Is the corporate zeitgeist changing? After 30 years of shareholder primacy and focus on shareholder value, the language seems to have shifted.
There have been so many announcements this year about the corporate world embracing ESG principles that it is temptingly easy to roll your eyes whenever a new survey drops. But sometimes, Moral Money remembers to stop being (almost) blasé and marvel about a crucial point: today’s corporate zeitgeist looks notably different versus two years ago, never mind a decade back.
Mark Carney talked about corporate purpose in his recent Reith lectures. He too senses a shift in the zeitgeist:
My sense is we’re at a stage where we have companies that in many respects are looking for pursuing purpose, but solving problems for society and, therefore, they will be profitable over the long term.
The question is, for some, will they go further, do they actually give up some profit for broader purpose or broader means?
His comments were in response to a question, not from a tree-hugging campaigner or journalist, but from a fund manager at Legal & General:
Now we’re seeing the rise of companies who are less interested in, I’d say, pure profit maximisation, and instead are pursuing profit with a purpose.
BlackRock CEO Larry Fink made these comments in his 2020 letter to CEOs (emphasis from the original):
Awareness is rapidly changing, and I believe we are on the edge of a fundamental reshaping of finance.
The importance of serving stakeholders and embracing purpose is becoming increasingly central to the way that companies understand their role in society. As I have written in past letters, a company cannot achieve long-term profits without embracing purpose and considering the needs of a broad range of stakeholders. A pharmaceutical company that hikes prices ruthlessly, a mining company that shortchanges safety, a bank that fails to respect its clients – these companies may maximize returns in the short term. But, as we have seen again and again, these actions that damage society will catch up with a company and destroy shareholder value. By contrast, a strong sense of purpose and a commitment to stakeholders helps a company connect more deeply to its customers and adjust to the changing demands of society. Ultimately, purpose is the engine of long-term profitability.
Here’s Harvard Law School’s Thoughts for Boards of Directors in 2020:
2019 may come to be viewed as a watershed year in the evolution of corporate governance. The focus on stakeholder governance has shifted from the question of whether a board of directors should take into account the interests of other stakeholders, to how a board should do so.
It was even top of the agenda at the annual conference of the corporate rich in Davos, with the World Economic Forum publishing The Davos Manifesto 2020: The Universal Purpose of a Company in the Fourth Industrial Revolution:
The purpose of a company is to engage all its stakeholders in shared and sustained value creation. In creating such value, a company serves not only its shareholders, but all its stakeholders – employees, customers, suppliers, local communities and society at large.
Perhaps most surprising was the statement in 2019 by Business Roundtable, an association of CEOs from large US companies, which has generally adopted a free-market tone in the past. In 2020, Business Roundtable clearly reiterated its intention to break with its past and redefine the purpose of a corporation:
On August 19, 2019, 181 CEOs of America’s largest corporations overturned a 22-year-old policy statement that defined a corporation’s principal purpose as maximizing shareholder return.
In its place, the CEOs of Business Roundtable adopted a new Statement on the Purpose of a Corporation declaring that companies should serve not only their shareholders, but also deliver value to their customers, invest in employees, deal fairly with suppliers and support the communities in which they operate.
A number of papers have been published on this subject by business law academics in the US, interested in its implications for corporate governance and for the potential re-definition of what a company is for. Harvard professor John Ruggie concludes:
The rapid expansion of corporate globalization has plateaued; it is unlikely to be fully restored any time soon post-COVID-19. The construct of the corporation itself is in flux again. Markets are pricing in more of the external costs of corporate operations; ESG investing is becoming a market-moving factor; and leading corporates have moved well beyond traditional CSR to take more seriously the relationship between their own sustainability and that of the social and natural environments in which they operate. The repurposing debate noted at the outset of this chapter is not mere virtue-signaling; it is an indicator of directional change, even if not a final destination.
The trajectory of corporate law and securities regulation is tending toward greater recognition of stakeholder interests.
It is tempting to dismiss all this as another fad. Those of us who have been around for a while will remember Corporate Social Responsibility, Stakeholder Capitalism, Enlightened Shareholder Value and various other concepts and initiatives that we were told were going to nudge, cajole and persuade businesses to behave more ethically.
This time, though, something is different. More people are talking about it and those people hold more senior positions in the business hierarchy. ESG (short for Environmental, Social and Governance) and related concepts like corporate purpose and investor stewardship have been creeping up the agenda over the last half-decade and have reached the top of it over the last two years. It’s not just a few academics and thinktanks talking about this. The idea of corporations having a purpose beyond simply making profit has gone mainstream. It’s pretty clear that something is going on. Corporate Purpose is where it’s at these days.
