Between 2014 and 2016, European law firm Frank Bold and the Modern Corporation Project at Cass Business School of City, University of London, hosted a global series of roundtables on corporate governance in which we engaged with over 260 practitioners, academics, and regulators. On the basis of these roundtables we have recently presented a report, available here, with concrete suggestions for the development of corporate governance.
Mainstream corporate governance models have been narrowing since the 1970s in order to put the maximisation of shareholder value at the centre of corporate attention. The resultant focus on short-term share price leads to short-termism, undermines companies’ ability to invest in their future, and diminishes their capacity to anticipate and mitigate systemic risks.
To address this move toward shareholder primacy, we looked closely at the identification of corporate purpose. The breadth of corporate purpose determines a corporation’s ability to recognise, respect, and balance stakeholder needs, which are key to its long-term success, ability to operate in line with societal interests, and maintenance of public trust and its social license to operate.
The roundtables identified how company law worldwide permits a broad perspective on the purpose of the corporation and mandates the direction of fiduciary duties toward the corporation, not the shareholders. Shareholder primacy, therefore, presents a socially constructed norm that is not subscribed to in most jurisdictions in the world, including the U.K. and the U.S.
To develop a corporate governance system that will sustain long-term value creation, the roundtables identified the purpose of the corporation as the creation of long-term sustainable value, while contributing to societal well-being and environmental sustainability. Accordingly, corporate governance theory and practice should be developed to a standard where it may contribute to these objectives.
Based on this identification of corporate purpose the report provides a comprehensive list of proposals that are necessary to achieve this goal in seven areas:
- Embedding a clear sense of purpose in the governance structure of the corporation. Examples include registering as a Benefit Corporation or other alternative legal form established to protect social purpose or, alternatively, obtaining B corporation certification.
- Clarifying fiduciary duties of directors and institutional investors. Examples include specifying directors’ duties with respect to the long-term development of the entity, systemic risk and stakeholders. These duties can be reflected in corporate governance documents, strategic objectives, key performance indicators, corporate reports and executive incentive systems.
- Strengthening the role of the board. Examples include mandating independent directors to represent specific types of stakeholders and setting the corporation’s mission and commitment to creating long-term value.
- Revising incentive structures. Examples include basing compensation on creating long-term value and conditioning share-based remuneration on achieving and sustaining long-term goals.
- Engaging stakeholders. Examples include specifying in corporate governance documents which audiences and matters are most relevant for the corporation
- Fostering “patient capital.” Examples include using multiple share classes to vest voting rights with committed shareholders and allocating rights and incentives to investors on the basis of how long they own shares or how much they contribute to the corporation’s capital.
- Reporting. Examples include adopting the Integrated Reporting framework and reporting on the risks of adverse social and environmental impacts connected to the corporation’s business.
In sum, the report aims to encourage a clear sense of corporate purpose, the rethinking of corporate governance so it aligns with that corporate purpose, and the creation of new institutions for embedding corporate purpose in corporate governance theory and practice.
This post comes to us from Jeroen Veldman, a senior research fellow at the Cass Business School, City University, London, and from Paige Morrow, head of Brussels operations at law firm Frank Bold. It is based on their recent report, “Corporate Governance for a Changing World: Report of a Global Roundtable Series,” available here.