Get 20M+ Full-Text Papers For Less Than $1.50/day. Start a 14-Day Trial for You or Your Team.

Learn More →

IESE ECGI CONFERENCE ON CORPORATE PURPOSE: Can Purpose Deliver Better Corporate Governance?

IESE ECGI CONFERENCE ON CORPORATE PURPOSE: Can Purpose Deliver Better Corporate Governance? VOLUME 33 NUMBER 2 SPRING 2021 Journal of AP PLIED COR PORATE FINANC E IN THIS ISSUE: Enlightenment Environmentalism: A Humanistic Response to Sustainable Climate Change Steven Pinker, Harvard University Financial Corporate Resilience and Response to COVID-19 Alex Cheema-Fox, Bridget R. LaPerla, and Hui (Stacie) Wang, State Street Associates; and George Serafeim, Harvard Business School Management IESE ECGI CONFERENCE ON CORPORATE PURPOSE SESSION I: Are Corporate Statements More Than Verbiage? Speaker: Colin Mayer, University of Oxford and ECGI; Discussant: Luigi Zingales, University of Chicago SESSION II: Company Valuation and the Effects of ESG Factors Speaker: Patrick Bolton, Columbia Business School and ECGI; Discussant: Sophie L’Hélias, President LeaderXXchange and Co-Founder of ICGN SESSION III: Corporate Purpose and the Theory of the Firm Speakers: Bengt Holmström, MIT and ECGI; Paul Polman, former CEO of Unilever and co-founder of Imagine SESSION IV: Corporate Purpose, Ownership, and Performance Speaker: Claudine Gartenberg, University of Pennsylvania; Discussant: Caroline Flammer, Boston University SESSION V: Unpacking the Purpose of the Corporation Speaker: Rebecca Henderson, Harvard Business School; Discussant: Jordi Gual, Chairman of CaixaBank SESSION VI: How Should Boards of Directors Deal with Corporate Purpose? Speakers: Baroness Denise Kingsmill, Non-Executive Director of Inditex and IAG; Juvencio Maeztu, Deputy CEO and CFO of INGKA (IKEA): and José Viñals, Chairman of Standard Chartered A Deeper Look at the Return on Purpose: Before and During a Crisis Greg Milano and Riley Whately, Fortuna Advisors; and Brian Tomlinson and Alexa Yiğit, CEO Investor Forum at CECP ESG in Emerging Markets: The Value of Fundamental Research and Constructive Engagement in Looking beyond ESG Ratings Mark Mobius and Usman Ali, Mobius Capital Partners Capital Allocation and Corporate Strategy: An Examination of the Oil & Gas Majors Andrew Inkpen, Michael H. Moffett, and Kannan Ramaswamy, Arizona State University IESE ECGI CONFERENCE ON CORPORATE PURPOSE Can Purpose Deliver Better Corporate Governance? October 28-30, 2020 Paul Polman Co-Founder and Co-Chair of IMAGINE and the former Bengt Holmström CEO of Unilever MIT and ECGI Colin Mayer Luigi Zingales University of Oxford and ECGI Chicago Booth and ECGI Sophie L’Helias Patrick Bolton President LeaderXXchange and Columbia Business School and ECGI Co-Founder of ICGN Rebecca Henderson Jordi Gual Harvard Business School Chairman of CaixaBank Marco Becht Jordi Canals ECGI and Université libre de IESE Business School Bruxelles ROUNDTABLE Jordi Canals: Good afternoon, I’m Jordi Vanessa Koenig, for their outstanding as Jordi has already said, corporate Canals and, on behalf of the ECGI work. I also want to thank the Social governance now occupies center stage. and IESE Business School, I want to Trends Institute, its chairman Carlos We first had codes, then the OCD Cavallé, and its executive director, give you a very warm welcome to this principles, then the emerging markets conference on corporate purpose. Our Tracy O’Donnell, for their support of and global financial crisis, and today working title is: Can purpose deliver this conference. e Th Strategic Manage - we are talking about corporate gover- better corporate governance? ment Society, whose scholars are closely nance, which really means the future When we started planning this following developments around corpo- of capitalism and the role of business conference with our colleagues at rate purpose is another very important in society. ECGI in May 2019, we were already partner in this conference. I’ve always found it a pleasure convinced of the importance of corpo- And with that, I’ll stop and invite to work with IESE because of the rate purpose and how it could change Professor Marco Becht from ECGI to outstanding professionalism of its sta. ff the understanding of corporate gover- say a few words. Marco, the floor and Not only does Felix Sánchez do excel- nance. In the 18 months since then, screen are yours. lent work but, nomen est omen, it takes our beliefs have been strengthened a bit of luck as well as hard work to run by the Business Roundtable State- Marco Becht: Thanks, Jordi. I am a conference with 1,700 participants. ment on the purpose for corporations Marco Becht, a professor of Finance And let me close by thanking Jordi and and multi-stakeholder management at the University Libre de Bruxelles everybody at IESE for their efforts. in August 2019, and by the World and the executive director of the Euro- Economic Forum manifesto in support pean Corporate Governance Institute, Canals: Thank you very much, Marco, of multi-stakeholder management a or ECGI. We have had a long-stand- for your kind words. It is a pleasure to few months later. ing connection with IESE. Jordi was a work with you and your colleagues at Unfortunately, we have also seen member of the ECGI board for many ECGI. And on behalf of Marco and the the onset of COVID-19, which has only years, and in 2008 he hosted the 2008 conference academic committee, let me made clearer the importance of environ- ECGI Annual Meeting at IESE’s brand provide a brief overview of the topics mental impacts