A pillar of the ECGI Responsible Capitalism Initiative
While an old topic, corporate purpose has risen to prominence over the last few years. The reason is a growing disquiet in many quarters about the single-minded focus of business on profit and financial value as the predominant objective of firms.
It is central to debates in corporate law around questions of corporate personhood, the fiduciary responsibilities of directors, the accountability of boards to stakeholders as well as shareholders, and the regulation of companies. It is closely related to issues about corporate ownership, governance, and the financing of firms. And it bears directly on the role of the financial sector; environmental, social and governance factors; activism; and engagement.
However, there are divergent views on what is or should be the purpose of business and, while there is growing recognition of mounting problems in relation to environmental, human, and social impacts of companies, there is little consensus about their causes and even less about their appropriate remedies.
To some, these problems reflect a deficiency of the design and enforcement of traditional tools of anti-trust, regulation, and taxation, and a need for more effective anti-trust policy, tougher regulation, and more effective use of tax to address market failures. To others, conventional tools are not efficient means of dealing with the problems. Instead, the failures stem from fundamental defects of the way in which corporate and financial sectors operate.
There is a pressing need for better understanding of the issue and more evidence to evaluate contending hypotheses.
Until recently a major limitation on empirical research on corporate purpose has been the paucity of available data. But this is changing and the availability of alternative sources of data is expanding. There are three areas in which there is a particular need for more academic analysis. The first is in relation to the role of business purpose in promoting business performance. It is frequently asserted that corporate purpose is associated with enhanced corporate performance but there are few studies providing rigorous empirical evidence. Furthermore, studies evaluate performance in traditional, predominantly short-term, financial terms and do not establish the degree to which purposeful companies confer benefits on other parties in the long-term.
The second area relates to corporate law and purpose. There is much discussion on whether effective implementation of corporate purpose requires changes in corporate law or whether existing law is sufficiently flexible and permissive to allow companies to adopt and enact their chosen purposes. Related to this are questions about the accountability of boards of directors to external parties, in particular employees and other stakeholders as well as shareholders, for delivery of and deviations from corporate purpose.
The third area concerns the relation of corporate purpose and responsible investment which are often unclear and confused. This gives rise to concerns about “greenwashing” and a lack of authenticity. Underpinning all three areas are questions about precisely what is meant by corporate purpose.
To CONTACT or SUPPORT:
The purpose of business is the reason why it has been created and its reason for being. It has become a central focus of business practice, policy, and academic research. There is a need for a substantial body of research that evaluates the relationship between purpose and performance of firms in not just financial terms but also in relation to impact.
What precisely is meant by the purpose of business? Is it a business tool, a reconceptualisation of business, or a policy agenda? Is it, or should be, legally relevant and, if so, how? How does it relate to such topics as sustainability, responsibility, inclusivity, and ESG?
Monash University and ECGI
University of Oxford and ECGI
IESE Business School