business, so that it can drive corporate policies and actions. Hence, the question arises as to how directors understand purpose and engage with it. An enquiry into purpose is relevant, given the current debate about corporations’ role in society and the self-fulfilling nature of economic theory (Ferraro, Pfeffer & Sutton 2005). Fundamentally, it is legitimate and reasonable both for society to expect corporations to add social value, and for investors to maximise the value of the assets entrusted in their care, and corporations’ need, among other things, to be financially healthy in order to remain in business. However, how these
expectations and needs can be reconciled is a matter filled with tensions.
The Development of Corporate Purpose
In this section, first I review the development of purpose through the humanities. Then, given that economics, law, and management scholarship are key drivers of business endeavours, I explore how purpose has filtered through these fields.
The humanities view organizations as social phenomena essential to the relational nature of mankind (Pirson & Lawrence 2010). Focus on purpose is connected to a generally accepted acknowledgment of the interdependence of business and society. Over 2,400 years ago, in his work The Politics, Aristotle (1981) regarded human beings as social animals, with a tendency to associate, create and live in communities. Sociability is linked to the ability to empathise with others, to cooperate with and help fellow humans (Melé 2011) and offers an explanation for the roots of communities (including business organizations) and society. In modern times, this view of humans extends to corporations, regarded as communities of people, and their relationships (MacIntyre 2007; Melé 2011), as well as business endeavours clearly aiming at creating economic and social value. Theology offers a broader perspective on life, relevant to
the business world (Loomis 2006), and hence important in understanding purpose. The Pew Research Centre (2015) estimates that by 2050 the majority of the world population will be Christian or Muslim. Islam and Christianity, among other religions, deal with many aspects of daily life (Uddin 2003), and value human dignity, man’s accountability to God and fellow men, solidarity, unity, care and compassion (Cremers 2017; Frémeaux & Michelson 2017;
Sison & Fontrodona 2012; Uddin 2003). Business is regarded as a pursuit of ‘theological significance’ (Byron 1988, p. 525; Uddin 2003, p. 26) and a ‘dignified activity’ (Uddin 2003, p.26), not just an activity to be tolerated or allowed. ‘The nature and purposes of corporations are unavoidably religious’ (Colombo 2017, p. 814), as purpose is linked to serving society. In theology, human endeavours are neither atomistic nor altruistic. Rather, they are about doing something for others on the condition of receiving something of fair value in return (Byron 1988; Hollensbe et al. 2014). This is an important point, supporting a view of corporations as human enterprises that are commercial at heart, and emphasising the importance of how they achieve their aims. Surprisingly, in the social sciences, religious and business discourses remain largely in separate fields, indicating the need to bridge across different disciplines if we are to appreciate how corporations can add value. A considerable body of literature acknowledges that humans are born to interrelate and perceive themselves as part of a bigger whole (Crocker & Canevello 2012; Rynes et al. 2012). Even though they are assumed to be self-interested, as is the case in neo-classical economics (Miller 1999), they do possess the ability to empathise, be compassionate, and are motivated by caring about others, as no person and no human endeavour (such as corporations) exists in a vacuum (Crocker &
Canevello 2012; Mikulincer & Shaver 2005, 2010). In fact, among the root causes of the challenges of our time is a failure to consider the relational nature of the corporation (Cremers 2017; Kochan 2002), and a lack of regard by corporations for the effects of their
actions on others. Somehow, since Adam Smith’s observation in 1776 that profit was by no means ‘all that it is needed’ (Berry, Paganelli & Smith 2013, p.583), the social dimension of business undertakings has been overlooked or disregarded.
In economics, purpose has mainly been conceptualised as shareholder value, which remains
‘the most celebrated corporate target’ (Loderer et al. 2010, p. 5); indeed, it has been argued that ‘the ultimate purpose of the firm is to maximise profits’ (Conner 1991, p. 123). A preoccupation with the optimal use of scarce resources runs through the history of
economics, the corporation being an important element in the larger mechanism of the market economy (Rowland 2005), which is in turn viewed as an instrument for converting self- interest into social welfare. The system is assumed to ‘work itself’ (Coase 1937, p. 387) and features a rational, self-interested homo economicus (Anderson 2000). In classical economics, corporations are organizations obtaining resources for production, and are supposed to make money through sales activities (Turnbull 1997), although economists have long noted that money also needs to be embedded in moral and social norms (Polanyi 1944; Smith 2010).