and the social impact of new state-of-the-art Executive Teaching and sessions of the next three days. companies. In just the past few weeks, facility in Barcelona. Our first session, which will begin we’ve had several debates about share- ECGI is a global network compris- in a few minutes, will be led by Profes- holders and stakeholders, inspired in ing about 300 of the world’s leading sors Colin Mayer and Luigi Zingales. part by the 50th anniversary of Milton researchers in economics, finance, Colin will present a paper on how Friedman’s article in The New York and law, with a strong interest in serious corporate purpose statements Times on the primacy of shareholders. corporate governance. More gener- promote better corporate governance. We look forward to contributing to ally, ECGI serves as a bridge between In our second session, later this the debate on corporate purpose during academic research, corporate practice, afternoon, Professor Patrick Bolton this conference. The subject of corpo - and policymaking. We have more than of Columbia University will present rate purpose and governance has been 600 members. ECGI is financed by valuation models that take externalities studied by scholars from many different membership dues, contributions, and such as carbon emissions into account. academic disciplines, including organi- donations. And our two largest donors Patrick’s paper will be discussed by zational economics, corporate finance, currently are BlackRock and Investor Sophie L’Helias, a well-known investor strategic management, and corporate AB, the holding company controlled by and President and Founder of Leaders law. More than 1,700 people have the Wallenberg Foundations. for Change. registered for this conference, includ- The roots of ECGI go back to In our third session, B e n g t 1996, when corporate governance Holmström ing a number of corporate CEOs. And , MIT Professor and 2016 was practiced by a few investors and Nobel Laureate of Economics, will I would like to start by thanking my present his thinking on how purpose ECGI colleagues, particularly Professor studied by some academics or, colloqui- can be incorporated in contemporary Marco Becht, Elaine McPartlan, and ally speaking, a bunch of geeks. But, 42 Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 ROUNDTABLE complex subject, and of the promise models of the firm. And Bengt will be Henderson, a leading scholar in organi- of strengthening corporate purpose for accompanied by Paul Polman, former zational economics from the Harvard improving the quality of governance. CEO of Unilever, who has been widely Business School, will also discuss the impact of purpose on employee recognized for his role in bringing Companies will command greater respect sustainability on the agenda of large motivation and engagement, and also in the political and social spheres and, in companies and for introducing purpose the effect of corporate decisions on so doing, enlarge their ability to create and multi-stakeholder management. climate change and social inequality. not just economic value and wealth, but Our fourth session, late tomorrow, Jordi Gual, currently the chairman all the other kinds of social value that will delve into a number of impor- of CaixaBank, will discuss Rebecca’s come with the concept of purpose and tant aspects of purpose, namely, how paper. corporate ec ffi iency and value. employee morale and engagement We will finish on Friday afternoon And with that thought, let me depends on corporate commitments with a panel featuring board directors, begin our first session by turning the to purpose, but also on the nature of CEOs, and company chairmen on floor over to Colin Mayer of Oxford ownership. Wharton’s Claudine Garten- how to bring purpose into boardroom University, a well-known authority berg will present an interesting paper on discussions and how this may help on the subject of corporate purpose. this topic, which will be discussed by boards frame strategic discussions and Colin, it’s all yours. Caroline Flammer of Boston University. improve strategic decision-making. At our fifth session, which takes Our aim in these sessions is to place on Friday, Professor Rebecca advance our understanding of this Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 43 IESE ECGI CONFERENCE ON CORPORATE PURPOSE SESSION I: Are Corporate Statements More Than Verbiage? Colin Mayer: Thanks, Jordi. The subject look after the suppliers in their supply holder value, companies should take of our conference today is “Can purpose chains, promote the environment, account of the interests of all other deliver better corporate governance?” important stakeholders—and that, in so produce safe and healthy products, and And the subject of this particular session doing, companies are likely to increase pay taxes—but only up to the point that is “Are corporate statements verbiage?” I their own value, at least under certain such measures work to increase share- will start by telling you that I think the circumstances that economists describe holder value. answer to both questions is yes, even if as involving no “negative externalities,” One problem with all this, however, those two statements seem to be at odds. no negative social effects, such as those is that such directives as the one I just The definition of “verbiage” arising from pollution, that are not cited from the U.K. Companies Act provided by the Oxford English Diction- captured on their P&Ls and balanced could be, and often are, interpreted