It seems that the idea of companies having a purpose other than profit and being accountable to a broader range of people than just shareholders has become almost orthodox. This has all happened fairly quickly. After three decades or so of shareholder primacy, suddenly everyone is talking about stakeholders and purpose. It feels like one of those rapid fashion shifts we used to get. Someone going on about shareholder value now looks a bit like the bloke buying a pair of flares just as everyone else starts wearing drainpipes.
Although the widespread discussion of corporate purpose is relatively recent, it is possible to track a shift in the mood music over the past couple of decades. The 1980s saw the high tide of Thatcherism, Reaganomics and of Milton Friedman’s view of shareholder primacy. The corporate governance reforms of the early 1990s were primarily about protecting shareholders’ interests from the greed, malevolence or incompetence of corporate managers.
The 1990s also saw the first widespread use of the term ‘Corporate Social Responsibility’, with its implication that perhaps companies did have some sort of social duty after all. In the 2000s, the concepts of Stakeholder Capitalism and Enlightened Shareholder Value appeared. The 2006 Companies Act, while re-affirming the primacy of shareholders, placed a duty of directors to consider the interests of employees, suppliers, customers and the wider community and to take into account the environmental impact of their decisions.
In the aftermath of the financial crisis, the sense that something was deeply amiss with capitalism saw the focus of regulation shifting to investors. In the UK, reports by David Walker and John Kay suggested that shareholders have a duty of stewardship towards the companies in which they invest, sharing responsibility with directors for the long-term development of the company. The 2010s saw the introduction of the Stewardship Code and the emphasis on Environmental, Social, and Governance (ESG) investment criteria.
Which brings us to 2020, with the drawing together of these strands into the idea of corporate repurposing and the championing of corporate purpose by academics business leaders and large investment management companies.
So what’s going on? Is this really, as Larry Fink says, a fundamental reshaping of finance, with the implication that the nature of capitalism is changing, or is it simply a PR exercise by corporations trying to deflect criticism in a post-crash and now post-Covid world?
Can companies simply ignore corporate purpose and dismiss it as the latest fad? Probably not. This has a momentum behind it that was missing with CSR, Stakeholder Capitalism and other previous attempts to reform the way companies are run. You only have to look at the quotes at the beginning of this piece to see that corporate purpose is far more of a Thing than anything that went before it. Executive search firms are reporting that candidates are asking about the social purpose of the companies. As we have already seen, major investment managers are asking about it too. Might a clear corporate purpose with a social dimension and commitment to wide group of stakeholders become a prerequisite for attracting both talent and capital?
What might the impact of the Covid pandemic be? Will companies retrench and ruthlessly cut costs as they try to rebuild their balance sheets? Or will the increased public scrutiny of organisations restrain them? I have heard the quote ‘people will remember what we did’, or variants of it, attributed to a number of senior executives. It is certainly true that many in the corporate world are keenly aware that people have paid a heavy price for this pandemic, while governments propped up economies and companies.
I also wonder about the conflation of corporate purpose with business ethics. A company producing landmines might say that its purpose is very clear but whether that fits into the WEF’s definition of serving society at large is debatable.
And is there, as one former investment manager and business school professor said to me, a contradiction between the various duties placed on directors and shareholders?
There are deep conflicts of interest here. From the point of view of a pensioner looking for high returns, the best investment is a solid monopoly that screws the customers and passes on costs to the public. This is in direct conflict with customers, who want good value products, and citizens who want the company to behave ethically. We can’t solve this conflict by writing a better stewardship code.
The statement by Business Roundtable inevitably drew flak from the left but also from the right for “demoting shareholders” and pandering to “liberal activist investors”. Larry Summers reckoned it might simply be a ruse to hold off higher tax and regulation. The term ‘purpose washing‘ has appeared as a descriptor for practices which, as with greenwashing, are insincere and use the concept as marketing spin.
It was this piece by Harvard Law School’s Mark Rowe that struck a chord with me though. He notes that public opinion is shifting and that anti-corporate rhetoric is a feature of both right-wing and left-wing populism.
It’s plausible to wonder, therefore, whether the Business Roundtable is recalibrating their statement of corporate purpose to help put big business lower on populist target lists.
Anti-corporate ideas are in the air, and they do not originate from the political leaders who are expressing them. They will persist regardless of how any leader fared.
All this might seem odd when the power of organised labour is at a low ebb. While there is definitely more open hostility towards some companies now, there doesn’t seem to be an immediate threat to the power of corporations or to the rewards reaped by those who run them. Perhaps the shock of 2016 and the realisation that politics now matters to business in a way that it hasn’t for the past 30 years has focused the minds of corporate leaders. Or maybe they believe they might actually burn the planet if they carry on as they have been and that, even with their wealth, they will have few places to hide. Whatever the reason, the corporate world has sniffed the air and senses a change. Whether anything changes beyond the tone of press releases and annual reports remains to be seen but, wherever it leads, something new is afoot in the boardrooms of the world’s major companies .