A Corporation’s Purpose: Disagreeing Without Being Disagreeable

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Boards must balance the interests of shareholders and stakeholders while maintaining a focus on value creation.

Corporate scholars tend to agree that corporate purpose is long-term value creation, rather than short-term shareholder profit maximization, though they may debate the definitions of long and short term or whether shareholders should have priority over other constituents. These thinkers also tend to agree that corporate boards may consider all factors relevant to that purpose, and some may even say boards must consider certain factors in particular contexts.  

Though the factors boards should consider change over time, they have almost always included employees and wages, customers and prices, and shareholders and dividends. In recent years, they have included employee well-being, product safety and shareholder voting rights. Of late, they encompass workforce diversity, greenhouse gas emissions and shareholder voice.
While, for decades, corporate scholars tended to debate the finer points of corporate purpose among themselves — in classrooms, boardrooms and courtrooms — in recent years, accelerating monthly, the terrain has become increasingly politicized, along with much else in contemporary life.  

The politicization of corporate purpose began subtly. One milestone occurred in 2005 when the United Nations extolled the virtues of an approach to investment and management that emphasized not simply value creation but equally social concerns and environmental impacts. A variety of thought leaders from nongovernmental organizations — from the British Academy to Davos to the Business Roundtable — gradually followed the example with increasing calls for corporations, including boards and shareholders, to attend to such additional factors. 

Political advocates readily seized upon these sentiments, embracing the suggestions to strengthen causes starting with gender and racial diversity, along with plastics recycling, greenhouse gas emissions, and potentially extending into any subject of public interest, such as abortion and voting rights. Those on the opposing side of such political issues tended to object to using the corporation form as the vehicle to pursue them. As a result, corporate purpose and board considerations were gradually exposed to political crossfire.
Political activists on both sides of the spectrum now take extreme positions alien to the traditional scholarly debate, one opposing any consideration of certain factors and the other mandating prioritizing those factors. Some Republican politicians want to outlaw consideration of environmental factors in corporate decisions, while many Democratic politicians want to put environmental factors above all. Such politicians have been enticed to enter and twist this debate by powerful interest groups with stakes in the outcome — from climate activists on one side to fossil fuel companies on the other. 

A political debate about corporate purpose may have civic advantages. The forum may illuminate issues more clearly or elicit a wider range of views and passions. But the downside is that political conflicts impair the corporate form’s traditional capacity for value creation, which is its venerable purpose. The civic advantages can be achieved by other means, while value creation of the corporate scale has scant substitutes. 

On balance, it seems socially optimal for the debate over corporate purpose to be removed from the political realm and returned to the scholarly one. It would, therefore, be wise for those political activists who enticed politicians into the fight to retreat and recalibrate, and for the politicians to be told that there’s no advantage to them in forcing a boardroom debate onto the political battlefield. 

I recently had the opportunity to discuss corporate purpose with Jeff Sonnenfeld, senior associate dean for leadership studies and Lester Crown Professor in the Practice of Management at Yale School of Management, at MLR Media’s Character of the Corporation event in Philadelphia. Jeff and I may hold different views on the details of corporate purpose and constituents, but it’s a scholarly disagreement united by core areas of concurrence, subtle differences in emphasis, historical references and prescriptions for proceeding. The vociferous Republican and Democratic antagonists not only hold different views but also seem to seek areas of disagreement rather than concurrence, exaggerate the other’s positions and demonize the other’s means and motives.
An example is defining corporate purpose: We share a general view around value creation, with perhaps degrees of difference about how unique the large public corporation is in pursuing that end. But in an extreme example, some Republicans may say Democrats favor socialism — and see ESG as code for advancing that agenda — while some Democrats say Republicans are profit mongers at best and racists at worst — and their resistance to ESG proves the point. Neither view seems true and the use of ESG seems too blunt. 

It would be more productive to take ESG apart and look at each item separately. The items — recycling to emissions, layoffs to wages, board independence to diversity — will be recognizable as long-standing recurring issues for many companies and of greater or lesser importance at different companies depending on variables, such as industry, size and location.
All items — workforce quality and productivity, customer satisfaction, community involvement, externalities from emissions and strategies for recycling product containers — impact profits in different ways and over different time horizons. They impact shareholders as well as others whose roles are both independently important and indirectly related to shareholder outcomes. 

Each board must always approach these topics (and others) as relevant. It doesn’t help to call this exercise ESG or stakeholder governance or shareholder primacy — it is simply the directors’ long-standing job. It’s difficult to think of any major U.S. company that has ever prioritized increasing short-term profits above all else or subordinated shareholder interests entirely to those of others. They have always balanced the contending interests and should continue to do so.

Lawrence A. Cunningham is vice chairman of the board and director of Constellation Software Inc., director of Kelly Partner Group Holdings, founder and managing partner of Quality Shareholders Group and professor emeritus of corporate governance at George Washington University.

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