Economist and entrepreneur Owen warned that commercial aims would have far reaching effects on society and needed to be tempered with ‘conscious social direction’ (Owen 1817,8 cited in Polanyi 1944, p. 134). Thus, in economic thought, we find a nuanced view of corporate purpose, and the acknowledgment that purpose might exercise a tempering effect on the legitimate pursuit of commercial aims. Furthermore, this development of purpose indicates that it might play a role in the reconciliation of societal and business expectations with respect to corporate aims and how they are achieved.
8 Owen, R. (1817). Report to the Committee of the Association for the Relief of the Manufacturing and Labouring
Unfortunately, these teachings have been distorted in their adoption by subsequent
practitioners. George Stigler and the Chicago School of neoclassical economics offered one of the most famous distortions: that purpose is about efficiency improvements and human motives driven by self-interest (Sen 2013; Stigler 1971). The common interpretation of Milton Friedman’s (1970) publication in The New York Times offers another distortion.
Although Friedman did argue that the purpose of corporations is to increase profits, he added that this is to be achieved ‘so long as it stays within the rules of the game’ (p. 22) and ‘while conforming to their basic rules of the society, both those embodied in law and those
embodied in ethical custom’(p. 33). Common wisdom has overlooked Friedman’s attention to the how of purpose. Given that rules of society, the law and ethical customs are contextual and changing, how commercial aims are achieved is as important as the aims themselves.
Consequently, among the leitmotivs of neoclassical economics, a view remains that in the rational pursuit of one’s own interest, there is no space for morality, social commitment or care, since companies exist because they possess superior abilities to efficiently temper opportunistic behaviour through the exercise of control (Williamson 1979). However, neoclassical economists also noted that this reasoning has limitations (Coase 1960; Dobson 1999; Polanyi 1944), as it ignores the context of human actions and motives, as well as companies’ broader economic objectives and the role a shared purpose can play in creating context for the evolution of a corporation (Ghoshal & Moran 1996).
In corporate law it is quite difficult to find support for the view of purpose as maximization of shareholder value (Deakin 2005). Ever since the creation of the notion of corporate personhood, academics have debated its purpose and the obligations of those who direct it (Lan & Heracleous 2010; Letza, Sun & Kirkbride 2004; Wallman 1999). In the US, the
famous Berle-Dodd dialogue of the 1930s addressed the topic (Weiner 1964). According to common wisdom, Berle and Dodd disagreed on the question of whose interest corporate fiduciaries were acting in when managing a corporation, and on the purpose of the
corporation. Berle (1932) argued that powers granted to a corporation had to be exercised in shareholders’ interests, while in the traditional legal view, a corporation is an alliance of shareholders ‘formed for their private gains’ (Dodd 1932, p. 1147), yet ‘it is undesirable (…) to give increased emphasis (…) to the view that business corporations exist for the sole purpose of making profits for their stockholders’ (Dodd 1932, p. 1148). A careful review of the dialogue indicates that Berle and Dodd agreed that a company should be managed in the interests of the shareholders but disagreed on how other interests should be taken into
account (Licht 2004). Berle (1932) noted that, in practice, managers do not recognise a social purpose, and the maximization of shareholder value holds its ground as the predominant purpose due to the non-existence of a clear and enforced alternative. I argue that there is a problem with this reasoning. Although the ‘beauty’ of shareholder value is its apparent simplicity, as it offers a clear mission and facilitates decision-making (Loderer et al. 2010;
Tirole 2001), an alternative to shareholder value is yet to be found, and we still lack a shared view of how corporations and directors can add value. I argue that a way out of this
conundrum is to start asking directors how they view purpose, and study their engagement with purpose, as an initial step in understanding how corporations can create value and how directors make a difference.
Although I am concerned neither with exploring the essence of value, nor with finding alternatives to shareholder value, I note a substantial stream of literature examining these topics (Allen, Carletti & Marquez 2007; Bapuji et al. 2018; Blair 1995; Cremer et al. 2019;
Hinna & Monteduro 2017; Mahoney & Qian 2013; Porter & Kramer 1999; Tirole 2001), and that the meaning of maximising shareholder value remains the object of debate. Beyond terminology, what is really meant by shareholder value is maximisation of the equity market price for the shares of listed corporations (Dobson 1999) or share price maximisation
(Hansmann & Kraakman 2000; Wallman 1999). This is possibly a flawed measurement of value to begin with, as the story of WorldCom (among others) indicates.
