While the corporate purpose debate is certainly not new, the most recent point of ignition has been the 2019 statement from the Business Roundtable about the purpose of the corporation. Parallelly, the UK corporate governance code has been amended to reflect new expectations from companies; and in Australia, the ASX Corporate Governance Principles were amended with similar themes. In a forthcoming article, I have compared the recent edition of the corporate purpose debate in the US, UK and Australia and argue that rather than creating a big shift to stakeholder-centric governance, these developments, at least in the UK and Australia, signify a focus on corporate culture and the relationship of company management with employees.
In the US, as Bebchuk and Tallirata and some others rightly argue, the statement from the Business Roundtable does not reflect a genuine change of approach. Bebchuk and Tallarita found that the companies whose CEOs were signatories to the Business Roundtable’s 2019 statement on corporate purpose had not amended their corporate governance guidelines to include stakeholder welfare. On the contrary, they find that many of those companies’ corporate governance guidelines contain strong endorsements of the shareholder primacy principle. However, in a recent post, Medland and Taylor argued that the statement should not be dismissed but should rather be seen as a recognition from businesses that their behavior is under public scrutiny and evaluation. Even if this is the case, the Business roundtable statement seems to be a recognition in words alone. Since the authors of the statement are the CEOs of companies, such recognition would only be useful if those companies backed up the statement with corresponding actions.
UK and Australia have more interesting developments on corporate purpose. For one thing, these developments have been initiated by regulatory bodies rather than CEOs making a statement. For another, they seem to emphasize internal corporate culture which is then expected to also flow into how companies interact with external stakeholders.
The UK’s Corporate Governance Code, 2018 (“Code”) embraced the idea of corporate purpose. It says that the board is responsible for setting the company’s purpose. Although purpose is not defined in the Code, the role of the board has been defined broadly to include “promot[ing] the long-term sustainable success of the company, generating value for shareholders and contributing to wider society”. While no hierarchy is specified, shareholder value is mentioned before the much vaguer concept of contributing to society. So, corporate law has not been shaken out of its mould. However, the Code then stipulates that “the board should establish the company’s purpose, values and strategy, and satisfy itself that these and its culture are aligned” and that “all directors must act with integrity, lead by example and promote the desired culture.” “Culture” is not defined, but the Code goes on to say that “the board should ensure that workforce policies and practices are consistent with the company’s values and support its long-term sustainable success” and that “the workforce should be able to raise any matters of concern”. Thus, corporate purpose should not only be a goal with regard to the company’s external stakeholders but also be relevant to how the company’s workforce operates at various levels and how employees are taken care of.
Australia has had similar developments. The 4th edition of the ASX Corporate Governance Principles and Recommendations does not mention the phrase corporate purpose. However, Principle 3.1 says that a listed company should articulate and disclose its values. Further, the commentary to Principle 3.1 echoes some of the ides regarding corporate purpose in the UK Code. It says:
A listed entity’s values are the guiding principles and norms that define what type of organisation it aspires to be and what it requires from its directors, senior executives and employees to achieve that aspiration. Values create a link between the entity’s purpose (why it exists) and its strategic goals (what it hopes to do) by expressing the standards and behaviours it expects from its directors, senior executives and employees to fulfil its purpose and meet its goals (how it will do it).
Thus, corporate purpose is not only the reason for the existence of the company but also its goals; and then achieving those goals in accordance with ethical standards the company sets for its senior executives and employees.
Commentators in the US are right to conclude that, since the law and incentives that company boards and executives are subject to have not changed, the Business Roundtable statement by itself cannot transform company law. However, in the UK and Australia, there is a more esoteric idea that is part of the corporate purpose developments. This idea is focused on a company’s purpose, not only in terms of why it exists but also of how it conducts itself both externally and internally. Rather than simply saying that stakeholder interests should be prioritised, there are specific exhortations about culture and values. The UK Code and Australia’s ASX principles are both soft law instruments that require companies to undertake some soul-searching to comply with the Code and the principles, and then make relevant disclosures. This process will be useful if companies understand that complying with these soft law mechanisms and making disclosures are not an end in itself but rather a means to an end. That end would be the prevention of egregious scandals which is ultimately in the interests of both shareholders and other stakeholders.