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Presented by:

Freddie Woolfe

frederick.woolfe@cass.city.ac.uk

Presented to:

Professor Jean-Pascal Gond

Professor for Corporate Social Responsibility

Faculty of Management

Cass Business School

City, University of London

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This is a redacted version of the dissertation I submitted for my MBA at Cass Business School in April 2020. The main amendments are the removal of the transcripts of the interviews that were conducted in the interests of participant confidentiality. Some other, very minor changes have been made to the main text, but with no amendments to the data, analysis or the conclusions. I would be very pleased to discuss any aspects of this research; I can be reached at the email address above. 

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NOT FOR REPRODUCTION OR QUOTATION WITHOUT THE EXPRESS PERMISSION OF THE AUTHOR

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Acknowledgements

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I am immensely indebted to many people for their help, advice and support throughout this research project.

My employer has been extraordinarily supportive throughout my MBA, without which I would have struggled to balance the time commitments of a job and a demanding academic endeavour. I very much hope that the company will benefit from my learning as much as I have done personally.

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I am most grateful to my supervisor, Professor Jean-Pascal Gond, for his interest in the topic of this research and his guidance throughout the process.

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Fifteen people very kindly gave up significant amounts of their time to be interviewed, without which this research would not have been possible. I cannot thank them enough. They are Ben Peters, Carla Antunes da Silva, Contributor A (you know who you are!), Liv Garfield, Mark Mills, Martin Todd, Omar Cordes, Paul Polman, Peter Michaelis, Richard Buxton, Rob Stewart, Sarah Bates, Stephen Billingham, Stuart Dunbar and Victoria Whyte.

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I am also extremely grateful to many others for having offered me expert insights and sound advice, as well as helping me expand my network of experts to speak to on the topic. They include Alessandro Giudici, Bess Joffe, Charles Wookey, Clare Chapman, Colin Melvin, Gianandrea Giochetta, Jillian de Menezes, Paul Lee and Richard Howitt. There are many others whose views and insights have been invaluable; I am indebted to them all.

Lastly, but by no means least, Greame Bruce and Nathan Griffiths – Cass Business School alumni – have been amazing sources of advice, moral support and humour as well as shoulders to lean on throughout the MBA. As have many of my cohort, in particular the other members of Team Weihenmayer – Katheryn Needham, Lisa Delaney, Martin Gallegillo, Michael Keane and Rossella Nicolin. The “Revision” group too has been a constant source of much needed comedy and distraction. These are friendships that I hope will endure well beyond the MBA, founded on a shared experience that will undoubtedly shape all our futures.

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Table of contents

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Acknowledgements
Table of contents
List of tables
List of figures
Abbreviations
Executive summary
1 - Introduction
2 - Literature Review
  2.1 - The historical context of corporate purpose

    2.1.1 - The prior 4,000 years of corporate purpose
    2.1.2 - The evolution to SVM
    2.1.3 - Approaches to considering other stakeholder’s interests
    2.1.4 - Current definitions of corporate purpose
  2.2 - The legal aspects of corporate purpose

    2.2.1 - The UK Companies Act
    2.2.2 - The UK Corporate Governance Code
    2.2.3 - The future
  2.3 - The economic and performance aspects of corporate purpose

    2.3.1 - Economic implications
    2.3.2 - Market short-termism
    2.3.3 - Stakeholder relations and company performance
    2.3.4 - ESG and company performance
    2.3.5 - Corporate purpose and company performance
    2.3.6 - Implementation of corporate purpose
    2.3.7 - Measuring company performance on corporate purpose
  2.4 - Literature review summary
3 - Purpose statement analysis
  3.1 - Methodology
    3.1.1 - Purpose statement data collection
    3.1.2 - Purpose statement analysis
    3.1.3 - Attribute and performance data collection
    3.1.4 - Attribute and performance data analysis
  3.2 - Findings
    3.2.1 - Statement gradings
    3.2.2 - Correlations
  3.3 - Limitations
  3.4 - Purpose statement analysis summary
4 - Interviews
  4.1 - Methodology
    4.1.1 - Data collection
    4.1.2 - Data analysis
  4.2 - Findings
    4.2.1 - Data structure
    4.2.2 - Revenue opportunities
    4.2.3 - Optimising the value chain
    4.2.4 - Barriers
    4.2.5 - Enablers
    4.2.6 - Performance expectations
    4.2.7 - Timeframes
    4.2.8 - Transparency
    4.2.9 - Accountability
    4.2.10 - Aggregate dimensions
      4.2.10.1 - Strategy and business model
      4.2.10.2 - Embedding purpose
      4.2.10.3 - Business value
      4.2.10.4 - Trust/licence to operate
    4.2.11 - The model
  4.3 - Limitations
5 - Conclusion and recommendations
6 - Recommendations for future research    76
Bibliography    77
Appendix A - Purpose statement analysis full methodology and findings    93
  A.1 - Methodology    93
    A.1.1 - Purpose statement data collection    93
    A.1.2 - Purpose statement analysis    93
    A.1.3 - Attribute data collection    95
    A.1.4 - Attribute data analysis    96
    A.1.5 - Performance data collection    97
    A.1.6 - Performance data analysis    99
  A.2 - Findings    99
    A.2.1 - Statement gradings    99
    A.2.2 - Correlations    106
  A.3 - Limitations    109
Appendix B - Interview participants    112
Appendix C - Interview questions    113
Appendix D - Interview questions methodology    114