Some corporate law scholars hold a broad view of purpose (Blair & Stout 1999; Clarke 2013;
Stout 2012, 2013; Wallman 1999; Weinstein 2013), while others note that not even countries appearing as the most shareholder-friendly (such as the US or the UK) have a legal
requirement for directors to act in the sole interest of shareholders (Loderer et al. 2010). In most legal systems, regulation requires or recommends directors to act in good faith and in the interests of the corporation (Clarke 2013; Deakin 2005), although what these interests might be is open to interpretation. Given that the corporation acquires legal personality upon incorporation (Aguilera et al. 2015; French 1979; Hansmann & Kraakman 2000; Lan &
Heracleous 2010), scholars theorise different perspectives on agency, viewing the corporation as principal, rather than the shareholders, in whose interest agents should act, supporting a broader view of purpose (Lan & Heracleous 2010). This perspective has important
consequences for conceptualising director engagement as, through engagement, directors may become clear about the interests of the corporation, and eventually drive strategic decisions anchored in purpose to create value. In this regard, it is worth noting one of the most remarkable developments of the last decade (Mayer 2017) in the area of corporate personhood and purpose. Following growing dissatisfaction with shareholder primacy, legislators in the US allowed the incorporation of an entity as a public benefit corporation (B-
corporation) (Alexander 2016; Mayer 2016), with a formal public purpose beyond
commercial aims (Steingard & Clark 2016). It remains to be seen how this legal form might contribute to value creation.
In management scholarship, although shareholder value is the ‘leitmotif of wealth creation’
(Windsor 2001, p. 226), it has come under increasing scrutiny (Martin et al. 2016) A view has developed that commercial and social aims can coexist (Garriga & Melé 2004), and that the satisfaction of stakeholder interests can be instrumental to maximising shareholder value (Campbell 2007; Hillman & Keim 2001; Hillman, Keim & Luce 2001; Kumar & Zattoni 2019; Mitchell, Agle & Wood 1997; Ogden & Watson 1999). Scholars have noted that stakeholders and society are increasingly exposed to the costs and risks of corporate actions (Letza, Sun & Kirkbride 2004; Phillips, Freeman & Wicks 2003; Schneider & Scherer 2015;
Turnbull 1997), as corporations are cultural and social systems (DiMaggio & Powell 1983;
Judge, Douglas & Kutan 2008), reflecting societal values and playing a broader role in our lives (Hatch 2013; Selznick 1957).
Revlon’s use of chemicals linked to cancer in its products; Kimberly-Clark’s destruction of forests for throw-away tissues; the mining industry’s giants such as Glencore or BHP use of child labour in cobalt and lithium extraction, and the ethical and legal issues these pose to their customers (Coles 2019; Gunther 2015; Hume 2019), are all indications that purpose needs to assume a broader dimension. By examining how directors engage with purpose there is therefore a promise of a better understanding of how a broader dimension of purpose can be defined and delivered, and the role directors can play in it. Having reviewed the
development of purpose across disciplines of the social sciences and over time, I now look at how it is regarded as it enters the twenty-first century.
Corporate Purpose in the Twenty-First Century
Reviewing previous movements in the view of purpose, the key insight of this much-debated concept, and the contrasting views presented above, lies in the recognition that purpose has various dimensions which can be complementary, and that there is a need to look beyond simply maximising shareholder value (Edmans 2017; Hollenbse et al. 2014; Martin et al.
2016; Mayer 2017), if corporations are to create value. The Edelman (2019) Trust Barometer, a survey with over 33,000 participants in 28 countries, continues to report a collapse in trust towards business. Such a pervasive crisis of trust has reached the level of a systemic threat to humanity (Edelman 2019). Expectations that business will promptly address the issue are high (Bansal & Song 2017; George et al. 2016; Hill 2019; Mayer 2017; Pirson, Martin &
Parmar 2017), as trust, or the lack of it, matters. Trust is indeed the ‘lubricant of society’
(Luhmann 1979, cited in Pirson, Martin & Parmar 2017, p. 1). Scholars call for new
consideration of the way business is conducted and governed (Mayer, Wright & Phan 2017;
Metcalf & Benn 2012; Pirson & Lawrence 2010). Although it is beyond the scope of this thesis, the Academy of Management’s call for research into alternatives to capitalism (Phan, Siegel & Wright 2016), and into alternative forms of capitalism (Mayer, Wright & Phan 2017) indicates the sense of urgency pervading the field.
