis was soon to be challenged, as we will observe in the next section.

2.2 Recent Developments

A clear shift toward stakeholder governance started in 2008 with the advent of the subprime crisis. For many legal and economic scholars, the economic activity in which corporations partake is a part of social activity and, as such, cannot be analyzed independently of its impact on the community and environment.³¹

As a consequence, several institutions, economic actors, and lawmakers have promoted and embedded stakeholder governance in the USA and Europe:

• Since 2012, Larry Fink, chairman of BlackRock (the world’s largest asset management company), has sent a yearly letter to important chief executive officers (CEOs). The content of the letters has evolved over the years but has had a systematic focus on sustainable returns over the longer term. In 2018, in a letter entitled A Sense of Purpose, he wrote that “Society is demanding that companies, both public and private, serve a social purpose. To prosper over time, every company must not only deliver financial performance but also show how it makes a positive contribution to society.” In his 2022 letter to CEOs, Larry Fink emphasizes again the importance of corporate purpose, stating that “Putting your company’s purpose at the foundation of your relationships with your stakeholders is critical to long-term success.”

• While the first version of the Swiss Code of Best Practice for Corporate Governance (SCBP) published in 2002 mentioned shareholder wealth maximization as a guiding principle, the revised version of 2014 emphasizes “the concept of sustainable corporate success as the lodestar of sensible corporate social responsibility.” The revised SCBP further specifies that “corporate governance encompasses all of the principles aimed at safeguarding sustainable company interests.” In this respect, while determining the strategic goals as well as the general ways and means to achieve them, the board of directors “should be guided by the goal of sustainable corporate development.”

• In 2016, the International Business Council of the World Economic Forum invited Martin Lipton, one of the established opponents of shareholder primacy, to prepare guidelines to promote a partnership between corporations and investors and to achieve sustainable long-term investment and growth. This document, called The New Paradigm: A Roadmap for an Implicit Corporate Governance Partnership Between Corporations and Investors to Achieve Sustainable Long-Term Investment and Growth,³² was unanimously approved and then submitted for adhesion by corporations, institutional investors, and asset managers starting January 2017. This analysis explicitly rejects regulation and proposes “private ordering through corporations and investors who best know their respective concerns.”

• In 2018, the revised version of the UK Corporate Governance Code emphasized the fact that companies do not exist in isolation and that successful and sustainable businesses need to “build and maintain successful relationships with a wide range of stakeholders” and be “responsive to the views of shareholders and wider stakeholders.” Within that frame, the UK Code provides that the board of directors should “establish the company’s purpose, values and strategy, and satisfy itself that these and its culture are aligned.”

• In early 2019, the French National Assembly and Senate adopted the Plan d’Action pour la Croissance et la Transformation des Entreprises (PACTE). Pursuant to this Plan, legislation was modified to consider social and environmental issues in companies’ strategies and activities.³³ In particular, Article 1833 of the Civil Code has been amended to set forth that the company shall be managed in its social interest, taking into consideration the social and environmental stakes of its activity.

• In August 2019, the Business Roundtable (BRT), an association formed by influent CEOs of leading US corporations, issued a collective statement promoting corporate purposes that support “an economy that serves all Americans” and stressing that any corporation has a “fundamental commitment to all their stakeholders.”³⁴

• The 2020 statement of corporate purpose by the World Economic Forum (Davos Manifesto 2020) explains that “the purpose of a company is to engage all its stakeholders in shared and sustained value creation. In creating such value, a company serves not only its shareholders, but all its stakeholders – employees, customers, suppliers, local communities and society at large.” Within that frame, “[a] company is more than an economic unit generating wealth. […]. Performance must be measured not only on the return to shareholders, but also on how it achieves its environmental, social and good governance objectives.”

Hence, at least since 2018, the stakeholder governance trend has appeared clear, strong, and growing.³⁵ As Leo E. Strine, Jr., observed, “[w]hen representatives of the very business elites who have been the winners of the redistribution signal their recognition […] that our corporate governance system is broken, that is not the start of something; it is the signal that the simmer is threatening to boil over. Before an establishment gest burned, its wiser and more enlightened leaders often speak up to push for a rebalancing that largely preserves the existing order and ameliorates the conditions that have given rise to widespread discontent.”³⁶

Finally, many commentators consider that with the economic difficulties and the new perspectives arising out of the COVID-19 pandemic, corporations should use this momentum to recognize that environmental, social, and governance (ESG) concerns and stakeholder governance are necessary elements of sustainable business.

3 Criticism of Shareholder Wealth Maximization and Stakeholder Governance

As we mentioned before, an intense debate has been existing for years between scholars who champion shareholder wealth maximization and those who promote stakeholder governance.