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List of tables

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1 - A selection of definitions of corporate purpose

2 - Select performance research into following the Five Principles of a Purpose Driven Business

3 - References in purpose statements for grading

4 - Company attributes

5 - Performance metrics

6 - Example perspectives on revenue opportunities

7 - Example perspectives on optimising the value chain

8 - Example perspectives on barriers

9 - Example perspectives on enablers

10 - Example perspectives on business performance

11 - Example perspectives on the social value of profit

12 - Example perspectives on timeframes

13 - Example perspectives on transparency

14 - Example perspectives on accountability

15 - Example perspectives on market consequences of purpose

16 - Linking The Five Principles for a Purpose Driven Business to purpose statement assessment

17 - Purpose statement presence by sector

18 - Correlation data for company attributes

19 - Purpose gradings by nature of CEO appointment

20 - Correlation data for company performance

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List of figures

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1 - NYSE and FTSE average holding periods

2 - Likelihood of companies taking various actions if quarterly earnings might be missed

3 - Number of public companies in the UK, 1980-2014

4 - Reasons why a company is perceived to have a strong purpose by consumers

5 - Purpose measurement and long-term TSR

6 - Purpose statement quality assessment by number

7 - Number of times stakeholders are referenced in purpose statements

8 - Statement reference to business activity and strategic choices

9 - Interviewees’ views on wider stakeholders and the applicability of purpose to business

10 - Number of times stakeholders were referenced by interviewees

11 - Stakeholder benefits referenced by company and investor participants, compared with the FTSE statement analysis

12 - Interview data structure

13 - A model of corporate purpose for the equity markets

14 - Purpose statement quality by sector

15 - Stakeholder benefits referenced by sector

16 - Edelman Trust Barometer 2019 score by sector

17 - Statement reference to business activity and strategic choices by sector

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Abbreviations

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CLR: Company Law Review

CSR: Corporate social responsibility

CSV: Creating shared value

ESG: Environmental, social and governance

ESV: Enlightened shareholder value

FCF: Free cash flow

FRC: Financial Reporting Council

P/E: Price/earnings

PRI: Principles for Responsible Investment

ROIC: Return on invested capital

SVM: Shareholder value maximisation

WACC: Weighted average cost of capital

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Executive summary

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What is the purpose of a corporation? A remarkably simple, yet contentious question.

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Shareholder value maximisation is the oft-repeated refrain in business education and practice.  However, only relatively recently has the idea been introduced as the objective of business. It is also increasingly being challenged by academics, companies, investors, regulators and society, with growing calls for reintroduction of a corporate purpose that has at its heart value creation for a wider set of stakeholders.

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At least in a UK context there appear to be few, if any, legal impediments to directors and companies pursuing a wider purpose; directors are permitted to do so by the Companies Act (2006) and, for listed companies, further encouraged by the 2018 UK Corporate Governance Code. While the benefits of corporate purpose have been relatively little covered in prior literature, studies into a range of related concepts show many advantages of improved stakeholder relations and managing externalities for corporate performance and stock market value. The studies that look at the link between corporate purpose and performance show similar results, however the lack of agreement even on the definition of corporate purpose and the dependent variable for performance testing make this research difficult. This in turn makes promoting the widespread adoption of the concept challenging, particularly for listed businesses whose equity value is so prominent.

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With a view to progressing the discussion on how corporate purpose can benefit companies and investors, this paper develops a model for how corporate purpose can work in the equity markets and makes recommendations for companies and investors interested in progressing the concept. It does so by looking at the public disclosures of corporate purpose at listed companies in the UK today and adding to this further with interviews of corporate and investor expert practitioners for more specific insights.

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In looking at current market practice, if judged only by the purpose statements that some listed companies have started publishing the concept has some way to develop. Just under half don’t even offer sufficient insights to tell what the company does or give an indication about how its purpose can direct decision-making. Only three percent of the statements are clear on what a company exists to do and the value it seeks to add. Investor interests are notably absent. If the statements are a reflection of the state of development of corporate purpose in the UK they generally leave much to be desired and suggest that the concept is being treated more as a marketing initiative than a rethink of business’ relationship with society.

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The practitioner interviews however paint a very different picture, one that addresses the value creation choices companies make and the opportunities they pursue by sitting at the heart of a company’s strategy and its business model. Purpose is embedded in the answers to the fundamental questions of why a company exists, who its serves and how it does so, and is therefore unique to each company and its competitive advantage. Some companies will have a more societally-impactful purpose than others, employing a variety of business models to achieve it, however a company’s long-term success depends on the delivery of its purpose as it is intimately linked to how it is able to generate revenues and earn profits. While clearly led by value creation for a wider set of stakeholders than just investors, purpose is not altruistic – it is simply good business and a useful lens for long-term investment.

For companies and investors looking to take advantage of these opportunities, I make several key observations and recommendations.

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First, corporate purpose is entirely relevant to and compatible with identifying and supporting good businesses in the mainstream equity markets. Answering the why, who, and how of purpose is essential to understanding a company’s prospects, and management teams can identify long-term, supportive investors by seeking those interested in discussing those questions.

