Corporate Purpose: The Role of Law and Culture

Corporate purpose is an increasingly hot topic amongst today’s business leaders. Many companies are now putting purpose at their core, signalling to the world that they exist to pursue social and environmental goals alongside the generation of profits. Pursuing purpose is not a corporate afterthought or a new marketing campaign which will be soon forgotten. Purpose places social and environmental considerations at the centre of strategic decision making, which underpins long-term profitability. It is what keeps employees engaged. It is what customers are loyal to. It is what investors invest in. The rise of purpose is a fundamental shift in corporate strategy, one that recognises that businesses can and should create long term value for many stakeholders, and not just shareholders.

The Value of Corporate Purpose

In our recent paper, The Value of Corporate Purpose, we explain how corporate purpose can lead to value creation. Our research suggests that the answer lies in understanding the nexus of purpose, authenticity, trust and value. Purpose could drive customer, employee and investor choices as long as that purpose is authentic. If the company’s purpose is authentic - and this is communicated to and understood by stakeholders -  they trust the company and could make choices accordingly. This creates value for the company and a competitive advantage in the marketplace. Critically, unlocking the value of corporate purpose depends on authenticity – the ability to validate that social and environmental commitments are genuine and have importance for a company. Yet demonstrating authenticity might appear to be an impossible task for managers that face constant pressures to focus on the short term and maximise shareholder profits.

Shareholder Value Maximization is a Barrier

A key barrier to companies effectively pursuing a broader social purpose is that shareholder value maximization currently dominates capital markets. Shareholder value maximization is the belief that managerial decision making must only consider the impacts of business decisions in a single dimension – whether the outcome will increase shareholder profits, thereby placing all other considerations (including societal concerns and environmental protection) further down the list.

Crucially, corporate law is seen by many to reinforce shareholder value maximization. In reality, the law permits directors to consider broader purposes, but for the most part it does not require them to do so. Moreover, managers (who run a business) placing social and environmental considerations at the centre of decision-making could risk liability if shareholders (who own the business) perceive a threat to financial returns.

How Changing Corporate Law Can Help

Corporate law is important because it defines the formal rules that drive behaviour. The process of legal incorporation brings a business entity into existence, and as such can be used to help clarify the answer to the question - for what purpose does a business exist?

In recent years, corporate law has been undergoing a transformation. New corporate forms have been created to specifically enable companies to embed purpose in a for-profit legal entity. The corporate forms are different because they require managers to consider the corporate purpose in their decision making, and they include obligations for upholding transparency around the company’s performance in achieving its purpose.

The maps below identify the US states which have created new corporate forms – including the Delaware Public Benefit Corporation and the California Social Purpose Corporation. The map on the left represents 2009, while the map on the right shows the transformation in corporate law which has taken place by 2016. Even more corporate forms are emerging globally.

2009-legal-forms
2016-legal-forms

But, is it law or culture that matters?

As part of our research, we organised a conference at Harvard Business School that brought together CEOs and C-Suite executives of purpose-driven companies, experts in corporate law and corporate governance, and leading academics. During the discussion, it was argued that “shareholder wealth maximization is a choice”, raising the important question of whether corporate law is really the problem or whether the solution lies with a change in cultural norms.

To pin down whether it is law or culture that matters, we conducted a statistical analysis using data for 32 countries on their level of shareholder primacy in the law and considering multiple dimensions of national culture. We related these factors to the number of certified “B Corps” present - companies that have signed up to have their social and environmental performance validated by a third party, and which seek to promote a global movement of businesses using “business as a force for good”. The emergence of over 2,000 B Corps around the world is significant because they are attempting to redefine the idea of success in business, to include social and environmental goals alongside profits.

We discovered that there are more B Corps in countries which are culturally more orientated towards the short term. We also found that there are more B Corps in countries with a higher degree of shareholder primacy present in the law. The evidence suggests that law and culture both play an important role in driving change.

Whether or not new corporate forms are needed, the interplay between law and culture is critical. They must support each other. Ultimately, by promoting a cultural shift, we gain momentum to effect change in corporate law. And by changing the law, we receive formal recognition and enhanced legitimacy for the culture to shift further. 

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