The core arguments that are usually presented to support shareholder value are now severely criticized by many legal and economic scholars. Nevertheless, several influential academics consider that the stakeholder approach is either a chimera or a risk for stakeholders.³⁷ Therefore, they request public/political actions through policy making or still promote the benefits of the classical model. For instance, in Switzerland, a majority of legal scholars still follow the principles of enlightened shareholder value, according to which the board of directors and management should take into consideration stakeholder interests and pay close attention to the effects of the company’s operations on stakeholders since this will maximize long-term value for shareholders. Hence, under this theory, any positive outcome for stakeholders would then eventually be a derivate consequence of the maximization of value for shareholders.³⁸

3.1 Shareholder Wealth Maximization Model

In short, under the shareholder wealth maximization doctrine, shareholders are described as “owners” of the corporation or at least the “residual claimants of the corporation” while the directors are viewed as “mere agents of the shareholders,” who have a duty to “maximize the profits for shareholders.”³⁹ We will briefly discuss these arguments.

Although the analogy with ownership rights is frequently used to illustrate the shareholders’ position, this view creates, in our opinion, a false premise for any analyses.

Indeed, shareholders do not have any ownership rights either on the corporation directly or on its assets but own shares representing their contribution to the company.⁴⁰ This analysis is coherent with the most widespread economic and legal theory of the firm, which defines the corporation as a nexus of contracts. Under this model, “someone owns each of those factors, but no one owns the nexus itself.”⁴¹ Indeed, similarly to shareholders, all other stakeholders contribute to the company: employees and managers devote time, customers purchase products, and the community offers framework conditions for the economy.

Another often-cited argument to promote the shareholder wealth maximization model is that shareholders are the corporation’s sole “residual claimants” or “residual risk bearers.” According to this opinion, all stakeholders would have fixed contracts conferring some protection, which would not be the shareholders’ case as they bear the business risk. This assertion is questionable.

First, shareholders can only be considered “residual-claimants” when the company is in bankruptcy. As stressed by Stout, “[w]hen the firm is not in bankruptcy, it is grossly misleading to suggest that the firm’s shareholders are somehow entitled to–much less actually expect to receive–everything left over after the firm’s explicit contractual obligations have been met.”⁴² Indeed, a company that makes profits can distribute dividends, regardless of the other stakeholders’ situation. Moreover, other constituencies, such as debtholders or even employees, can also qualify as residual claimants in view of their vulnerability to the firm’s overall performance;⁴³ hence, there is no ground to consider that shareholders are the sole claimants who would not be adequately protected by contracts.⁴⁴

The agency theory (and associated costs) is certainly the most cited economic theory to justify corporate governance regulations and the increase of shareholders’ rights over management. In essence, under this model, shareholders are considered principals who hire directors who act as agents.

If this theory has important theoretical merits, notably in the model of closely held corporations, its premises do not apply to large or listed companies. First, the shareholders’ meeting and the board of directors are two independent bodies of the corporation whose obligations and duties are derived from law. Moreover, the directors are not hired by the principals but have a contractual relationship with the corporation itself. Even if shareholders have the legal power to remove directors, this is practically very difficult to achieve for listed companies with dispersed ownership. Furthermore, the appointment of management and its chief executive officer remains a duty of the directors.

As a consequence, it does not make sense to consider the members of the board of directors as mere agents of the shareholders.

Finally, it is worth mentioning that the shareholder wealth maximization doctrine can be eventually detrimental to investors themselves. In other words, the myopic focus on shareholder value “can hurt shareholders both individually and immediately, and collectively and over time.”⁴⁵ For example, the pressure imposed by the publication of quarterly results led the board of directors of many companies to limit the investments in research and development. This policy has proven to be largely counterproductive and detrimental to shareholders. One of the latest examples is Boeing, which adopted a shareholder-centric doctrine ahead of engineering-driven decisions and long-term strategy, which is at least one of the reasons for the Boeing 737 Max crisis.⁴⁶

3.2 Stakeholder Governance Model

The recent shift from shareholder value and the numerous statements of business leaders in favor of the so-called stakeholder capitalism (notably the 2019 statement of the Business Roundtable) have given rise to criticisms of different kinds.⁴⁷

These criticisms were notably the object of several publications prepared by shareholders’ primacy advocates as well as by other scholars considering that these calls of business leaders would divert from effective solutions to protect stakeholders, notably from an efficient action by policy makers.

One of the most recurring criticisms is related to the confusion of interests created by this theory and the “Herculean task” that stakeholderism assigns to corporate leaders.⁴⁸ Indeed, the stakeholder governance doctrine requests the board of directors to weigh and balance a plurality of autonomous interests of independent constituencies. But having “several masters” or principals to serve will confuse directors and undercut managerial accountability to shareholders. As this was stated by the US Council of Institutional Investors, which represents public and private pension funds as a reaction to the Business Roundtable Statement of 2019, “accountability to everyone means accountability to no one.”

