The U.S. debate on corporate purpose centers on whether corporations should prioritize shareholders’ interests over the well-being of non-shareholder constituencies. Though the debate dates back at least to the 1930’s Berle-Dodd exchange in the Harvard Law Review, it is resurging due to modern issues like climate change, the future of work, and rising wealth inequality. Many U.S. commentators seem eager to provide fresh takes on whom should ultimately benefit from corporate activities.

In Europe, however, a different discussion on corporate purpose is being led by the British Academy’s Future of the Corporation research program (Program).  In a recent paper, I analyze what the Program has to offer a scholarly audience, and more particularly I engage in a thought experiment. The Program suggests “pathways” to integrate certain socio-environmentally responsible “principles” into shareholder-centric corporate governance systems. I explore how UK corporate governance might function if it adhered to the Program’s guidelines. I focus on the Program’s “legal” pathway[1] and its “law” principle, the latter of which advocates for compelling corporations to define their purposes and actively pursue them.

The Program’s Law Principle

At the law principle’s core, the Program challenges the current framing of Section 172(1) of the UK Companies Act 2006, arguing that the provision is unsatisfactory because it only permits directors to consider non-financial interests for shareholders’ benefit. While there is an escape hatch in Section 172(2) for corporations with altruistic goals, the Program’s view is that it’s rare use and limited scope is insufficient for fostering purposeful corporations.[2] The Program, therefore, supports discarding the Section 172 regime entirely and replacing it with a universal approach that would mandate all corporations to prioritize purposeful objectives.

The Program’s vision for corporate purpose requires corporations to focus on solving societal or environmental issues, with profit-generation being a secondary concern.[3] Unlike in the U.S., this approach shifts the debate on corporate purpose from the “shareholders versus non-shareholders” dichotomy to how corporate activities contribute to the common good. It advances a corporate governance system that prioritizes the corporation’s stated purpose over all stakeholders’ interests; a model where product or service improvement serves to produce societal or environmental benefits. This is what I call an “institutional” view of corporate purpose.

What little academic treatment there is of the Program is skeptical of the above legal reform. One critic argues that corporations might exploit potentially vague regulatory requirements for defining a corporate purpose to avoid genuine commitment.[4] However, the Program recommends fairly detailed disclosure requirements that could minimize such evasion. Indeed, the Program’s approach loosely aligns with how the UK’s social enterprise corporate form, the “community interest company” (CIC), regulates corporate purpose institutionally. The CIC regulator reports limited directorial misconduct, indicating that a well-defined legal framework can plausibly enforce purposeful corporate behavior in the boardroom.

The Attendant Examples

Although the CIC legal regime is a real-world reference point demonstrating that the Program’s institutional articulation of corporate purpose could be workable in practice and foster corporate accountability, the attendant examples the Program furnishes to illustrate how national policymakers could implement the law principle are problematic. These attendant examples, I argue, represent a category error. That is, they embody other manifestations of corporate purpose – the “pluralistic stakeholderism” and the “mission statement” approaches, specifically – and are presented by the Program as if they are consistent with an institutional corporate focus. These alternative approaches to corporate purpose carry with them some serious directorial accountability deficiencies.

The first and second examples offered by the Program I address are the proposed Better Business Act (BBA) and the corporate purpose provisions in U.S. benefit corporation legislation.[5] I show that both the BBA and benefit corporation legislation embrace a pluralistic stakeholderism conception of corporate purpose, which mandates that directors independently consider the interests of various stakeholders in their decision-making. This approach is initially criticized for not aligning with the Program’s institutional understanding of corporate purpose, which prioritizes addressing societal or environmental commitments over the interests of any one stakeholder group. The critique extends to the practical pitfalls associated with trying to implement pluralistic stakeholderism and highlights issues with enhanced directorial discretion and accountability and the potential for “purpose washing.”[6]

The third and final example from the Program I consider is Novo Nordisk, a Danish healthcare corporation. I argue that Novo Nordisk’s corporate purpose – to “drive change to defeat serious chronic diseases” – is not institutionally focused. Rather, it is a mission statement. While mission statements tend to prioritize a corporation’s societal or environmental contributions (i.e., not stakeholders’ interests), they lack the linguistic specificity anticipated by the Program to effectively guide and evaluate corporate performance and hold directors accountable. Without clear criteria in a mission statement for assessing “success” and “failure,” I demonstrate that directors have unwarranted discretion in decision-making, which opens the door for abuses of power and increases in agency costs.

Social Enterprise Law

In the paper’s final part, I concentrate on the absence in the Program’s recommendations of a government role in screening provisional corporate purpose statements. The Program’s institutional conceptualization of corporate purpose could be workable in practice and hold corporations accountable, but, I contend, it must be augmented with a public oversight mechanism. Such an enhancement would theoretically impede corporations from stating corporate purposes that track with the Program’s attendant examples rather than with its actual institutional definition.

Vis-à-vis where UK policymakers could look for inspiration, I suggest that they could gain from adapting principles from social enterprise law, specifically the CIC legal regime. Not only do CICs pursue institutionally focused corporate purposes that are loosely consistent with what the Program advocates, but the CIC legal regime also features a provisional corporate purpose statement screening function. I propose that UK policymakers adapt the CIC regulator’s practice of requiring corporations to submit a provisional corporate statement at the point of registration.