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Second, purpose statements as they exist today are insufficient for the task at hand. To answer the three questions requires a common thread through discussions on many aspects of the business. Why, who, and how is a useful template for structuring disclosures.

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Third, purpose is about opportunities. In identifying these opportunities stakeholders can be prioritised. For every company this will include its customers and its employees, and other priority stakeholders can be determined by those that enable and benefit from the business model. Investors and boards should actively seek to understand these stakeholders’ experiences and the value they receive.  

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Fourth, purpose should result in better performance. Discussions of purpose between companies and investors should be founded on how it strengthens the business. Economic value creation must be a consequence of purpose to be viable in the equity markets.

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Fifth, embedding purpose effectively requires a company-specific approach as it is unique to each company. For companies the opportunity is in ingraining purpose in most aspects of the business and decision-making, and making long-term commitments that can outlast a strategy cycle or even a CEO. Investors must be pragmatic and accept that this could involve structures that would not be seen as traditionally “shareholder friendly”.

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Sixth, the measurement of a company’s purpose is likely to be unique as well. Companies, investors and other key stakeholders should work together to determine the most relevant measures of success against why, who and how.  Sitting alongside the usual financial and strategic performance metrics and disclosures this should help give a more complete picture of how a company is performing against its purpose.

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Lastly, for purpose to be credible, the message must be consistent across all stakeholders. If this can be achieved, there should be no barriers to being able to create value for society with the support of the equity markets.

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1 - Introduction

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Since Milton Friedman’s pronouncements in the 1970s that the responsibility of a firm is to increase its profits it has been widely assumed that the purpose of a company and the duty of its directors is to maximise shareholder value. This mantra has been promulgated by a mis-interpretation (Financial Times 2009) of a speech made in 1981 by the then CEO of General Electric Jack Welch (“manager of the century” as recognised by Fortune [1999]) and subsequent business school education (Stout 2012, Smith & Ronnegard 2016, Mayer 2019). In 1997 the influential Business Roundtable in the US proclaimed “the paramount duty of management and of boards of directors is to the corporation’s stockholders” (Business Roundtable 1997).

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However, this view is coming under increasing societal challenge. Simon Sinek (2019) describes today’s business environment as “capitalism abuse”. In its latest Trust Barometer, Edelman (2020) found 56% of people globally “believe that capitalism as it exists today does more harm than good in the world”. Sinek calls for more “infinite” thinking to increase the value of business to countries and economies and determines “the responsibility of a business is to use its will and resources to advance a greater cause than itself, protect the people and places in which it operates and generate more resources so that it can continue doing all those things for as long as possible” (p.88). He is not alone in his criticism of the economic, social and corporate implications of a singular focus on shareholder value maximisation (SVM). 

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Regulation is also starting to pull in a different direction. In the UK in 2006 the Companies Act introduced a range of other stakeholders whose interests should be considered in a director’s duty. The Financial Reporting Council (FRC) in 2018 updated the UK Corporate Governance Code which now requires listed companies’ boards to “establish the company’s purpose, values and strategy, and satisfy (themselves) that these and the company’s culture are aligned” (FRC 2018:4). Investors have similar expectations placed on them by the 2020 UK Stewardship Code (FRC 2019). In 2019 France introduced the Loi PACTE which specifically allows companies to add their “raison d’être” - described as “the long-term plan incorporating the social purpose of the enterprise” - into their constitutional documents (Ministère des Finances, 2019).

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And companies are getting on board. Welch subsequently pronounced that “on the face of it, shareholder value is the dumbest idea in the world” in an interview with the Financial Times (2009). Recently a group of 181 influential CEOs of US companies, including of major listed businesses such as Exxon Mobil, General Motors and Goldman Sachs, signed an updated document from the Business Roundtable (2019) entitled ‘Statement on the Purpose of a Corporation’, committing to “lead their companies for the benefit of all stakeholders – customers, employees, suppliers, communities and shareholders”. Investors, too, are waking up to the idea; in 2018 the world’s largest asset manager, Blackrock’s, CEO wrote to other CEOs encouraging them to instil a sense of social purpose in their businesses, without which “no company, either public or private, can achieve its full potential” (Fink 2018). The most recent Edelman Investor Trust Barometer (2019:a), with respondents collectively managing US$9 trillion, found 84% of respondents agreed that SVM cannot continue to be the main objective of the corporation and that executives must strike a wider balance. COVID-19 is a major test for many companies in how they balance actions to satisfy short-term market pressures with the interests of those stakeholders required for them thrive in the future; “the way large companies respond to this crisis is a defining moment that will be remembered for decades.” (Kramer 2020).

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So if not SVM, what should the purpose of the listed corporation be which is, after all, accountable to its shareholders who provide it capital and whose wealth is exposed to its performance? This paper develops a model of how a wider purpose (herein corporate purpose) can function in the mainstream equity markets and makes recommendations for companies and investors in progressing the concept together.

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The research is split into four parts. First, I conduct a literature review to explore the history of corporate purpose, the legal debates of a purpose wider than SVM and related economic, market and company performance aspects. Second, to take a snapshot of the current market interpretation of the concept and examine its potential use for investors I review the purpose statements issued by the constituents of the FTSE 350 ex-Investment Trusts. Third, informed by the insights from the literature review and current applications I undertake in-depth interviews with leading investors and executives about the concept and how it has benefitted them in running businesses and identifying investment opportunities. Consequently, I develop a model for corporate purpose in the equity markets and lastly make recommendations on key actions for companies and investors to take it forward.