In relation to this critique, several scholars consider that stakeholder governance gives excessive discretion to the board of directors, notably with respect to the category of stakeholders that the board wishes to support. Moreover, Lucian Bechuk and Roberto Tallarita consider that stakeholder capitalism and the statements made by business leaders in favor of stakeholders are aiming to give more power to the management and insulate them from the shareholders’ influence.⁴⁹

In that respect, some scholars argue that since stakeholders are as a rule not entitled to file claims to enforce ESG duties, the directors’ accountability and the effective enforcement of stakeholders’ interests are at least questionable.⁵⁰

Finally, several authors point out that the management and board of directors have no incentive to promote effectively stakeholders’ interests. Indeed, the members of the board are appointed only by shareholders (except in the legal regimes that apply codetermination, such as Germany), and they would put their “re-election in danger” if they prefer employees or suppliers to shareholders.⁵¹

4 Profit and Shareholders vs. Stakeholders: A False Debate?

As mentioned, corporations face a public loss of confidence. Obviously, the disenchantment of public opinion toward capitalism stems from various causes. However, “it is becoming increasingly clear that a persistent belief in shareholder value maximization […] as the only legitimate basis for guiding corporate strategy and measuring corporate performance has contributed directly to this ethical drift.”⁵²

Similar analyses led the legislators (incl. through popular initiatives in Switzerland) to adopt several measures to limit management compensation mechanisms (say on pay, the prohibition of golden parachutes, etc.). More broadly, several criticisms were made of profit-driven companies.

In our opinion, multiple reasons make the rejection of “profit” as a constitutive part of the corporation system flawed.⁵³

First, it is generally accepted, at least under all western legal regimes, that corporations shall realize incomes and try to obtain a profit.⁵⁴ Profit, as generated by a successful business activity, allows companies to hire and compensate employees, develop new ideas and products, as well as pay taxes.⁵⁵ In addition, profit is also essential to reward investors’ confidence and to finance through dividend distribution pension funds or educational endeavors.

Second, and more importantly, the traditional debate between shareholders and stakeholders relies on competing and irreconcilable interests: the shareholders’ financial interests on the one hand and the stakeholders’ welfare on the other hand. This traditional approach may be viewed as “pie-splitting”: a fixed-size pie represents a company’s value (i.e., both financial and social value), and the only way to increase one member’s share is to split it differently, consequently reducing others’ share.⁵⁶

As pointed out by the British Academy in its final report of the Future of the Corporation program, that is a sterile debate. “The issue is not whether to promote the interests of shareholders or stakeholders but how to do both by profitably solving problems of people and planet.”⁵⁷

Indeed, the concept of corporate purpose should lead to avoiding a debate between profit-driven or socially responsible corporations to rather promote profit-driven and socially responsible corporations.

Professor Alex Edmans, in his book “Grow the Pie. How Great Companies Deliver Both Purpose and Profit,” considers the pie as expandable and encourages developing a “pie-growing mentality,” as opposed to a “pie-splitting mentality.” That means that investors do not have to take from stakeholders, and stakeholders have no need to defend themselves from investors. A responsible business approach is not about splitting the pie differently (e.g., sacrificing profits to increase wages or reduce the impact of climate change) but about growing the pie through innovation and excellence in its own business. The concept—which includes profitability as an essential part—is “to create value for society … Profits, then, are no longer the end goal, but instead arise as a by-product of creating value.”⁵⁸

Is that a naïve theory when considered under practical terms? It is not. Various analyses persuasively conclude that in companies with management committed to the company’s success in the long run, it causes a degree of trust among employees, communities, and creditors sufficient to encourage them to devote time and make important investments in the company.⁵⁹ Put differently, a more inclusive corporate governance regime is key to attracting and retaining important investments and both internal and external contributions to the firm’s success. Additionally, several surveys recently demonstrated that ESG funds seemed to be highly competitive and more resilient in the face of COVID-19 pandemic-related financial impacts than other “standard funds.”⁶⁰ It is also worth noting that Bank of America Merrill Lynch stated in a recent note that attention to ESG matters “could have helped avoid 90% of bankruptcies” but also that “‘[g]ood’ companies enjoy a lower cost of capital.” ⁶¹

Research does not conclusively show that ESG strategies would systematically outperform traditional strategies.⁶² In addition, the difficulty to efficiently and validly measure ESG performance (contrarily to shareholder value, which can be clearly measured) and determine the applicable criteria is a challenge for rating agencies.⁶³ That being said, research showed that investors behave more patiently toward high-ESG firms and are hence less likely to sell their shares in a company that has communicated weak earnings if its ESG performance (based on several ESG criteria which significance can—once again—be discussed⁶⁴) is strong.⁶⁵ In addition, it seems that several investors are ready to give a significant premium on companies that are first in line to address climate change and related sustainability issues. Rivian Automotive Inc.’s initial public offering, which took place in November 2021, recently evidenced that phenomenon. The shares of this electric pickup truck manufacturer increased by 29% on the day following the offering, resulting in an enterprise valuation of more than US$ 86 billion.⁶⁶

