Shareholder Voice and Corporate Purpose: The Purposeless of Mandatory Corporate Purpose Statements
Since the publication of Colin Mayer’s book, Prosperity, in 2018, there has been extensive discussion world-wide of a single, simple reform proposal for corporate law which, it is argued, would have a transformative impact on the way the boards of (large) companies set their strategic goals. The proposal is that companies should be required include in their constitutions (articles of association) a commitment to pursue a communal or a social purpose. Companies would continue to aim at a profit (and so would remain in the private sector of the economy) and so the goal would be, as it is put in Prosperity, that companies would seek to produce ‘profitable solutions to the problems of people and the planet.’ There is also a negative goal for this proposal, namely, to wean boards from the view of Milton Friedman that the sole purpose of boards is to maximise the company’s profits (within legal and conventional constraints).
I have recently published a paper, Shareholder Voice and Corporate Purpose: The Purposeless of Mandatory Corporate Purpose Statements (ECGI Law Working Paper 666/2022—also to appear in Board-Shareholder Dialogue: Policy Debate, Legal Constraints and Best Practices (Luca Enriques & Giovanni Strampelli eds, 2023, Cambridge University Press) which casts doubt on this reform proposal. Attractive though the policy goal is, I argue that this reform on its own is likely to be largely ineffective or largely unnecessary, according to the goals of investors who hold the company’s voting equity. I test the reform proposition in two different investor worlds. In the first, the investors adhere to Professor Friedman’s mantra. In the second, they take a broader view of their investment goals, but the nature of those broader goals and the extent to which investors are prepared to trade off financial returns for non-financial achievement remain uncertain.
In the first, Friedmanite, world, I argue shareholders will neither themselves adopt nor permit the directors to adopt purpose statements which are constraining of the company’s profit-maximising statements. So, either such statements will not appear or they will be cosmetic. It is argued that the French experience with the reforms of 2019 support this analysis. Among the SBF 120 companies, only one has adopted the société à mission status, which maps quite closely onto the proposed purpose company. Under official encouragement, many more have adopted raison d’être statements but all but a few are cosmetic. Experience from the US with shareholder proposals to shift to public benefit corporation status and the UK historical experience with required corporate objects point in the same direction. There are responses a bold legislative could make to counter the reluctance of shareholders to take up the purpose challenge, but those responses are likely to be resisted strongly by institutional investors or to involve a high level of state specification of acceptable corporate purposes.
In the second world, somewhat akin to the current state of ESG investing, there is the potential that investors would look favourably on the adoption of purpose statements. Whether that potential will be realised is, however, highly uncertain. The focus of current ESG activism by shareholders is on narrower issues, which may be the subject of passing fashion or of marketing incentives on the part of fund managers. However, if ESG investing does realise its full potential, a mandatory purpose requirement will not be the driver of change. If shareholders wish to adopt communal or social goals, they are currently free to do so and those goals, once adopted, will shape the strategy adopted by the board via the directors’ fiduciary duties, as currently formulated. A mandatory purpose requirement might generate internal discussion of the issue, but it will be the shareholders’ changed goals which will determine the nature and scope of any constitutional changes.
Paul Davies is a Senior Research Fellow at Harris Manchester College, University of Oxford.
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