In the twenty-first century, corporations, particularly global corporations (Mayer 2016, 2017) such as L’Oréal, Bosch, China National Petroleum, Novartis, Saudi Aramco, Amazon, Google or Shell, have considerable market, social and political power (Mayer, Wright &
Phan 2017; Starbuck 2014). They are becoming the new leviathans (Chandler & Mazlish 2005; Mayer 2013), swiftly exploiting regulatory gaps and national differences for their own benefit (Schneider & Scherer 2015) and threatening the survival of humanity (Metcalf &
Benn 2012). These ‘new supernatural organizations’ (Beck 2008, p. 794) are among the
‘world’s most powerful social entities’ (Phillips 2003, p. 1) and are expected to contribute to finding solutions to the challenges of our time (Priem et al. 2018; Scherer & Smid 2000). The challenges we face are beyond governments’ capabilities, and public money will not be sufficient to finance a sustainable economy (EU 2018). Investment and business
communities, therefore, have a role to play in building a sustainable future. Furthermore, activism has developed into a force that corporations have to reckon with (Berry 2003;
Briscoe & Gupta 2016; Ingram, Yue & Rao 2010; Lee & Lounsbury 2011), as they are frequently theorized by a range of activists, aiming to force changes in corporate conduct (Cundill, Smart & Wilson 2018; Goranova & Ryan 2014; Greenwood & Schor 2009; Kahan
& Rock 2010; Renneboog & Szilagyi 2011; Rock 2018; Sjöström 2008; Tkrac 2006).
From a corporate and investment perspective, these challenges do not exist in a different sphere. They represent risks and opportunities that are anything but tangential to business and investment decisions (Van Duuren, Plantinga & Scholtens 2016), as they are fundamental to how corporations access capital and create value. ESG factors can act as indicators of risks and opportunities that may affect the financial bottom line, hence the ability to create value, and to attract capital. For instance, they can point to upcoming regulation (as was the case in the Facebook Cambridge Analytica scandal of 2016, which accelerated the European General Data Protection Regulation). They can be instrumental in shifting consumer preferences (for instance towards healthier food and lifestyles) or affect a corporation’s ability ‘to produce
people’ (Hollensbe et al. 2014, p. 1229), in other words committed and dedicated employees.
In search for answers as to what constitutes corporate purpose and how corporations can create value, attention is going beyond the role of government to include systems and processes of corporate governance.
Initiatives such as The Purposeful Corporation (Big Innovation Centre 2017), launched in the UK; the call of the Academy of Management for the future of the corporation (Mayer, Wright
& Phan, 2017; Phan, Siegel & Wright 2016); the Future of the Corporation programme of the British Academy (2017); and US senator Elizabeth Warren’s proposal of the Accountable Capitalism Act (Indap 2018), are testimony to the rising interest in corporate purpose and its role in the future of humanity. The corporation is in need of reinvention as a vehicle to promote the interests of society and investors (Mayer 2016, 2017) and, if we are to address the troubling disconnect between business and society, we need to understand more about purpose and the role the processes and people involved in governance, including directors, can play. Since ‘collectives do not act, only people do’ (Rousseau 1985, cited in Bridoux &
Stoelhorst 2016, p. 231) and ‘corporate outputs are influenced by individual outputs’
(Nicholson & Kiel 2004, p. 449), we need to study individual directors, rather than boards as homogeneous groups (Long, Dulewicz & Gay 2005; McNulty & Pettigrew 1999), so that we can account for variances among them (Bezemer, Nicholson & Pugliese 2018; Guerrero et al.
2017; Harrison et al. 2018). The stream of governance studies with individual directors as a unit of analysis is relatively recent, and based on the premise that some directors can have
‘far more influence than others’ (Hambrick, Werder & Zajac 2008, p. 382), and ‘certain directors can sway the entire board to be more or less involved’ (Judge & Talaulicar 2017, p.136), hence individual directors can potentially sway other directors, the board and the
company towards engagement with purpose. I posit that an important step in this direction is to examine how directors view and engage with purpose, as through engagement they may contribute to the corporation’s reinvention, eventually placing purpose at its heart. It can be assumed that individual differences exist among directors (Hillman, Nicholson & Shropshire 2008). Thus, if purpose-driven boards are to make good, value-creating decisions, it is
essential to examine how directors engage with purpose. In the next section I review the roles assigned to directors in corporate governance and how they might relate to purpose.