In addition, research also revealed higher effectiveness and profitability when companies elect and implement some specific ESG aspects on which they have a greater influence (rather than addressing all stakeholders’ issues or working on all ESG aspects simultaneously).⁶⁷ As an example, an article published in 2019 concluded, based on approximately 500,000 survey responses on workers’ perceptions of their employer, that “firms exhibiting both high purpose and clarity have systematically higher future accounting and stock market performance, even after controlling for current performance, and that this relation is driven by the perceptions of middle management and professional staff rather than senior executives, hourly or commissioned workers.”⁶⁸

5 The “New” Corporate Purpose Theory

5.1 Notion

In this section, we will define the core criteria of the new theory of corporate purpose.

For the clarity of this article, it is initially necessary to distinguish the notion of “corporate purpose” from other related concepts, such as the (legal) “corporate objects” or the “corporate missions and values” (Sect. 5.1.1). We will then list several definitions proposed by academics, practitioners, and special interest groups (Sect. 5.1.2) before citing some examples of purpose statements set by large and well-known companies (Sect. 5.1.3). Finally, we will outline the criteria that we selected as a tool to understand the scope and interest of corporate purpose for good corporate governance (Sect. 5.1.4).

As we will see, this concept has also business and moral significance rather than a purely legal scope (unlike the purpose clause in the articles of association). However, as we will discuss below, as a result of the continuous increase of the importance of ESG aspects for all companies and the associated risks, the board has the duty to analyze how the company achieves its missions and to lead the materialization of a purposeful activity.

5.1.1 Distinctions from Other Notions and Concepts

Within the context of this article, the “corporate purpose” shall be understood as the “raison d’être” of a corporation and concerns the role of corporations in society.⁶⁹

First, it is worth mentioning that the question of the economic purpose or “Endzweck” of the company is not discussed in this article, which concerns exclusively business and for-profit corporations.

Then the notion of corporate purpose shall be distinguished from the “purpose” or “objects” (e.g., the production and distribution of ice cream, the manufacturing of cars, etc.) of the company, which are set by the shareholders at the incorporation of the company or—as amended later—in the company’s articles of association. These kinds of clauses lost a lot of importance, in particular in the USA, where they are usually drafted as permissive boilerplate provisions⁷⁰ and where the ultra vires doctrine has eclipsed. In other countries, such as Switzerland or Germany, the purpose clause shall still define the activity of the company and may limit the possibility for the management to enter into any new business line.⁷¹ In addition to this description of business activity, it is worth noting that a large for-profit corporation such as Nestlé SA inserted in the purpose clause of its articles of association a sentence setting forth that “Nestlé shall, in pursuing its business purpose, aim for long-term, sustainable value creation.”

The vagueness or imprecise character of the purpose clause in the articles of association and/or its limited public character in several countries may have led companies to develop corporate brands and communicate about values to market products. As stated by professor Elizabeth Pollman, “[t]he intangible aspects of branded goods and the associations and expectations they create for a corporation are, of course, different than a formal legal statement of purpose in a charter. They do not restrict a corporation’s activities or create legally binding governance commitments. Their value depends on the ongoing actions and contributions of corporate managers and employees.”⁷²

Finally, corporate purpose and “mission statements” are often conflated even if they are clearly correlated. The mission statement will describe what a company does and for whom when the corporate purpose provides the reason why the company exists. In any case, we consider that the definition of missions and the way such missions will be achieved are required to set a clear purposeful activity. Indeed, as outlined by the famous “management guru” Peter Drucker in 1973, “A business is not defined by its name, statutes or articles of incorporation. It is defined by the business mission. Only a clear definition of the mission and purpose of the organization makes possible clear and realistic business objectives.”⁷³

5.1.2 Definition(s)

Corporate purpose is currently the “hottest topic in corporate governance.”⁷⁴ Its definition is, however, not settled in economic or legal literature. In addition, economic scholars, legal practitioners, or other special interest groups do not put equal importance on the same criteria.

Among all the numerous publications, memos, and reports on this topic, we will mention here several complementary definitions:

• Professor Alex Edmans argues that purpose is “why an enterprise exists – who it serves, its reason for being and the role it plays in the world.”⁷⁵

• Professor Colin Mayer considers that the fulfillment of purpose is “the reason why companies exist.” Purpose is then established as “an ultimate goal, not an intermediary objective in the attainment of something else.” On that basis, he argues that “doing well by doing good” is “a dangerous concept because it suggests that philanthropy is only valuable where it is profitable.”⁷⁶

• Professor Beate Sjåfjell argues that the purpose of the company can be summarized in a normative perspective “as the fulfilment of its function as an all-important component of our economies in a way that, as far as possible, contributes to the general goals of society (and at least does not, on aggregate, work against them).”⁷⁷

• In 2015, Harvard professors Rebecca Henderson and Eric Van den Steen defined purpose as “a concrete goal or objective for the firm that reaches beyond profit maximization.”⁷⁸ In a recent book aiming at reimagining capitalism, Rebecca Henderson supplemented that companies with a purpose (in the sense we consider here), “embrac[e] a pro-social purpose beyond profit maximization and tak[e] responsibility for the health of the natural and social systems.”