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2 - Literature review

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This section provides an overview of the literature related to corporate purpose and its development, with a specific focus on the historical, legal, economic and financial aspects.

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2.1 - The historical context of corporate purpose

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In order to discuss corporate purpose today it is first important to understand the evolution of the concept. Already the subject of sections of entire books, this part covers only the key milestones.

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2.1.1 - The prior 4,000 years of corporate purpose

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Over its 4,000 years in existence the business enterprise has had a strong sense of social purpose (The British Academy 2019a) based on the idea that legal personhood was bestowed upon the corporation in exchange for societal contribution. Its foundations lie in the provision of public services and administration, academia and religion. This evolved over time into business activities, taking on the capital raising attributes of partnerships to fund trading companies, with the first joint stock company in England being established in 1553. This evolution resulted in organisations that were effectively public bodies with social purposes adopting funding structures originally intended for small exploration and trade projects that did not need to be concerned with their position in society – a conflict that persists today (Mayer 2018).

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The direct connection between social purpose and the corporation was formally broken in the 19th century by general incorporation laws which limited companies’ liabilities and allowed them to incorporate without permission from Parliament (Davoudi et al 2018). Many companies at the time retained social purposes voluntarily; however at the beginning of the 20th century, as public funding markets grew, “we find the corporation progressively losing its public sense of purpose as its investment tail increasingly wags the administrative dog” (Mayer 2018:82). 

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2.1.2 - The evolution to SVM

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At the beginning of the 20th century academic interest in the differences between large, complicated corporations and small, owner-managed businesses that dominated increased (Palladino 2019). In 1932 Berle and Means published ‘The Modern Corporation and Private Property’ where they detailed the problem of the separation of ownership and control and argued managers should be required to create value for shareholders while “balancing a variety of claims by various groups in the community and assigning to each a portion of the income stream on the basis of public policy rather than private cupidity” (p.312). There followed debate between Berle and Dodd in which Dodd (1932) argued managers are trustees of a company not its shareholders, and must operate in the interests of multiple stakeholders, including customers and the public.  The modern legal aspects are considered later in this paper.

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As the significance of manager-run-but-not-owned corporations grew in the 1950s and ‘60s, decisions taken by managers were counterbalanced by labour unions, and while shareholders took dividends they had little influence over how or why the corporation was run (Palladino 2019). During the 1960s however the shareholder focus argument from the ‘30s was taken forward with a twist, this time as economic efficiency. In the interests of finding a measure of efficiency, Henry Manne concluded shareholder primacy must result in profit maximisation, which in turn is incompatible with other stakeholders’ interests (Sneirson 2019).

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The “Chicago School”, connected to Milton Friedman, believed that solving social problems must be government’s responsibility, otherwise managers allocate assets to causes outside of their expertise, with this inefficient use of wealth ultimately being to society’s detriment (Pfarrer 2010). In 1970 Friedman published ‘The social responsibility of the business is to increase its profits’, explaining that an executive’s responsibility to the company’s shareholders, who he equates with its owners, “is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to their basic rules of the society, both those embodied in law and those embodied in ethical custom” (Friedman 1970:122). While the social rules and customs aspects are often missed from this quote, this marked the beginning of a mainstream discussion of SVM as the purpose of the corporation.

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As business schools adopted a more theoretical approach to research (Fourcade & Khurana 2011) agency theory ensued in the mid-‘70s from the idea that humans are self-interested, and so when a manager (the agent) is entrusted with running some else’s (the principal) assets they must be incentivised to pursue their interests. In the case of the public corporation this equated to maximising shareholder value, with any other result leading to a reduction in social wealth through the imposition of “agency costs” (Jensen & Meckling 1976). Agency theory has led to the board and management incentive structures widely seen today at listed businesses (Pfarrer 2010).

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Extending this debate, Hart and Zingales (2017) argue that if shareholders themselves are socially-minded then shareholder value is not equivalent to market value, and that managers should operate according to the social preferences of their investors. While theoretically neat, practically this is complicated, particularly for a listed business, as shareholders are not a homogenous group and are likely to have different and possibly conflicting priorities themselves (Stout 2012, The British Academy 2019a). Maximising market value has therefore continued to be the easiest shorthand for promoting shareholders’ interests.

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In the 1980s the SVM mantra moved into the business world. This was partly due to increased distribution of profits causing a greater reliance on the capital markets (Sneirson 2019), increased M&A activity and the growth in equity incentives for executives stemming from agency theory (Stout 2012, Fourcade & Khurana 2011). Welch’s 1981 speech about how he intended to reinvigorate GE cemented SVM into management thinking, although he subsequently decried the interpretations of his comments as false denouncing SVM as “the dumbest idea in the world” (Financial Times 2009). According to Gordon (2007), “by the end of the 1990s, the triumph of shareholder value was nearly complete” (p.1,530).

