Although the corporation as a form dates from the 17th Century, what we would call the “modern corporation” originated with the development of formal corporate law, and the establishment of limited liability, in the middle of the 19th Century. However, up until the early 20th century there was little discussion as to whom a corporation was ultimately responsible. While historically corporations would be chartered by the state (or the ruler) and hence their “license to operate” (LTO) would be subject to the rights of the state (or the whims of the ruler), this regulatory oversight has devolved to a wide variety of jurisdictions over time.
In The Theory of Moral Sentiments, Adam Smith laid out a socio political philosophy as to the nature of people’s personal, political and economic interactions. In something a counter balance to The Wealth of Nations, Smith argues that there is more to personal and commercial interaction than just self-interest: “How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it, except the pleasure of seeing it.” (The Theory of Moral Sentiments, I, §I, Ch. I, p. 9). Smith talks about two guides to decision making, rules and virtues. Rules serve as the core of regulation of actions and articulate what is and is not permitted in a society. Virtue, however, goes beyond simply following the rules and reflects not just ‘intentions’ but the ‘consequences’ of decisions and actions on others. From a corporate perspective, what mostly mattered to the operation of the corporation were “rules” as opposed to “virtues”.
It was really not until the famous Berle-Dodd debates of the 1930s (see, e.g., A. Sommer, Jr. [1991], Whom Should the Corporation Serve – The Berle-Dodd Debate Revisited Sixty Years Later, Delaware Corp Law Journal) that the idea that someone other than the owners of the firm (i.e., the shareholders or private owners) had legal and regulatory rights moved into mainstream policy and legal discussions. If we fast forward this debate into the latter part of the 20th Century, Freeman (Strategic Management: A Stakeholder Approach) argued that there are more claimants on corporate rights and that the best corporations are those that recognize and manage the complexities of those diverse and competing claimants, whom he call “stakeholders”. Today, the debate has progressed further, where regulators, investors, stakeholders and managers all recognize there is an implicit (and sometimes increasingly explicit) “Social License to Operate” (SLTO) that goes far beyond the traditional and narrowly legal LTO that has been the commercial norm. In Smith’s parlance, we have moved from an era where “rules” alone mattered to one in which corporations are now required to live by the rules and to act virtuously.
This leads us to the rather recent notion of corporate purpose. The key to corporate purpose is to recognize that the core function of the corporation is not to make money, nor is that the ultimate goal. The making of money is the result of a whole series of technologies, processes, decisions, and so on that lead to the most appropriate and desirable outcome to a collective of stakeholders who both co-create value and willingly share the value created in what is recognized as a fair distribution.
The logic of corporate purpose is sometimes difficult to see with respect to large public corporations who ultimately get captured by standardize internal processes, investor benchmarks and an increasing distance from their point of founding. However, the idea of purpose is more visible with smaller enterprises or firms where a family or single individual is the driving force. When questioned these individuals rarely say they went into business to make money. Invariably, there was another passion that drove them to do what they did. Sometimes the initial purpose was an expediency. As Steve Jobs noted about the beginnings of Apple: “Basically Steve Wozniak and I invented the Apple because we wanted a personal computer. Not only couldn’t we afford the computers that were on the market, those computers were impractical for us to use.” Similarly, Ben & Jerry’s founded an ice cream company because making bagels was too expensive and Ben (Cohen) had a condition that made it hard for him to smell (hence their trademark ‘chunks’ in the ice cream). For these organizations, the purpose is their raison d’être. It becomes internalized in terms of processes and goals and, if successful, is the motivator for employees down the line.
But how does the notion of corporate purpose apply to the large public corporation. In this instance, we can look at two aspects – strategy and governance.
Richard Rumelt distinguishes between “bad strategy” – a strategy that “accommodate[s] a multitude of conflicting demands and interests” – and “good strategy” that focuses “energy and resources on one, or a very few, pivotal objectives whose accomplishment will lead to a cascade of favorable outcomes”. Having a clear and distinctive purpose, as opposed to a plethora of goals and key performance indicators (KPIs) unique to divisions and subsidiaries, can be the essence of a good strategy. It makes clear the line of sight between the purpose and actions/decisions as the key question is simply “how does this action/decision enable us to fulfill our purpose?” It also aligns any subsidiary KPIs to a singular point of reference. For employees it means that the do not need to be driven by rules but by virtue. As Herb Kelleher, the late CEO of Southwest Airlines put it, “If you create an environment where the people truly participate, you don’t need control. They know what needs to be done and they do it.” The key, of course, is to have a meaningful and actionable purpose that resonates distinctly and operationally with the key stakeholders.
The key to successful governance is also driven by purpose. The legal requirements of board members fall clearly into the category of rules. Some boards work well, and others do not. But whether they work well or not has almost nothing to do with whether or not they know the rules and choose to follow them or not. We are all schooled in the rules that define “hard governance”. What matters is “soft governance” – the unwritten rules, routines and interactions that embody the underlying culture of the organization. It is what people do about the rules and what they do when there are no rules, or the rules are unclear or provide no guidance. In other words, it is the virtues aspect of governance. The key to governance is the fact that virtues flow downward – the board and top management team embody them and their choices and decisions and modes of speaking, interacting and managing signal what is virtuous and purposeful. If they do not live the purpose of the organization, purpose becomes shallow and meaningless.
So why is purpose important? Today organizations are facing three existential threats. The first is related to climate and it impact on businesses and societies. The second is public health, most noticeably seen in the case of Covid-19 but seen in other major outbreaks and systemic health issues related to lifestyle and longevity. The third is the failure of political governance and the rise of populist leaders in both democratic and autocratic political systems. Together they force companies into decision making modes for which clear options are not there. If you are HSBC, how do you deal with the Hong Kong Security Law? If you are Google or Facebook, how do you deal with calls for data protection, transparency and hate speech? Or demands for back door access by security agencies? If you are any multinational enterprise how do you address demands for local taxation or the outsourcing of operations? If you are a pharmaceutical company working on a Covid-19 vaccine, how do you address issues of access, pricing and efficacy of the treatment? For any company, what is your commitment to climate action over and above aspects that might be considered “greenwash”?
The list of questions for which the answers are not clear is nearly endless. But what is clear is that there are no simple business model answers to them. It is also clear that the answers to questions like these are not only strategic but critical to the head-to-toe aspects of any business. So you have a series of questions for which there is no guidance and as a board or senior executive you have to signal to the rest of your organization that the decisions you are making are more than just compromises that satisfy no one and reflect nothing truly. It is here where purpose matters. If there is a clear purpose to the organization, reflected in the virtues that underly all that motivates the individuals in that organization, the answers become clearer. They may not be crystal clear, but purpose helps highlight what actions can be ruled out. Google reflected this when it chose not to compromise with the Chinese governments demands for censorship and handed over that market to competitors.
But it is important to recognize that purpose may be reflected in values but that it is more. Companies compromise on supposed values all the time and most companies list of values amount to little more than generic motherhood statements. They make commitments to employees but engage in outsourcing and retrenchment. They make commitments to customers but raise prices when it is convenient. They make commitments to suppliers but change them all the time. They make commitments to the environment or social causes but rarely beyond a limited impact on their business model.
Hence, purpose matters when it is simple. Purpose matters when it is embodied by the board and top management team. Purpose matters when it directs operational and financial KPIs. Purpose matters when every decision can be justified as an alignment to the purpose. Purpose matters when it is lived by each and every employee and understood and respected by all the organization’s stakeholders.
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