• In a Wachtell Lipton Rosen Katz memorandum dated 2020, Martin Lipton, William Savitt, and Karessa Cain broadly formulated corporate purpose as follows: “The purpose of a corporation is to conduct a lawful, ethical, profitable and sustainable business in order to create value over the long-term, which requires consideration of the stakeholders that are critical to its success (shareholders, employees, customers, suppliers, creditors and communities), as determined by the corporation and the board of directors using its business judgment and with regular engagement with shareholders, who are essential partners in supporting the corporation’s pursuit of this mission.”⁷⁹

• According to the audit company Deloitte, corporate purpose refers to “a company’s stated role in society, connected to long-term value, and how the company fulfills that role in the communities in which it operates. It is a concept that involves proactive engagement in society on a broad range of social, and in some cases political initiatives and answers the question ‘why is the company in business, and how will it stay in business and remain relevant.’” Pursuant to PricewaterhouseCoopers, “a company’s purpose is often expressed as the reason it’s in business. But it’s more than that. A company’s purpose, as well as messaging and activities, need to be aligned to the overall business strategy – how the company will achieve long-term sustainable returns.”

• The British Academy Future of the Corporation program defines the purpose of business as follows: “to produce profitable solutions for the problems of people and planet, not profiting from producing problems for either.”

• In several articles related to purpose, McKinsey writes the following on purpose: “it’s so much more than just a mission statement. It’s purpose. Purpose answers the question, ‘What would the world lose if your company disappeared?’ It defines a company’s core reason for being and its resulting positive impact on the world. Winning companies are driven by purpose, reach higher for it, and achieve more because of it.”

5.1.3 Examples of Purpose Statements

Most of the large corporations adopted a statement of purpose explaining in one or two sentences the objective or position that the company aims at. While several of these statements can be considered “catchwords” rather than an effective business guideline, it is important to stress that the statement is not the only defining element of a company’s purpose since the statement is usually developed and detailed in a document called “purpose and values” or “mission and purpose statement,” which lists the company’s missions, values, and culture.

The common feature observed in all purpose statements that we could review is that they state or describe what the company does or plans to undertake for third parties, its “raison d’être”:

• In the 2021 version of the document “Nestlé Purpose and Values,” the Swiss corporation Nestlé states as purpose the following: “Unlocking the power of food to enhance quality of life for everyone, today and for generations to come.”⁸⁰

• The manufacturer of play materials LEGO wishes to “Inspire and develop the builders of tomorrow.”

• Airbnb defines its purpose as “We help people to belong anywhere.”

• Microsoft adopted the following purpose: “To empower every person and every organization on the planet to achieve more.”

• Purpose can change or evolve with the development of the company. For instance, Tesla had as original statement the following: “We exist to accelerate the planet’s transition to sustainable transport.” The current version is “We exist to accelerate the planet’s transition to sustainable energy.” The term “energy” instead of “transport” indicates that Tesla wants to be active not only in the transportation (car) business but also in power sources.

5.1.4 Selected Criteria

The discussion about corporate purpose aims to explain the companies’ reason to exist. In short, any corporation’s reason for existence is to conduct a prosperous business, but not at any stakeholder’s expense.

In our opinion, the key elements that a company shall analyze and define while setting and materializing the corporate purpose statement and missions are the following:

• 1. A corporation aims to provide solutions or offer services (notably through research, development, and invention) to its customers; this aspect is obviously correlated with the (legal) objects and “branding” of the company.

• 2. A corporation conducts a lawful and successful business over the long term to realize income and create profits. Even if the obligation to conduct business lawfully seems to be mundane, compliance obligations and risk management which derive from this basic duty require taking into consideration ESG concerns, as we will elaborate below.⁸¹

• 3. A corporation positively impacts society and shall not create problems or negatively impact stakeholders.

• 4. The commitment of the board of directors and management, as well as of all constituencies, including the shareholders, is essential to define a purpose statement, its missions, and its core values. Such commitment is also required to deliver credible actions that fully comply with the communicated purpose statement and to avoid greenwashing or fairwashing abuses.

Based on the above, we consider that every company should express and develop its corporate purpose through the following four elements: (1) definition of the missions to be completed within the framework of the corporate objects (if defined in the articles of association), (2) the culture and means by which the company wants to achieve its missions, (3) the way it considers and deals with all the stakeholders, and, finally, (4) the implementation mechanism of its purpose and missions.

