Corporate purpose is the reason a company exists,1 and traditionally purpose is related to profit. But the purpose of business and finance is changing.
An increasing number of policy makers, business leaders and academics are now embracing the idea that the purpose of a business is to create long-term value for all stakeholders, rather than simply maximise returns for shareholders. There are strong calls, especially since the pandemic, for companies to embed corporate purpose by making profit through solving the world’s problems and refraining from doing harm.2
Some academics acknowledge that investors have a role in scrutinising investments and determining whether investee firms are fulfilling their corporate purpose. Academics and practitioners indicate that investors should use stewardship activities to engage in dialogue with investee companies to hold them accountable.3
However, views around defining corporate purpose, and how best to approach it, still vary widely. As outlined in the 2021-2024 strategy, the PRI will prioritise work on corporate purpose, seeking to outline investors’ role and help them take action. As a first step, in this article, we summarise the findings of our review of the corporate purpose landscape and discuss the following topics:
- What is corporate purpose?
- Governance and implementation frameworks
- How to measure corporate purpose
What is corporate purpose?
Corporate purpose is defined by Colin Mayer4 as “producing profitable solutions for the problems of the people and planet, and not profiting from creating problems”. This definition is adopted by the World Economic Forum (WEF), the Enacting Purpose Initiative and the British Academy, among other prominent organisations.
The terms ‘corporate purpose’ and ‘stakeholder capitalism’ are often used interchangeably. However, the WEF defines stakeholder capitalism as a form of capitalism in which companies seek to create long-term value by aligning themselves to the United Nations’ Sustainable Development Goals, delivering value for both shareholders and stakeholders.5 We refer here to corporate purpose as a means for companies to progress towards stakeholder capitalism, as defined by the WEF.
Advocates of corporate purpose6 argue that businesses have a collective economic interest in solving public problems – businesses, they say, have both the responsibility and better capability than governments to do this. Martin Lipton and Alex Edmans, two well-known academics and authors on the subject, also advocate for greater investor involvement in delivering purpose. Lipton and his co-authors outline an alternative framework for voluntary collaboration among shareholders, corporations, and stakeholders to create long-term value, arguing this shareholder engagement replaces the need for government oversight. Edmans and others echo similar thoughts, that there are externalities that can’t be quantified and therefore can’t be regulated.7
Proponents claim that while pursuing profits is still fundamental to a company, they must be made via solving problems and avoiding harms that are relevant to their business. Solely focusing on profits or addressing sustainability objectives that do not fall inside of the company’s remit, means the company may lose out on long-term economic value that corporate purpose can provide.
However, causal evidence demonstrating improved profits due to a company’s pursuit of purpose remains scarce. Critics8 argue a focus on purpose other than profit is economically unsustainable, businesses are not responsible for public problems and implementation is infeasible. Milton Friedman’s shareholder primacy theory – that maximising shareholder value is the most efficient operating principle – remains prevalent among critics.
Governance and implementation frameworks
Purpose should create long-term value for both stakeholders and shareholders. However, having diverse stakeholders makes it difficult for management to prioritise and for the board to assess executives’ performance if there is not one clear goal, other than profits. This lack of clarity can lead to weakened corporate governance.
Therefore, it is important to differentiate between purpose (why a company exists), mission (what the company does), value (how the company achieves its mission) and vision (where the company wants to be in the future).9
Boards have traditionally been held accountable for meeting financial goals in shareholders’ interests. The British Academy suggests that a purpose-led strategy also requires directors to be held accountable for defining and setting the company’s purpose.10 The UK Financial Reporting Council revised the Corporate Governance Code to emphasise that boards should set companies’ purpose.
In contrast, some practitioners11 recommend executive management to set purpose instead of the board, since the former are responsible day to day and have greater access to information. Another proposed alternative is the co-creation of corporate purpose between the executive team and board.12
Corporate purpose frameworks
Some examples of corporate purpose frameworks are below:
- The British Academy’s eight principles for purposeful business, put together by a group of business leaders, government officials and leading academics, is amongst the most extensive research currently available on corporate purpose. The principles provide a framework for implementation, including a call for revised legislation, so all businesses are aligned with long-term value creation via management incentives and other accountability mechanisms.
- The Enacting Purpose Initiative’s framework, SCORE, enables investors and boards to work together to assess corporate purpose and embed it into governance structures.
- In the US, certain companies are structured as a public benefit corporation (PBC), whereby the board of directors is required to uphold its public and commercial objectives and release a public report of their social and environmental performance, benchmarked against independent standards.
- B Lab, a non-profit organisation, certifies B Corporations, a voluntary certification for businesses globally that meet the highest standards of social and environmental performance, public transparency, and legal accountability to balance profit and purpose.
- In 2021, a group of academics came up with a new Integrated Framework13, endorsed by the British Academy, to measure purpose. It recommended company boards to define and set a purpose, establish what assets are material to fulfilling it and how to assess their purpose fulfillment.
