IESE ECGI CONFERENCE ON CORPORATE PURPOSE: Can Purpose Deliver Better Corporate Governance?. Issue 2 (9th September 2021)

• Record Type: Journal Article
• Authors: Mayer, Colin; Zingales, Luigi; Bolton, Patrick; L'Helias, Sophie; Holmström, Bengt; Polman, Paul; Gartenberg, Claudine; Flammer, Caroline; Henderson, Rebecca; Gual, Jordi; Kingsmill, Baroness Denise; Maeztu, Juvencio; Viñals, José; Canals, Jordi; Becht, Marco
• Is Part Of: Journal of applied corporate finance. Volume 33:Issue 2(2021)
• Page Start: 41
• Page End: 94
• Publication Date: 2021-09-09
• Subjects: Corporations -- Finance -- Periodicals; Capital investments -- Periodicals; Business planning -- Periodicals; Corporate governance -- Periodicals; 338.6041
• DOI: 10.1111/jacf.12456
• Languages: English
• ISSNs: 1936-8216

Abstract

Abstract : The inaugural dean of Oxford University's Said Business School and academic director of the British Academy's Future of the Corporation program begins by identifying four alternatives to Milton Friedman's Shareholder Value doctrine: (1) enlightened shareholder value maximization; (2) stakeholder value; (3) shareholder welfare; and (4) corporate purpose. The pursuit of enlightened shareholder value is found wanting because of its difficulty of taking into account and responding to "externalities, " the social costs and benefits of corporate actions not reflected on their own cash flows and balance sheets. Stakeholder theory, while properly recognizing an intrinsic interest in non‐investor corporate constituencies, provides management with no guidance for decision‐making, particularly for evaluating tradeoffs among stakeholders. Shareholder welfare advocates, like this session's discussant and his coauthor Oliver Hart, expect pension funds, sovereign wealth funds, and other "universal investors" to succeed in influencing management to temper long‐run value maximization with investment addressing social problems like the environment and inequality. The main speaker of this session, after expressing doubt about investors' ability to fulfill this responsibility, urges companies to adopt corporate purposes that go beyond value maximization in seeking "profitable solutions to individual and social problems and without creating problems for people and the planet." A distinguished Columbia finance professor and former president of the American Finance Association discusses the findings of his research on the market pricing of climate change risk with a well‐known activist investor and corporate governance expert. After examining the stock returns of high‐ and low‐carbon emitting public companies in 77 countries during the relatively recent period 2005‐2017, Bolton reports that the realized returns of high‐carbon emitting companies were significantly higher than those of their low‐emitting counterparts. Such higher returns are construed as the risk premiums required by investors for bearing the "transition risk" now faced by corporations. These premiums also represent a higher cost of capital for high‐carbon emitters and, as such, reflect the market's attempt to "price, " and thereby, limit the negative externalities associated with climate change. And as both panelists go on to point out, this premium did not exist in the 1990s, and increased notably in the wake of the 2015 Paris Agreement. In this exchange between a Nobel Prize‐winning economist and the former CEO of Unilever and champion of ESG, the Nobel laureate begins by defending the Coase‐Friedman value maximization approach that, he argues has largely prevailed in large corporations throughout the world. According to this view, the best prescription for social welfare are policies that encourage companies to maximize their own long‐run efficiency and value. In so doing, they create the largest possible economic "pie, " which can then be redistributed by governments as they see fit. The former CEO of Unilever, while agreeing that radical reform of capitalism is unwarranted, calls for greater urgency and larger corporate efforts to combat climate change and inequality. Noting that Lord Lever founded his company some 150 years ago to solve serious hygiene problems that contributed to infant mortality, companies must increasingly be driven by a sense of purpose that goes beyond value maximization to satisfy today's universal investors. Two distinguished academics discuss the findings of recent studies that aim to measure the effects of corporate purpose on financial performance using measures of purpose that rely on surveys of how much meaning employees say they find in their jobs. Distinguishing between high‐purpose camaraderie, in which employees feel the organization is a little like a family, and purpose clarity, in which employees find a high sense of meaning in their work as well as a clear view of what they need to do, the studies that although camaraderie has no correlation with performance but purpose clarity is highly predictive of performance. And what appears to be a causal connection between purpose and performance is driven entirely by the middle ranks of the company. Employee beliefs about their firm's purpose also appear weaker in public companies than in private, and weaker in private‐equity‐owned, firms than among conventional private firms. Among public companies, purpose is lower for companies with significant hedge fund ownership, but higher in companies with high percentages of long‐term investors. Although environmental degradation and accelerating wealth inequality are "public good" problems, government is no longer capable of solving them alone. The private sector must play a major role, in part by pricing negative externalities into their goods and services. But if business enterprises have a strong interest in solving environmental and social problems because they are threats to economic growth, both speakers stress that economic growth is also essential to solving these problems. While agreeing that capitalism is the engine of wealth creation, and recognizing the threat its harmful side effects pose to corporate legitimacy and license to operate, both speakers see daunting challenges to solving the collective action problem and persuading companies to "internalize" externalities. The CEO of CaixaBank holds up his organization as an example of a successful bank that operates with a stakeholder approach. CaixaBank's ability to pursue this approach reflects in large part the 40% ownership of its shares by a non‐profit foundation that has been funding social work for more than 100 years. A U.K. entrepreneur and Member of Parliament discusses corporate governance challenges during the COVID pandemic with the deputy CEO of INGKA, the retail arm of IKEA, and the Chairman of Standard Chartered, the largest bank in Spain. The Chairman of Standard Chartered calls for integrating purpose into the operation of its business in five fundamental dimensions: ownership, governance, values, leadership, and financial resilience. To put ESG goals into practice, the bank uses "Sustainable Development Goals, " or SDGs, and publishes an annual summary demonstrating its progress toward those goals. IKEA, which is owned by the INGKA foundation, professes commitment to eight values, including cost consciousness and care for people and the planet. IKEA's management measures the company's performance in four ways: value created for (1) its investors; (2) its consumers; (3) its employees and local communities; and (4) the environment.