5.2 Identification, Expression, and Implementation of the Corporate Purpose by the Board of Directors

5.2.1 Identification and Expression

In our opinion, the identification and expression of the purpose and missions of the company, which may in most cases be—at best—only implied from the perspective of the shareholders, are business judgment issues for the board of directors to resolve.⁸² But the board may not adopt a broad statement of purpose for reputational reasons without conducting first a detailed analysis and then just “do as it pleases” anyway.

On the contrary, the expression of the purpose requires a specific and thorough analysis of the company’s identity, should include a list of its core values, and should express how it may have a positive impact on society. As a consequence, the corporate culture as defined by the board of directors “is a reflection of, and a foundation for, the corporation’s purpose.”⁸³

The board’s work should be about two different aspects: why the company exists and who the company exists for.⁸⁴

If the “why” refers in particular to the business activity (products, services, missions to achieve), the “who” has been under less scrutiny. Usually and as noted above, most statements of purpose focus on customers. But some companies’ statement explicitly refers to employees or to environmental concerns.⁸⁵ Again, research evidenced that a company’s success might depend not on its ability to act on all stakeholders’ issues but on some (or even one) of them, especially those issues on which it might have a greater influence. Hence, to have an impact, a company shall prioritize some interests and accept the resulting trade-offs, meaning that some stakeholders may not benefit from the company’s purpose-oriented activities as others. Therefore, to be meaningful, a purpose should be selective with a clear orientation.

That analysis also implies an assessment of the company’s social and environmental impact (What does it produce, and what are the required resources [notably energy] for the product’s development, making, use, and end-of-life treatment?)⁸⁶ Obviously, it also involves the corporation’s risk profile (including climate-related risks), which every board should know and understand. More broadly, these aspects can be addressed through one of “the most important foundational question corporate directors and managers need to be able to answer to be an effective fiduciary […]: ‘How does the company make money.’”⁸⁷ Indeed, this question will force directors “to examine closely what the company does that results in the ultimate profitable sale of a product or service.”⁸⁸

On the basis of this analysis and after a review of the business processes by which the company conducts its activity, the board of directors and management of such company should be able to describe the “positive contribution to society the company will make, and the steps it will take to eliminate its negative impact on society.”⁸⁹

The cross-cutting issues to be reviewed imply that the final analysis is a task for which the entire board is responsible. Obviously, the internal research and assessment of the criteria or values may be conducted by a corporate governance committee or a specific committee in charge of risk management, compliance, and ESG functions.⁹⁰ However, it is in our opinion crucial that the board organizes a group discussion so that the final decision and definition becomes a core part of the corporate strategy and activity.

Moreover, the corporate purpose definition cannot be a solitary exercise of the board. The stakeholders’ involvement—as well obviously as the support and endorsement of the management—is key to expressing a “valid” purpose as well as to legitimizing its content.

As noted by McKinsey in an article published in 2020, “[c]onnecting purpose with the heart of your company means reappraising your core: the strategy you pursue, the operations driving you forward, and the organization itself. That’s hard work, and you can’t do it without deep engagement from your top team, employees, and broader stakeholders. But there’s no substitute. Your stakeholders care about the concrete consequences of your lived purpose, not the new phrase at the start of your annual report.”⁹¹

In that context, discussions, meetings, and interviews with an employee panel, key customers, or suppliers, as well as with shareholders, are necessary to draft a statement that is (1) clear enough for the management and the board when it faces trade-offs in its strategic or daily decisions, (2) in line with the values of the company, and (3) also credible and meaningful for stakeholders.

5.2.2 Concretization and Implementation of Corporate Purpose

Once the board has defined a specific purpose for the company, it shall ensure that the company will “live purpose” and “translate it into action.”⁹² As summarized in a PricewaterhouseCoopers memo, after defining the purpose, the board shall “set related goals and lead accordingly.”

The first step toward purpose implementation is its communication to all relevant stakeholders. The corporate governance report should provide a “statement of purpose” in which the central aspects or topics of the statement will be described. Ideally, the report should define precisely (1) the process followed to identify the topics on which the company wants to create shared value and have a positive impact, (2) the way the company plans to implement these goals, and (3) the achievements obtained.⁹³

The board members have a major function while exercising their business judgment to implement the company’s objectives. To that end, the board of directors shall act as a mediator (and if needed arbitrator) and harmonize as much as possible within the frame of the defined corporate purpose the interests of all stakeholders, including the shareholders, with a clear mandate: developing a successful business which has a positive impact.

As already noted, several legal scholars criticize the wide discretion that an inclusive corporate purpose would provide to the board. The stakeholders’ inclusion in the company’s purpose would make it difficult for a board of directors to assess among (too) many interests. Too much discretion for the board could lead, at best, to negligent management and, at worst, to corporate waste or malpractice.⁹⁴

In our view, this opinion fails to recognize the already existing and “standard” complexity implied by a company’s management, including in the almost constant mediation of the various constituencies’ interests.⁹⁵

Defining the corporate strategy and corporative management are inherently difficult tasks. They require “great skill, attention to detail, substantive expertise, and perseverance through difficult circumstances.”⁹⁶ Thus, assessing different interests to make the best decision in each case (including as regards its impact on the various stakeholders, as mandated by the company’s purpose) is certainly a frequent if not a daily task for managers and directors of big companies.⁹⁷ That is also why a clear purpose definition is crucial in the first place.

