The purpose of a corporation is always a hot topic at the Center for Higher Ambition Leadership. We see purpose as integral to Higher Ambition strategy, stakeholder engagement, and high performance on both social and financial fronts. Purpose was also front and center at a recent meeting of the Aspen Institute’s Business & Society Program that was held in San Francisco on February 25 and 27.
Among the conclusions of the meeting was that “purpose creates value by clarifying strategic choices (providing a ‘true north,’) motivating employees, attracting talent with shared commitment, and building trust in a company brand.” Despite the enthusiasm of some, others maintain that a focus on purpose distracts from the pursuit of returns for shareholders; the classic Friedman view that “the social responsibility of business is to increase its profits.”
In a paper that summarizes three years of Aspen discussions on the topic, Miguel Padró writes that four misconceptions about corporation law unnecessarily constrain the understanding of corporate purpose:
- Under U.S. law, a corporation is not the property of shareholders. It is a distinct entity that is not owned by anyone. Shareholders “are granted a set of economic rights and a role in governing the corporation.” This may come as a surprise but Padró holds that this is a “design feature of the corporate form.”
- Maximizing shareholder value is not as straightforward as it seems: shareholders have different interests and time horizons and thus are heterogeneous, not homogenous. There are investors seeking immediate profit while others hope to reap their gains months, years, or even decades in the future. Short-term investors often get priority; Padró cites a study that found that “78% of the surveyed executives would give up economic value in exchange for smooth earnings” because of the severe reaction of markets to missed earnings projections. “The variability of investor interests and time horizons underscores the importance of a corporate leader’s ability to rise above the interests of different factions and exercise independent judgement on a correct long-term course of action for the company.”
- Delaware law, which governs many corporations, provides special considerations for shareholders but puts the corporation under control of its management and board so long they do not use its assets for personal gain. “There is no requirement in Delaware’s corporate code for management to maximize value for shareholder.”
- “The law does not dictate corporate purpose: purpose is a choice. Corporate purpose “is a foundational business decision that can and should be determined at the firm-level…” It is a “strategic and ethical decision” with an impact on the full range of stakeholders. This includes shareholders but does not exclude employees, customers, or others.
Pradó argues that a more enlightened understanding of purpose as defined by corporate law presents great opportunities for both executives and those who educate the next generation of business leaders. Seizing those opportunities could help reverse the downward slide of trust in business seen in recent years. Here at the Center we are encouraged and enthused by Pradó’s work. We believe that integrating corporate purpose with long-term value creation for all stakeholders is far more productive than assuming they are somehow in opposition, both good for business and good for society.
Purpose, of course, can be positive, neutral, or negative. Emerging research that will be covered in future posts will show an increasingly apparent correlation between clear, positive purpose with employee engagement and, in turn, financial returns. That’s alignment that matters.