The Purpose of Corporate Purpose Statements

In a recent Oxford Business Law Blog entitled ‘Shareholder Voice and Corporate Purpose: The Purposelessness of Mandatory Corporate Purpose Statements’, Paul Davies summarizes a working paper of the same title in which he critiques the suggestion in my book Prosperity: Better Business Makes the Greater Good (Oxford University Press 2018) that statements of purpose can assist companies in addressing problems of commitment they otherwise confront.

Davies’ analysis proceeds by considering two worlds, one where the Friedman Doctrine prevails and one where it does not. He asserts that, in the former, corporate purpose statements will be ineffective or infeasible because they will be resisted by shareholders and, in the latter, they will be irrelevant or unnecessary because they can in any event be adopted by shareholders. So, either they are infeasible, or they are irrelevant, and in both cases they are redundant.

There are five concerns that Davies raises about the adoption of legally mandated corporate purpose statements. The first is inclusion of social or communal objectives in them. The second is the difficulty of their adoption when they are at variance with shareholder interests. The third is the use of such statements to shield directors from adverse reactions from shareholders. The fourth is their use to promote entity and managerial concepts of the firm. The fifth is the idea of corporate purpose statements being subject to regulatory or court approval.

In a paper entitled ‘The Purpose of Corporate Purpose Statements’, to be published in Board-Shareholder Dialogue: Policy Debate, Legal Constraints and Best Practices (Luca Enriques & Giovanni Strampelli eds, Cambridge University Press forthcoming 2023), I describe why Davies’ objections are without foundation.  None of the objections are what Prosperity is proposing. It is not seeking to impose the inclusion of social or communal objectives that are at variance with shareholder interests, or to shield directors from adverse reactions from their shareholders. It is not an entity or managerial concept of the firm, and it is not proposing that purpose statements be subject to regulatory or court approval.

On the contrary it is seeking a strengthening not weakening of board accountability to shareholders; a proprietary not entity view in which the objectives of the firm are aligned with, not divergent from, those of its shareholders; and freedom of choice and plurality of purposes unconstrained by regulatory, court or government approval.

While Davies recognizes these points and the multiplicity of purposes companies can have, he erroneously believes that Prosperity seeks to promote communal or social objectives. It is this which he sees as lying behind legally binding purpose statements and the difficulty of their implementation.

That is not the case at all. The sole objective behind legally binding purpose statements is to allow companies to make their statements credible. It is enabling not prescriptive or restrictive. It applies equally to private as well as communal or social objectives and it is potentially at least as significant in enhancing financial value for shareholders as it is beneficial for other parties, including customers, employees, and communities.

Furthermore, Davies himself sets out how companies can make their purpose statements legally binding without requiring a change to company law. Prosperity suggests that, irrespective of the private or public nature of a corporate purpose, the ability to commit offers immense potential benefit for all those affected by the firm, including its investors.

While there is therefore no substance to the criticisms that Davies raises, there is a substantial issue that he does not address, which goes beyond Prosperity and which I address in my forthcoming book, Capitalism and Crises: How to Fix Them, to be published by Oxford University Press in January 2024. This concerns the ability of companies to profit from inflicting negative detriments on others. It undermines the functioning of markets and the feasibility of companies to adopt positively beneficial purposes. It explains the limited commitment of large companies to positive purposes to which Davies refers in his blog, and it justifies the deployment of private ordering and company law, as well as public law and regulation, to restrain corporate conduct that allows firms to profit at the expense of others.

Colin Mayer is Emeritus Professor of Management Studies, Said Business School, and Blavatnik School of Government, University of Oxford.

This post is part of an OBLB series on Board-Shareholder Dialogue. The introductory post of the series is available here. Other posts in the series can be accessed from the OBLB series page.