In that context, it is worth mentioning an article written in 2009 by Alan George Lafley (former CEO of Procter & Gamble) and published in the Harvard Business Review, which describes his tasks as a highest-ranking manager. He notably emphasized that “[a]lthough the consumer is clearly P & G’s most critical external stakeholder, others are important as well: retail customers, suppliers, and, of course, investors and shareholders. Over the past decade we have dramatically changed how we work with retail customers and suppliers […]. For too long these relationships were transactional – a series of win-lose negotiations. Beginning in 2000 we tried to make them win-win partnerships. We focused on common business purposes and goals, on joint business plans, and, most important, on joint value creation.”

Hence, to think that the management and the board of a company are not able to (and do not have to) mediate and assess the interest of several constituencies reflects a profound ignorance of business reality.

In addition, it is obvious that stakeholders have a clear interest in the profitability and success of the company, be it to be repaid (for creditors) or to keep their job (for employees). As a consequence, “governance focused on stakeholders is not an authorization for management to do what it wants, it is a mandate for management to run a profitable company in a way that respects all stakeholders and benefits, not harms, society.”⁹⁸

That being said and for the sake of clarity, a statement of purpose should not state that the company will protect equally all stakeholders’ interests. The board shall set priorities and “clarify the principles that would apply to trade-offs the company might make between investors and stakeholders (say, it will sacrifice profits to reduce carbon emissions) or between different stakeholders (it will decarbonize even though doing so will lead to layoffs).”⁹⁹

5.2.3 Accountability, Compliance Duties, and Disclosure

The accountability issue is closely related to the question of the board’s discretion in its management and undertaking of the daily missions, including the implementation of the company’s purpose.

First, it is important to bear in mind the board of directors’ independent capacity as a body, which is also under the legal duty to conduct the company’s business, if possible, toward success. Effectively, most legal systems provide directors with a wide discretion as to the firm’s allocation of resources.¹⁰⁰ Directors may use that leeway to increase the share value of the firm or choose to use its resources for the benefit of employees or clients.¹⁰¹ To be sure, that does not insulate directors from any accountability. But as long as they act in the company’s best interests (i.e., in compliance with its carefully defined purpose) and are not conflicted, their decisions should not be second-guessed.

This is the rationale underlying the business judgment rule. In short, courts must exercise restraint in reviewing a posteriori business decisions made following an irreproachable decision-making process, based on adequate information and free from any conflicts of interests.¹⁰²

Even if the business judgment rule provides robust protection to directors, it is nevertheless difficult for directors and managers to understand how to include these new tasks, such as setting a corporate purpose or defining corporate missions and, more generally, addressing ESG responsibilities.¹⁰³

In a recent and incisive article, Leo E. Strine, Jr.; Kirby M. Smith; and Reilly S. Steel argue that the “company’s compliance and EESG plans should not be separate, but identical” and “if a corporation already maintains a thorough and thoughtful compliance policy, the corporation has a strong start towards a solid EESG policy.”¹⁰⁴ Essentially, the board has the duty to put in place an effective compliance system and to minimize any (legal or business) risk for the corporation, and by “trying to engage in EESG best practices, the corporation will have a margin of error that keeps it largely out of the legal grey and create a reputation that will serve the company well with its stakeholders and regulators when there is a situational lapse.”¹⁰⁵

If environmental risks (e.g., dangerous emissions or pollution) are already key elements of any corporate compliance program, there are also several examples, both in the USA and in Europe, of (recent) judicial actions regarding consumer protection, employee working conditions, or misbranding, which evidences that the consideration of ESG concerns (at least partially) overlaps with compliance.¹⁰⁶ As a consequence, the practical integration of ESG concerns into risk management and the compliance process will help directors adopt and implement an ethical corporate culture while satisfying their legal obligations.

Furthermore, it is important to emphasize that if directors enjoy a large legal discretion, they are, however, subject to various pressures from the financial markets, suppliers, customers, and employees. In addition to (limited) legal and economic constraints, requirements related to behavioral economics analysis—notably on social norms and trust—cause additional limiting factors. “This constraint is directors’ internalized belief that they ought to behave in a careful, loyal and trustworthy fashion.”¹⁰⁷ Unlike corporate governance regulations, which state that boards and management should not be trusted but controlled, we consider that the role and importance of trust in corporation law is overlooked.¹⁰⁸

Finally and while we do not consider that granting specific or new enforcement rights to stakeholders in connection with the statement of purpose or ESG practices would be desirable (in particular due to the practical difficulties or false hopes that the enforcement of such rights would constitute), we argue that the regulators’ and interest groups’ current efforts to establish global-climate-related and other ESG disclosure standards will, if need be, constrain companies reluctant to effectively conduct a purposeful business.¹⁰⁹ In that context, the option to have not only public companies but also private socially influential companies reporting on their ESG impact should be discussed, notably to avoid any “perverse incentive to go private”¹¹⁰ to avoid reporting duties imposed on listed companies.