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2.1.3 - Approaches to considering other stakeholders' interests

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While SVM remains the “de facto expression of corporate purpose and guide for decision making for most publicly owned firms” (Salter 2019:2), that business has no other stakeholder responsibilities is anything but accepted by all. Corporate social responsibility (CSR) has been in corporate parlance for a long time. While it has many interpretations, it’s often-recognised origin (Acquier et al 2011) is from Bowen (1953) who described it as “the obligations of business to pursue those policies, to make those decisions or to follow those lines of action which are desirable in terms of the objectives and values of our society” (p.6). The concept has evolved; Moon (2014) describes many of the definitions as incorporating business’s responsibilities to and for society, as well as its behaviour towards it. While CSR’s foundations are economic, i.e. being profitable, other aspects relate to legal, ethical and philanthropic responsibilities (Carroll 2016) with a thread of ethics throughout. Pursuing those other activities towards stakeholders that extend beyond minimum legal requirements is clearly contrary to Friedman’s view (Smith et al 2016); unsurprisingly, he dismissed CSR as a “fundamentally subversive doctrine” (1970:126).

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Environmental, Social and Governance (ESG) is another broadly promulgated concept that relates to a company’s interactions with its stakeholders. In investment the UN-backed Principles for Responsible Investment (PRI) - an independent body that promotes responsible investment with 2,372 signatories managing over US$86tr (PRI 2019) - defines ESG integration as “the analysis of all material factors in investment analysis and investment decisions, including environmental, social and governance… factors” (PRI 2018). It therefore takes a less discretionary and more business-relevant approach than CSR by focussing only on issues that are pertinent to the company’s success.

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This can be equated with the concept of enlightened shareholder value (ESV), whereby the interests of other stakeholders are considered with the end objective of long-term shareholder value (Millon 2010). This is also seen in the views of Alfred Rappaport who, while often quoted as the father of the shareholder value movement, determined that “a value-creating company benefits not only its shareholders but the value of all other stakeholder claims… enlightened self-interest dictates that shareholders and other stakeholders actively engage in a partnership of value creation” (1998:29). Bebchuk and Tallarita (2020) argue that this in fact is compatible with SVM: “Friedman would not have a problem with any choices made under enlightened shareholder value, as they would also be choices required by shareholder value” (p.12).

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ESG as a lens for strategy is not clear, however. Porter et al (2019) found that many constituents of Fortune Magazine’s Change the World list, comprising companies that “have had a positive social impact through activities that are part of their core business strategy”, did not score top ESG ratings in their industries but outperformed a global stock index by on average 3.9% in the following year. The authors find a siloed approach to ESG, which tends to be focussed in the main on risk management (CFA Institute 2019) and managing the costs of business borne by society (externalities), misses the strategic aspects in seeing purpose as core to a company’s competitiveness. While others acknowledge that ESG can present opportunities (PRI 2018), these usually arise as a corollary of a company’s strategy rather than guiding it – only 2.3% of the US$30.7 trillion of global sustainable assets under management self-report as adopting sustainability themed or impact/community approaches (GSIA 2019).

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In 2011 Porter and Kramer introduced their concept of creating shared value (CSV), acknowledging that social needs define markets. Importantly, shared value doesn’t see business and society in a struggle of trade-offs but instead is “about expanding the total pool of economic and social value” (p.5) from which many can benefit. Opportunities include reconceiving products and markets and redefining productivity in the value chain. Unique to each company, CSV is therefore integral to competitive advantage and profitability by leveraging “the unique resources and expertise of the company to create economic value by creating social value” (p.16). CSV sees creating societal value as a way of generating economic value.

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Edmans (2018) creates the distinction between companies with a “pie-splitting”, i.e. a fixed amount of value with a tussle between society and investors to capture it, and a “pie-growing” mentality whereby companies create value for investors by adding value to wider society. He describes a company’s purpose as the value it creates for society, with the two key dimensions being who a company exists for and why it exists. The Purposeful Company, on whose Steering Group Edmans sits, adds another dimension of how a company operates to achieve long-term, sustainable value and notes that “investors and boards should recognise that making competitive returns for shareholders is essential to a company’s success” (2018:1).

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Extending beyond this concept comes what is sometimes incorrectly referred to as stakeholder capitalism. The assumption is that stakeholder priorities are put above those of investors, or even that investor interests are disregarded. In reality this approach tends to be more akin to CSV, with the father of the theory of stakeholder management - R. Edward Freeman - clarifying that “shareholders are stakeholders, and the whole point is that stakeholder interests have to move in the same general direction over time” (2004:231). Theories that disregard investors are more applicable to public services rather than equity markets and so have not been a focus of this research.

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From this a spectrum of approaches emerges. It begins with pure SVM. It then moves to CSR, discretionary initiatives that benefit society but with little or no strategic logic, to ESG and ESV where social and environmental issues are considered in the interests of the company but mostly focussed on risk exposure as a consequence of a company’s strategy. This moves to CSV, that addresses a company’s relationship with society as a strategic question and recognises the opportunity in creating value more widely in order to create shareholder returns, and finally a sole strategic focus on stakeholders with investor interests secondary or absent altogether.

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2.1.4 - Current definitions of corporate purpose

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An increasing number of regulators, CEOs, stakeholder groups and investors are calling for a different kind of corporate aim, one which sees companies as having a social purpose. These tend to be centred around a CSV approach, with varying emphasis on shareholders. Some worry that statements of purpose risk being “empty rhetoric” (Winston 2019) and “a PR move rather than a harbinger of change” due to the lack of detail around how to balance stakeholder and shareholder interests (Bebchuck et al 2020) and the breadth of definitions. However, regulations too are shifting in favour of requiring companies to take other stakeholders’ interests into consideration, which are further explored later in this paper. A selection of current approaches to and definitions of corporate purpose are included in table 1.

