The Value of Corporate Purpose: A Guide for CEOs and Entrepreneurs
KKS Advisors & The Generation Foundation / May 2017
George Serafeim, Sakis Kotsantonis, Bronagh Ward, and Daniela Saltzman
Many companies are now seeking a way to signal their purpose; their reason for being beyond profits. In doing so, some companies have chosen to become certified B Corps or adopt alternative legal forms, such as the Public Benefit Corporation. But why do companies choose to signal their commitment to society and what are the potential mechanisms to do so?
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 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.
Since purpose has value, but this value depends critically on authenticity, then the critical question is - how do companies signal their authenticity? We find that organizations adopt different ways to do so. Some companies choose to signal the authenticity of their purpose by adopting integrated guidance and reporting, ceasing quarterly earnings guidance, and aligning incentive structures with long-term societal impact. Other companies choose to become B Corps and use the measurement and certification mechanism provided by B Lab to signal the authenticity of their purpose. Some companies choose to adopt alternative legal forms that require directors to consider the company’s purpose in each decision they make. No one solution fits all. Business leaders should carefully weigh the benefits (i.e. credibility of the signal) and the costs (i.e. uncertainty introduced by the signal) in choosing how to signal the organizational purpose.
The report then goes on to explain the rise of B Corps around the world. We conclude that this is related to a measure of short-termism and the extent to which the law is interpreted in a country to require shareholder value maximization. Specifically, we find more B Corps in countries with a higher short-term orientation and an interpretation of the law that puts shareholders first. Many business leaders, as a result, decide to certify their corporations as B corps to protect the purpose of the business from short-term pressures and an interpretation of the law that might be too restrictive for the company’s mission.
Read the report here.