However, I also argue that the state should not carry over the “community interest test.” The community interest test, broadly, is a mechanism in the CIC legal regime’s provisional corporate statement screening function that empowers the regulator to make normative value judgments in legally determining the appropriateness of a corporation’s proposed corporate purpose. To become a CIC, and to remain one, a corporation must pass the community interest test. There are good reasons for the presence of this test in the CIC context, but those reasons are not convincing as applied to the Program’s vision for purposeful corporations.

Therefore, the adaptation I argue for does not authorize the state to handle a corporation’s registration application on normative grounds. Differently, acceptance or rejection by the state hinges on whether a corporation has properly observed certain procedural formalities. Namely, a corporation must submit a detailed account of the chosen societal or environmental commitment that conforms with a number of Program-inspired disclosure requirements. The point is to erect a registration system that ensures the submission of provisional corporate purpose statements that are suitably detailed and align with the Program’s institutional position; one that filters for statements that enable avoidance of accountability (e.g., pluralistic- and mission- based proposed corporate purposes). The paper cautions that, in borrowing from the CIC legal regime, the UK should not restrict corporate purpose diversity and hamstring innovation through excessive politization and state interference.

Avenues of Future Research

Implementing the proposed government oversight mechanism will not, on its own, make corporations fully purpose-driven and accountable for their societal or environmental commitments. Future research should delve deeper into the Program’s other recommendations, such as its “ownership” principle, which suggests that shareholders have obligations to support corporate purpose. The examples that the Program offers for how the ownership principle could be implemented do not argue for a rethink of shareholders’ governance entitlements.[7] This is troubling. The powerful suite of governance entitlements vested in the general meeting is exactly why the UK is regarded as a shareholder-centric jurisdiction.[5] Even if the proposed government oversight registration mechanism were implemented, it would not stop shareholders from reneging on the particular purposeful commitment downstream for personal gain. Consequently, a crucial area of future research may be to consider what changes to shareholders’ governance entitlements are possible, potentially looking again to the CIC, so that purpose is respected in the general meeting after such a commitment is made.[6]

ENDNOTES

[1] The Program emphasizes the importance of the legal pathway. Shareholder-centric jurisdictions typically feature a corporate governance framework that, through legal means, favors investors’ needs, which jeopardizes the emergence of purposeful corporations. The Program, thus, asserts that corporations cannot truly be purpose-driven without substantive legal changes that dilute shareholder primacy. This belief underpins the Program’s call for a comprehensive legal, regulatory, governance, and reporting infrastructure to establish purposeful corporations. One proposed legal change is the law principle.

[2] Note that commentators question the utility of Section 172(2) for encouraging corporations to depart from the shareholder-focused default rule in Section 172(1) and experiment with alternative corporate purposes. See eg David Kershaw and Edmund Schuster, “The Purposive Transformation of Corporate Law” (2021) 69(3) American Journal of Comparative Law 478, 516-517 (contending that the prevailing legal stance in Section 172(1) discourages deviation – for example, because of reputational risks – from shareholder wealth maximization and the adoption of alternative corporate purposes under Section 172(2)).

[3] Colin Mayer, the Program’s principal, further elaborates on the Program’s conception of corporate purpose in a number of academic articles. See eg Colin Mayer, “The Future of the Corporation and the Economics of Purpose” (2021) 58(3) Journal of Management Studies 887, 889-890.

[4] Paul L. Davies, “Shareholder Voice and Corporate Purpose: The Purposelessness of Mandatory Corporate Purpose Statements” European Corporate Governance Institute – Law Working Paper No. 666/2022 (2022) 1, 15-16.

[5] I reference Delaware’s Public Benefit Corporation Act of 2013 specifically. See DEL. CODE tit. 8, § 362(a)-(b).

[6] Generally, purpose washing describes a situation in which a corporation outwardly claims through its marketing to pursue public benefits, but does not meaningfully commit to acting responsibly behind the corporate veil. See eg Dayana Jimenez, Isabel B. Franco and Tahlia Smith, “A Review of Corporate Purpose: An Approach to Actioning the Sustainable Development Goals (SDGs)” (2021) 13(7) Sustainability 3899, 3910.

[7] The Program claims that shareholders’ “rights cannot simply be re-allocated; changing structures and the decisions members are expected to make can have statutory knock-on effects.” Instead, the Program insists that policymakers should consider “ways to influence shareholder behaviour that…[do] not rely on statutory change.” See Bridget Kustin, Jonathan Chan and Mary Johnstone-Louis, “The Future of Corporate Ownership and Governance” British Academy Future of the Corporation Working Paper (2019) 1, 12.

[8] See eg Paddy Ireland, “Limited Liability, Shareholder Rights and the Problem of Corporate Irresponsibility” (2010) 34(5) Cambridge Journal of Economics 837, 848 (describing the UK as a “shareholder’s paradise”).

[9] I am working on a project that explores this possibility.

This post comes to us from J S Liptrap, a lecturer in legal research at Quinnipiac University School of Law and a research associate in the Center for Business Research at the University of Cambridge’s Judge Business School. It is based on his recent paper, “What Can Social Enterprise Law Contribute to the Corporate Purpose Debate? A UK Perspective,” available here.