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Table 1 - A selection of definitions of corporate purpose

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2.2 - The legal aspects of corporate purpose

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With the evolving definitions of corporate purpose, an important question relates to whether there are legal obligations requiring companies and directors to pursue SVM.

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This is pertinent given that in no known law do shareholders own corporations; by treating corporations as legal persons they cannot be owned by anyone else and have their own rights to property and to contract with others (Veldman et al 2016). Kay (1996) highlights the different rights of ownership attributable to a share in a company and an object; shares are contracts that offer limited rights to owners that don’t include proprietary rights to a company’s assets (as Stout [2012] highlights, an Apple shareholder cannot walk in and help themselves from an Apple Store). The UK’s House of Lords confirmed that “shareholders are not, in the eye of the law, part owners of the undertaking” (House of Lords, 2003). Veldman et al (2016) determine that “claims to shareholder primacy - and associated claims to corporate control and to corporate value for shareholders - are unfounded in terms of their theoretical underpinning in law” (p.22)

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2.2.1 - The UK Companies Act

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The most recent developments to UK Company law regarding directors’ duties stem from the Company Law Review (CLR) launched in 1998 (DTI 1998). This involved consideration of directors’ duties, which at the time had been laid out as fiduciary to the company, exercising due care and skill. The Companies Act (1985) also made specific requirements to consider the interests of the company’s employees.

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A key question for CLR was “in whose interests should a company’s affairs be conducted?” (Collinson et al, 2012). In particular, the review noted “A wider issue … is whether directors’ duty to act in the interests of their company should be interpreted as meaning simply that they should act in the interests of the shareholders, or whether they should also take account of other interests, such as those of employees, creditors, customers, the environment, and the wider community.” (DTI 1998)

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CLR considered two different approaches to the future scope of UK corporate law: an ESV model and a “pluralist” approach (CLR 1999). The pluralist approach extended accountabilities of companies and directors from shareholders to a wider set of stakeholders, implying that companies have a duty to pursue a wider set of policy aims over and above their own objectives (Millon, 2010). Ultimately CLR concluded that the pluralist view required accountability to groups who had no ownership interest in the company, and shareholder accountability already existed (Tsagas, 2017). The result was a continued focus on shareholders, with the explicit mention of a range of other factors relevant for consideration in promoting the success of the company.

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S.172(1) is not without its critics. While it provides further guidance regarding directors’ duties under an ESV approach, the legislation doesn’t define “have regard to” and doesn’t deal with how to prioritise the additional interests (Davies, 2007). This opacity offers significant leeway in interpretation and application. Tsagas (2017) considers that in 1985 form the Companies Act did not preclude taking other stakeholders’ interests into account and, given the subjectivity afforded by Section 172(1), the 2006 version is unlikely to change behaviours from SVM absent some additional enforcement powers for non-shareholder members (Keay 2007, Lynch 2012, Tsagas 2017). The wording in S.172(1) was described as “a fudge” by some CLR participants (Collinson et al 2012).

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While sub-section 1 therefore is open to a range of interpretations, it is also important to consider sub-section 2. This allows for companies to put an alternative purpose at the centre of their directors’ duties (The British Academy 2019b) and legal documents. For example, Anglian Water amended its articles of association to include its purpose in order to “formally enshrine public interest within the constitutional make-up of the business”:

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This requires agreement of the shareholders than an alternative purpose may be pursued, which Marin (2013) concludes effectively perpetuates SVM as they would likely only agree to alternative purposes that will positively impact their wealth. However, as demonstrated by Anglian Water, this can also formalise the intentions of the company towards the other stakeholders and is significantly more binding on the company, addressing some of the concerns about the lack of prescription in S.172(1) and adopting more of a CSV approach.

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Indeed, several alternative profit-seeking corporate forms exist formalising corporate purpose, collectively known as Public Benefit Corporations (Levillain et al 2019). These generally share three common features: in addition to profit seeking they commit to a social or environmental legally enforceable purpose, their directors are obliged to pursue that purpose, exempting them from pursuing profits alone, and they commit to report against it and be held accountable for its delivery. While several of these concepts have originated in the USA (Serafeim et al 2017), Section 172(2) would appear to support them in a UK context, and indeed Community Interest Companies - for-profit companies which operate to benefit society and have certain operating restrictions (BEIS 2016) - have existed since 2016.

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Businesses can also be externally certified as ‘B Corps’ by “updating their articles of incorporation, reincorporating as benefit companies, or making other structural changes” (B Corporation 2020:a) to show that they use “profits and growth as a means to a greater end: positive impact for their employees, communities and the environment” (B Corporation 2020:b). There are 3,243 B Corps globally in 71 countries across 150 industries, many of which are subsidiaries of public companies (including AB-Inbev, Coca-Cola, Danone, OppenheimerFunds, P&G, The Gap and Unliever [Lift Economy 2019]) and some are publicly traded themselves, such as Natura (B Corporation 2020:c).