Since the proliferation of diverse approaches to ESG reporting is “inefficient, encourages greenwashing and gamesmanship of the kind that has characterized corporate governance ratings,”¹¹¹ the convergence of private and public efforts is crucial. In this context, the trustees of the IFRS Foundation indicated in 2021 that they will create an International Sustainability Standards Board (ISSB), in coherence with other standard setters’ work. The US Securities and Exchange Commission (SEC) indicated in the same year that ESG disclosure regulation (in particular, climate change disclosure) will undergo a central reform. The SEC notably communicated that it will be “working toward a comprehensive ESG disclosure framework” as well as “offering guidance on human capital disclosure to encourage the reporting of specific metrics like workforce diversity, and considering more specific guidance or rule making on board diversity.”

5.3 Partnership with Shareholders

To obtain a credible definition and then a successful implementation of the corporate purpose, shareholders’ support is key. The idea is to obtain, when possible, a commitment from shareholders and investors to prioritize and support the companies’ long-term growth and sustainability.¹¹²

Investors shall engage with companies and their boards to define both missions and values as well as encourage a purposeful business. More particularly, the board of directors should identify strongly committed shareholders to discuss and gain their support to promote the long-term fulfillment of the company’s purpose. These shareholders shall then also oversee the implementation of such purpose and be aligned with the firm’s purpose.

In line with the proposal formulated in The New Paradigm, voluntary collaboration among corporations and their stakeholders, in particular their shareholders, is a fundamental condition to resist short-termism and reach sustainable long-term value. As stated by Martin Lipton in this document prepared for the International Business Council of the World Economic Forum, “the company and its shareholders need to engage on a regular basis to foster a mutual understanding and alignment as to corporate purpose and strategy.”¹¹³

This partnership could be achieved through different channels, which can be combined:

• Informal meetings between (committed) groups of shareholders and a delegation of the board of directors and management can be useful to discuss strategic options as well as ESG concerns.

• Instead of or in addition to informal contacts with selected shareholders, the creation of more representative platforms in the form of shareholder committees could be preferred by companies to challenge or legitimize the analysis made by the board. Such committees are already widely present in listed companies in France.¹¹⁴ Shareholders’ committees would be able to deal with issues that require in-depth analysis or a constructive exchange of views.¹¹⁵

• Some scholars have suggested giving investors a “say on purpose” vote, similar to the two-part “say on pay” votes that investors in Europe have. This vote would cover, on the one hand, a statement specifying the company’s purpose issued by the board and, on another hand, its implementation. Alex Edmans and Tom Gosling suggest, in particular. that every 3 years, investors would have a “policy vote” on the statement “to convey whether they buy into it and the trade-offs it implies. An investor would vote against it if he or she disagrees with the priorities, or if it is so vague it gives little guidance on what the company stands for.” Then every year, shareholders could have an “implementation vote” to express whether they “are satisfied with how the company is delivering on the statement. Although both votes would be advisory, meaningful opposition would show leaders that they are off course, which could precipitate investor selling or a change in management.”¹¹⁶ In that context, it is worth mentioning that several companies already organized consultative votes concerning climate policies and roadmaps. For instance, on April 15, 2021, Nestlé’s shareholders overwhelmingly approved—by more than 95%—the climate roadmap submitted by its board of directors. In the invitation to the annual general meeting sent to shareholders, the board of directors of Nestlé stated that “shareholders should be able to express their views on environmental, social and governance (ESG) issues” and that it wished to obtain, through a consultative vote, shareholder support for its climate roadmap, after noting that “climate change is one of society’s greatest challenges.”

To be sure and as we previously highlighted, all stakeholders are key to the company’s success. However, considering the specific allocation of powers to shareholders, who can elect directors, the support of long-term shareholders is critical for the board’s ability to embrace ESG principles.

6 Conclusions

Corporate purpose may be a concept that will allow moving beyond the classical debate or dichotomy between shareholder wealth maximization and stakeholder governance theories.

Even if the scope and content of corporate purpose are closely related to stakeholder governance, it brings an additional component, emphasizing the importance of a system that promotes profit-driven and socially responsible corporations.

Within this frame, the success of corporations is and will be largely subject to the fulfillment of two conditions: first, the success of the board of directors’ mission to create a corporate culture and strategy aligned with the corporate purpose and, second, the commitment and responsible stewardship that shareholders are ready to provide to a company, as well as the trust that investors are ready to grant to the management.