There are also several amendments to laws in developed countries that have been proposed or implemented to enable purposeful businesses. For example, the 2019 French PACTE law introduced a legal structure called Entreprise à Mission, which allows companies to embed their purpose in a set of social and environmental goals, laid out in the company’s articles of incorporation. The law requires a separate committee, including at least one employee, to be responsible for evaluating the company’s purpose, and their evaluation is verified by an independent third party.
Civil society campaigns to change laws are ongoing. For example, the Better Business Act aims to amend Section 172 of the UK Companies Act, so that so that companies are legally obligated to operate in a manner that benefits their stakeholders, including workers, customers, communities and the environment, while seeking to deliver profits for shareholders.
How to measure corporate purpose
Companies need methods to define their purpose and how it links to their ability to create value, measure how they deliver purpose and assess their sustainability performance. For example, the concept of double materiality in corporate reporting asks companies to consider two perspectives: whether sustainability issues affect the financial performance of the company, and whether the company’s activities impact people and/or the environment. These methods can also enable investors to compare and evaluate companies’ performance in fulfilling their purposes.
Companies could refer to sustainability metrics developed by the Global Reporting Initiative, the International Sustainability Standards Board and the WEF to guide them in their selection. The World Business Council for Sustainable Development also provides a framework based on qualitative metrics, such as the quality of the relationship with stakeholders, for the board to evaluate how it fulfils its purpose.
The Enacting Purpose Initiative outlines how ESG metrics can be used to demonstrate how a company fulfils purpose.14
Initiatives and organisations are experimenting with different methods of measuring and assessing corporate purpose, but they are united in calling on businesses to integrate monetary valuations of stakeholder impacts into accounting standards. In this sense, we are moving away from the traditional accounting system that does not consider a company’s impact on people and the planet.
The aforementioned Integrated Framework recommends two approaches to assessing a company’s performance in fulfilling its purpose:
1) The enterprise cost-based approach: accounts for resources spent on correcting negative and generating positive externalities. Companies should track the external costs that its activities impose on human and natural resources. For example, environmental damage caused by the company should be reflected as a cost.
2) The societal valuation-based approach: captures the net benefits or costs of the businesses’ impacts on stakeholders. Harvard Business School is leading in this area through its Impact-Weighted Accounts Project. Impact-weighted accounts reflect a company’s impact on the people and the planet. Its research discovered that monetising organisational and product impact translated into a significant impact on company’s earnings.
While this discussion and activity signals progress towards holding companies accountable for their purposes, there is still a lack of consensus and investors need clarification.
Changing the purpose of business requires civil society, investors, businesses, and policy makers, amongst others, to cooperate. Corporate purpose aims to deliver value for both shareholders and stakeholders, focusing on the positive and negative real-world outcomes that businesses generate. Investors have a role to play in incentivising businesses to shift their practices and deliver better outcomes for people and the planet.
There are challenges ahead on how corporate purpose translates into specific outcomes for stakeholders and how investors can meaningfully integrate corporate purpose into their analysis and engagement. We will continue to educate investors on corporate purpose and help signatories to support positive outcomes and mitigate or prevent negative outcomes.
- What corporate purpose actually means – and how investors can assess it – PRI blog post by Alex Edmans, Professor of Finance at London Business School
- The future of the corporation – Keynote by Colin Mayer, Peter Moores Professor of Management Studies, Saïd Business School, University of Oxford
- What does corporate purpose mean for investors – PRI podcast
Author: Betina Vaz Boni, Bowie Ko | Editor: Rachael Revesz
1 Enacting Purpose Initiative (2020), Enacting purpose within the modern corporation: a framework for board of directors
2 The British Academy (2017), Future of the corporation
3 London Business School Centre for Corporate Governance and the Investor Forum (2022), What does stakeholder capitalism mean for investors?
4 Colin Mayer is the Peter Moores Professor of Management Studies at the Saïd Business School at the University of Oxford
5 World Economic Forum (2021), What is stakeholder capitalism?
6 Colin Mayer, Alex Edmans, Rebecca Henderson, Vivian Hunt, Paul Polman and Klaus Schwab among others
7 London Business School Centre for Corporate Governance and the Investor Forum (2022), What does stakeholder capitalism mean for investors?
8 Lucian Bebchuk, Bengt Holmstrom, Jill Fisch and John Cogan among others
9 Enacting Purpose Initiative (2020), Enacting purpose within the modern corporation: a framework for board of directors
10 The British Academy (2021), Directors should be held to account for their companies’ purposes, concludes long-running British Academy programme
11 Former CEO of Sodexo at the Oxford Economics of Mutuality Forum 2021
12 Wachtell, Lipton, Rosen & Katz in Lipton, M., Rosenblum, S., Cain, K., Niles, S., Blackett, A. and Lannone, K, (2019), It’s Time to Adopt the New Paradigm
13 Barby, C., Barker, R., Cohen, R., Eccles, R., Heller, C., Mayer, C., Roche, B., Serafeim, G., Stroehle, J., Younger, R. and Zochowski, T., (2021), Measuring Purpose – An Integrated Framework
14 Enacting Purpose Initiative (2021), Directors & Investors: Building on Common Ground to Advance Sustainable Capitalism