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2.2.2 - The UK Corporate Governance Code

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While the Companies Act places duties on directors, the 2018 UK Corporate Governance Code (FRC, 2018) is the latest iteration of governance best practice that companies with a Premium Listing in the UK market must report against. Previous iterations of the Code had a shareholder-focussed orientation (Meyer 2018), however the most recent version places more emphasis on wider stakeholders and purpose.

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This represents a shift in UK soft law to support an ESV and beyond approach, and provides more clarity on the consideration of a wider set of interests. Principle B provides the foundation requirement for the purpose statements which are assessed as part of this research. While it is early to see how much influence these new Principles will have, historical compliance with the UK Corporate Governance Code has been high, with around 70% of large companies adhering to all the provisions (FRC 2020).

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2.2.3 - The future

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Following the historical context of the UK’s shareholder-oriented company law regime and its socio-political climate Moore (2018) concludes that SVM remains contingent on social acceptance, which is not a foregone conclusion. Indeed, the 2018 Code requirement of disclosure on how directors have had regard to S.172 should shine additional light on how directors have considered the interests of wider stakeholders in reaching major decisions (EY, 2019). The legal basis in the future is therefore not fixed in stone, suggesting if the “fudge” continues to prove unsatisfactory the requirements may yet evolve.

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Some expect the focus on de-emphasising shareholder primacy and on enhancing the visibility of ESG to be two key trends for the ongoing development of governance practices as well (e.g. O’Kelley et al 2018), with increasing calls for alternative governance structures to allow for corporate purpose to be more easily and readily practiced and accounted for (e.g. Levillain & Segrestin 2019, Levillain et al 2019, Mayer 2018). In some cases these recommendations contradict the agency models widely entrenched in today’s corporate governance structures. For example, Veldman et al (2016) conclude that to enable companies to protect their purpose they should adopt dual-class share structures. However this tends to be frowned upon by investors; the International Corporate Governance Network’s Global Governance Principles state “divergence from a ‘one-share,-one-vote’ standard, which gives certain shareholders power or control disproportionate to their economic interests should be avoided” (ICGN, 2019:29). That being said, Stout (2012) highlights that investors still buy equity in companies with dual-class stock, suggesting that they can be content with giving up these rights – the advisory firm Stout (unknown) finds that non-voting stock only trades at a discount of between 3-5% to account for the lack of voting rights. The market might therefore be more willing to accept these structures, if a sound rationale can be provided, than it often admits.

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2.3 - The economic and performance aspects of corporate purpose

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Given the evolving theoretical and legal approaches beyond SVM, it is necessary to consider the economic and company performance implications.

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2.3.1 - Economic implications

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The benefits to the economy of SVM divide opinion. Centuries of economic and financial theory suggest that social welfare is maximised when firms maximise their value, absent externalities or monopoly power (Jensen 2001). These are large caveats.

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Morck (2014) argues social welfare maximisation can only be achieved when capital is allocated to projects that maximise shareholder value subject to achieving acceptable success of societal purposes, which extends beyond internalising costs borne by society. This view is reflected by Salter (2019), who argues for moral and economic principles and the concept of reciprocal justice as the foundation for corporate purpose to address business’s social disengagement. Veldman et al (2016) point to several negative economic consequences of SVM, including lower capacity for companies to play a positive societal role.

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The most common economic criticism of SVM lies in inequality. While agency theory might make for sound theory, it is based on assumptions such as perfectly efficient labour markets which aren’t observed in reality and result in a misunderstanding of the extent of the risks borne by principals and agents (Ghoshal 2005). Veldman et al (2016) highlight the consequences of this in the reallocation of risk and rewards across the value chain as a result of SVM, transferring the share of value from those involved in labour to owners. Lazonick (2014) points to the widening gap in the US between productivity growth and wages since the mid-70s, implying labour is taking an ever decreasing share of the spoils, and shows how dividends and share buybacks account for an increasing amount of the proceeds of profits meaning less money left over for productive re-investment and job creation. Montier (2014) highlights the counter-productive implication of this redistribution of wealth given top earners’ lower propensity to spend. Elsewhere describing inequality as a result of SVM, Collinson et al (2011) detail the significant improvements to life expectancy, mental health, crime and other major social welfare measures if levels of income inequality in the UK and the USA were more aligned with that of “social market countries” such as Japan and the Nordics.

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While mindful of the argumentum ad ignorantiam fallacy, the paucity of research results in support of “the economic benefits of shareholder primacy” and “the economic benefits of shareholder value maximisation” and the plenitude highlighting the contrary is notable.

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2.3.2 - Market short-termism

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While a whole topic for research itself, market short-termism is another criticism of SVM. Much has been covered by Alex Edmans, who in 2009 wrote “Many academics and practitioners believe that myopia is a first-order problem faced by the modern firm” and has subsequently covered many structural issues in depth. In 2011 a UK government report into the activity of equity markets and its impact on UK business concluded that “short-termism is a problem in UK equity markets, and that the principal causes are the decline of trust and the misalignment of incentives throughout the equity investment chain” (Kay 2012:9), and made wide-ranging recommendations for regulatory, behavioural and cultural change to restore trust in the equity investment chain. This can be observed in the significant shortening of average holding periods since the time of the introduction of SVM in the 70s, which implies that investors are taking a shorter-term view on the market (Heugh & Fox 2018).

