Corporate Purpose and Sustainability After the Backlash

Only a few years ago, corporate purpose and ESG seemed destined to reshape corporate governance. Today, both ideas face sharp criticism, political resistance and regulatory retrenchment. Yet the underlying questions have not disappeared. Companies still affect society and the environment, and corporate law still influences how they respond.

Corporate purpose and sustainability therefore remain closely connected and relevant to corporate law, even if the policy agenda must now change.

A meaningful corporate purpose explains why a company exists and how it contributes to society. This is more demanding than a slogan. It also differs from the familiar claim that a company’s purpose is simply to make profits. Profits are indispensable: without financial sustainability, a company cannot survive. But a company may also impose environmental and social costs that do not appear in its accounts. A credible purpose therefore needs to say something about the company’s contribution net of these externalities.

This is where purpose and sustainability meet. If purpose describes how a company creates value for society, sustainability asks whether that contribution can be maintained financially, environmentally and socially. The two concepts are therefore symbiotic. A company cannot be expected to solve every social and environmental problem, but its purpose can help identify the problems it is particularly well placed to address.

This does not mean that governments should require every company to adopt a legally prescribed purpose. Mandatory purpose regulation is largely off the table. There is too little evidence that compulsory purpose statements improve corporate behaviour. They may instead become vague compliance exercises, encourage “purpose washing”, or expose companies to political and bureaucratic intervention.

Purpose must be authentic to be useful. It should be endorsed by shareholders, directors, managers and employees rather than imposed from outside. It must also remain sufficiently flexible to adapt to changing technologies, markets and social conditions.

But rejecting mandatory purpose regulation does not mean that law is irrelevant. Corporate and organisational law can facilitate—or obstruct—private commitments to purpose. The central question is not whether the state should decide corporate purposes, but whether the legal system permits companies and owners to make credible commitments of their own.

Enterprise foundations provide a particularly clear example. An enterprise foundation is a self-owning, non-profit foundation that holds a controlling interest in a business company. The foundation is legally bound by its chartered purpose and has no residual owners who can appropriate its assets. It can therefore act as a long-term guardian of the company’s mission and ownership structure. This creates a stronger form of purpose commitment than an ordinary corporate statement that can be changed whenever management or shareholders find it inconvenient. Companies such as Novo Nordisk, Carlsberg, Bosch and Zeiss illustrate how foundation ownership can combine commercial activity, long-term control and legally embedded purpose. Foundation law can either facilitate such arrangements or prevent them, for example by refusing to recognise responsible business ownership as a legitimate foundation purpose.

Other private mechanisms are also available. Directors may be held accountable for acting against a clearly stated purpose. Companies may choose legal forms that incorporate purpose commitments. Third-party certification can strengthen credibility. Purpose boards, as in the French société à mission, can monitor compliance. Steward-ownership structures and perpetual purpose trusts can protect a mission against future changes in control.

These solutions are not suitable for every company. But they show how law can support voluntary private ordering without creating a public “purpose police”.

The sustainability agenda requires an equally fundamental rethink. ESG, as a concept and as an investment label, has lost much of its credibility. ESG ratings often disagree, mix incompatible objectives and bear an uncertain relationship to actual environmental and social performance. The term has also become politically weaponised. In that sense, ESG may indeed be dead.

Sustainability, however, is not. Climate change, biodiversity loss, resource constraints, working conditions and supply-chain risks will continue to affect companies, investors and societies. The practical question is therefore not whether sustainability will disappear, but how sustainability law can become more effective and less costly.

The European experience illustrates the problem. Sustainability reporting and due-diligence requirements expanded rapidly, often with limited attention to implementation costs. Under the Corporate Sustainability Reporting Directive, companies could face more than a thousand potential data points, depending on their materiality assessment. Much of this information is difficult to obtain, estimate and audit. The result is a reporting system that risks consuming resources without producing proportionate benefits.

Reporting costs need to come down. But simplification should not mean abandoning sustainability. It should mean concentrating on what matters.

An elevated materiality standard offers a possible way forward. Sustainability obligations should focus on issues that are genuinely significant in light of the company’s size, sector, energy use, emissions, business model and capacity to influence outcomes. Carbon emissions may be central for an energy company but less material for a pharmaceutical firm. Supply-chain obligations should focus on risks that companies can realistically identify and affect.

Corporate purpose can help provide this focus. A well-defined purpose can serve as a compass for deciding which sustainability issues belong at the centre of strategy, reporting, risk management and due diligence. It can replace an unmanageable obligation to address every problem with a more disciplined responsibility for the problems most closely connected to the company’s activities and capabilities.

The “man on the moon” phase of ESG regulation is over. The next phase must be more selective, realistic and economically informed. Purpose should remain voluntary, but law should enable credible commitment. Sustainability regulation should remain ambitious, but it should apply elevated materiality standards and recognise that technology, prices and business incentives often matter more than ever-expanding disclosure.

Purpose and sustainability are not passing fashions. Their legal form must change, but the underlying challenge remains: how can companies make durable, profitable contributions to society without imposing costs that others must bear?

Steen Thomsen is Professor and founding chairman of the Center for Corporate Governance, Copenhagen Business School, and an ECGI Research Member.

This blog is based on a paper presented at the twelfth annual Global Corporate Governance Colloquia (GCGC), hosted by the National University of Singapore and ECGI. Visit the event page to explore more conference-related blogs.

The ECGI does not, consistent with its constitutional purpose, have a view or opinion. If you wish to respond to this article, you can submit a blog article or 'letter to the editor' by clicking here.