The Shifting Sands of Corporate Purpose
Corporate purpose is the reason a company exists, and traditionally, purpose has been linked to profit. The landmark case of the Michigan Supreme Court, presiding over Dodge V/S Ford Motor Co, said, “A business corporation is organised and carried on for the profits of its shareholders,” thus affirming the principle of “shareholder primacy” in 1919. The increasing impact of corporate actions on the socio-economic fabric of the developed economy slowly saw the dilution of the “shareholder primacy” principle, and the corporate purpose got extended to include the interests of stakeholders, e.g., employees, consumers, society, etc. In 1957, Cark Kaysen 2, a Harward economist, wrote that “management should be responsible to stockholders, employees, customers, the general public, and perhaps most important, to the firm itself as an institution.” Similar views were echoed by Peter Drucker, who said that management should be responsible for the corporation itself. This was a major shift that occurred as societies evolved. There was and is a clear growing expectation for corporations to go beyond a profit motive and deliver on the larger requirements of society at the time.
In recent times, the best definition of ‘Corporate Purpose’ has been given by Colin Mayer as “producing profitable solutions for the problems of the people and planet, and not profiting from creating problems.” This is a marked shift from “maximising profits” to “value creation for stakeholders.” If we analyse this further, “producing profitable solutions for the problems of the people and planet” implies aligning sustainability practices and profit motives for long-term value creation for business, society, and the environment. “profiting from creating problems for people and the planet” indicates dissension between sustainability practices and profit motives that is potentially destructive for long-term value creation for business, society, and the environment. The purpose of the company is the key driver of corporate actions and takes primacy over everything else. The emphasis on sustainability may not always support the attainment of corporate purpose. Thus, corporate Boards need to make a clear choice in this regard. Companies that make investments in sustainability while failing to produce profitable solutions for people and the planet are also failing in purpose. Companies that are profitable while disregarding the environment and society are focused merely on profits and not on purpose. Such companies are unlikely to be able to sustain themselves in the long run. The qualitative output of corporate purpose lies in the quality of corporate governance. Therefore, it can be argued that the essence of sustainability lies in the recognition of a complex link between sustainability practices and corporate governance. Poorly governed companies cannot be sustainable.
Moving towards Accountability
Corporate purpose statements often remain pompous, aspirational, and self-serving. There is little or no accountability towards them except for the corporations that consider the corporate purpose core to their business. This leaves considerable latitude in interpretation, accountability, and performance. This is slowly beginning to change. In an important silent development, countries around the world are debating attaching legal status to how companies define and integrate corporate purpose. French reform legislation passed in 2019 opened the possibility for all companies to voluntarily name a raison d’être in their articles of association. Similarly, the 2018 UK Corporate Governance Code recommends that the board specify the company’s purpose.
In a world unifying in its efforts to respond to climate change in the larger existential interest of life on our planet, options for discretionary action by businesses are only shrinking. Meaningful and purposeful actions are the way forward.
Capt. Tapas Majumdar (RETD) is the founder and Director of The Sustainability Practitioners, and an Independent Director with Mcon Rasayan India Limited (a listed entity). His expertise is in “building and connecting strong sustainability practices to strong financial and environmental outcomes for clients.” He enables companies to build their sustainability practices and connect them to financial and environmental outcomes. He is 6 Sigma qualified, a published author and a life member of the Institute of Directors, the Indian Institute of Corporate Affairs and Mentor My Board. He can be reached at email@example.com.