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Figure 1: NYSE (left) and FTSE (right) average holding periods

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Source: UK Investor Magazine (2018)

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Research by Barton et al (2016) found 65% of board members and executives agreed that pressure to deliver short-term results had increased. From interviews with more than 400 executives, Graham et al (2006) found strikingly that a significant majority would sacrifice long-term corporate value, including by deferring NPV positive projects and cutting R&D expenditure, in order to hit market expectations or smooth results. While Thakkor et al (2013) note that “principals who pursue higher purpose invest more capital” (p.3), Ayres (2017) shows over the previous decade an increase in profits accompanied by a decrease in investment.

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Rappaport (2011) argues that this behaviour is contrary to creating shareholder value, which entails the investment of resources to maximise the present value of future cash flows and includes maintaining strong relationships with key stakeholders. Some (e.g. Roe 2013) suggest the cause is matters internal to the firm (including executive pay structures, themselves a product of SVM). If this were the case, they would be within an executive’s grasp to solve if desired. However, Black Sun (2019) that found 71% of executives would like to take a longer-term view, with 82% believing this would improve the organisation’s ability to create long-term value. The benefits of a longer-term approach were explored by Barton et al (2016). In a study looking at the impacts of different decision-making timeframes they found that of the 37% of executives reporting long-termism to be effectively implemented in their corporate cultures, 88% agreed that it “has a positive effect on financial performance” (p.7). The behavioural differences in responses to short-term earnings pressure at these companies is striking.

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Figure 2: Likelihood of companies taking various actions if quarterly earnings might be missed

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Source: Adapted from Barton et al (2016)

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In response to undesired short-termist pressures from the market several executives have called for removal of quarterly earnings guidance, including in 2018 the CEO of JP Morgan and Warren Buffett, CEO of Berkshire Hathaway and renowned value investor (WSJ 2018). On his first day as CEO of Unilever in 2009, Paul Polman scrapped it (HBR 2012).

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Others appear to have left the public markets altogether; the number of listed companies in the UK decreased by over 30% between 1980 and 2014 (World Bank 2019). Asker et al (2014) compared the investment behaviour of publicly listed companies and private peers in the US with the hypothesis that the latter would be subject to fewer short-term pressures. Their research found that public companies invest significantly less and take advantage of investment opportunities less than their private peers.

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Figure 3: Number of public companies in the UK, 1980-2014

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Source: World Bank (2019)

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However, others disagree that short-termism is a problem at all. Kaplan (2017) argues that while criticisms of short-termism are oft-repeated, the negative impacts in the US of short-termism have not been shown in corporate profits or valuations. Bonnet (2018) finds also that investment is increasing at some US companies, particularly those with the highest valuations. Roe (2013) points to highly valued stocks comprising barely a business, suggesting markets can also be excessively long-term and cause bubbles. This appears to be at odds with the executive experience described previously.

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2.3.3 - Stakeholder relations and company performance

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Much research has been undertaken showing how relationships with stakeholders positively impacts performance, which is too large a subject to be covered in detail here. A review by A Blueprint for Better Business (2015) finds many advantages of following its Five Principles of a Purpose Driven Business for a company. These include better relationships with staff and higher employee performance, improved customer and supplier loyalty and advocacy, better reputation and a more secure licence to operate. Overall, the authors find many studies that show correlation between stakeholder relations and financial performance. An overview of some of that research is included in table 2.

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Table 2: Select performance research into following the Five Principles of a Purpose Driven Business

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Source: adapted from from Blueprint for Better Business (2015)

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Consequentially, Cheng et al (2014) found that companies with better CSR performance have better access to finance. 90% of the studies that Clark et al (2014) reviewed found that good sustainability standards lower the cost of capital for companies. In a related study, Ioannou and Serafeim (2015) examine whether equity analysts’ perceptions of CSR as an agency issue could lead to less positive stock market recommendations. They observed this historically but also note an increasingly positive view from equity analysts on CSR performance, and that recently the highest rated analysts are responsible for the increasingly positive relationship between CSR performance and recommendations. This implies an increasingly business-relevant, material approach to CSR.

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2.3.4 - ESG and company performance

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Many studies show a positive relationship between a company’s ESG profile and its performance. Clark et al’s (2014) meta-study found that 88% of research shows that good ESG practices result in better operational performance and 80% of studies show equity market values are positively impacted by sustainability performance. Research has also shown a small positive relationship between ESG and corporate credit returns (Desclee et al 2016). Giese and Lee (2019) find the strongest statistical confidence in the ESG characteristics of firms reducing their risk, in particular tail risk exposure. Khan et al (2016) found that firms that perform strongly on sustainability issues that are material to them perform better than those that don’t; those that rated well on material issues and poorly on immaterial issues performed the best.

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However, not all research is conclusive. Dimson et al (2020) criticise some approaches to research on the link between sustainability and corporate performance, suggesting that meta-studies they assessed don’t weight the quality of the underlying research and combine market and accounting measures. The authors conclude “we cannot say whether firms that do good do well, or whether firms that do well do good” (p.13). Around the same time Vishwanathan et al (2020) published their meta-analysis to identify the mechanisms of “strategic CSR”, whereby the benefits of CSR can be directly linked to firm performance. Specifically they looked at firm reputation, stakeholder reciprocation, firm risk and innovation capacity and found that all could be statistically linked to firm value (albeit to varying degrees) but that together they only explain 20% of the relationship between CSR and firm performance.