What is the purpose of the corporation?
After the global financial crisis, there has been considerable debate about the role of corporations in society. It has become broadly accepted that corporations — particularly the world’s largest publicly traded corporations — should be governed with respect for the society and the environment. This is because corporations are dependent on the broader institutional and systemic framework within which they operate for their long-term survival. In addition, the most pressing of society’s problems cannot be solved by regulation alone without contributions from corporations, such as the attainment of the UN Sustainable Development Goals.
The current model of corporate governance has led companies to focus on maximising short-term shareholder value. This has a range of unintended consequences: inappropriate focus on the short-term; excessive executive pay; underestimation of systemic risks; and undermining of corporate resilience by redirecting corporate resources away from innovation, development, and human capital. Ignoring the long-term interests of corporations and of the society also hurts investors and end beneficiaries with a long-term horizon for their investment, mostly people who are saving to fund retirement or support their children’s education
Eminent economist, John Kay, has noted that: ‘Short-termism, or myopic behaviour, is the natural human tendency to make decisions in search of immediate gratification at the expense of future returns, decisions which we subsequently regret’.
With this context in mind, European law firm Frank Bold and Cass Business School held a number of global roundtables to consider these issues. The results of those discussions have been synthesised in a report, Corporate Governance for a Changing World. Key questions it sets out to answer are:
- How can corporate governance contribute to robust long-term value creation for companies?
- What is the role of stakeholders, including shareholders, in fostering a long-term focus on sustainable behaviour?
- What incentives for short-termism exist in law, corporate governance codes and business practice?
The report sets out recommendations for a new governance model, suggesting best practices in seven areas:
- Embedding purpose in the governance structure of the corporation.
- Clarifying fiduciary duties to restore the focus to long-term value creation.
- Strengthening the role of the board to pursue a broad and long-term view of corporate purpose.
- Revising incentive structures for directors and executives.
- Engaging stakeholders in corporate governance.
- Improving shareholder engagement to foster patient capital.
- Integrating intangibles, non-financial capitals and ESG matters into corporate accounting and reporting models.
The report presents an emerging comprehensive approach to corporate governance that can assist corporations to develop a broad understanding of their purpose, as well as build a corporate strategy that will deliver long-term sustainable value, build organisational resilience, and sustain a strong social licence. This approach can be beneficial to a wide set of stakeholders who take part in or are affected by corporate governance, as it aligns corporate strategy with the broader interests of society by taking account of systemic risks such as climate change and growing inequality.