ary is “superabundant or superfluous sheets. This doctrine became very as saying that companies should pay wording; profusion of words without popular during the 1980s, and a version as little in wages to their employees, good cause, or without helping to make of it was effectively adopted in 28 Ameri- employ people in their supply chains the intended meaning clearer or more can states in the form of “constituency” at the cheapest conditions possible, precise; excessive wordiness or elaborate- statutes. The concept of enlightened produce addictive products, undermine ness of language.” And I would describe shareholder value has also been embod- the environment and avoid paying taxes purpose statements as even less meaning- ied in the U.K. Companies Act, which whenever possible, provided they don’t ful than “verbiage,” as mostly just states that “a director of a company must break the law. But in doing all this, of “twaddle”—which the OED defines as act in a way he considers, in good faith, course, such companies risk significant “senseless, silly or trifling talk or writing; would be most likely to promote the harm to their reputations that is likely empty verbosity; dull and trashy state- success of the company for the benefit to undermine the value of their compa- ment or discourse; empty commonplace; of its members as a whole.” Although nies. And needless to say, such behavior prosy nonsense.” basically a shareholder primacy state- does not meet most people’s concept Most corporate statements of ment, it goes on to say that “and in doing of “enlightened.” But the concept of purpose, I will argue, lie somewhere so… regard… the likely consequences enlightened shareholder value relies between twaddle and verbiage. And in of any decision in the long term for its in part on market investors rewarding making my point, I will show that most other stakeholders—namely, its employ- virtuous companies with higher stock statements suffer from confusion about ees, suppliers, customers, communities, prices—and to the extent such virtue where they stand in terms of what I view the environment, the company’s reputa- is not in fact rewarded, the approach as the four main alternatives to today’s tion, and its members.” could fail to provide “protection” for prevailing paradigm—namely, the value In sum, enlightened shareholder socially responsible companies against maximization or Friedman doctrine, value says that companies should protect the attacks of activist investors that call which holds that the social purpose of and promote the interests of all their for cuts in employee wages or taxes paid business is to increase its own profits stakeholders in so far as this enhances the in the name of increasing shareholder while complying with laws and regula- value of the company over the long run. value. tions, or “the rules of the game.” The four This is what might be described as an But now let’s turn to stakeholder alternatives to value maximization that I “instrumental” view of the promotion of theory, whose fundamental premise is will refer to are as follows: (1) enlight- stakeholder interest. It is also an extrinsic that companies should take an intrinsic ened shareholder value; (2) stakeholder concept in the sense that it takes account interest in their other stakeholders—and theory; (3) shareholder welfare and (4) of the values, interests, and well-being that such interests should thus be viewed corporate purpose. And I will take a brief of other stakeholders only insofar as they as equivalent to, or on a par with, their look at each of them. contribute to greater shareholder value. shareholders’. As one example, consider Enlightened shareholder value is It implies that companies should, for Minnesota’s 1991 Constituency Statute, the notion that, in pursuing share- example, pay their employees fair wages, which allows the directors of a public 44 Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 ROUNDTABLE company faced with a takeover bid to So, neither enlightened share- behavior through state regulation. For consider holder value nor stakeholder theory are example, it is one thing to recognize and condemn affronts to employee themselves very compelling arguments. the interests of the corporation’s employ- This brings us to the third alterna- dignity, but quite another to come up ees, customers, suppliers and creditors, the tive, which is the shareholder welfare with clearly written rules and regula- economy of the state and nation, commu- concept proposed by Luigi Zingales tions that will anticipate and deter nity and societal considerations, and the and his co-author Oliver Hart. Luigi’s such possibilities, especially in a way long-term as well as the short-term inter- concept is appealing because by focus- that does not significantly limit their ests of the corporation and its shareholders, ing on shareholders as human owners of commercial viability and incentives to including the possibility that these interests a business enterprise, and not disparate invest. This is especially true of global might be best served by the continued inde- stakeholder interests, it recognizes our enterprises, whose local operations pendence of the corporation. collective interest in a clean environ- are effectively overseen by a variety of ment, healthy societies, high quality national governments. The message here is that public consumer products, and in the welfare Recognizing these limits to the companies have what amounts to an of our children and grandchildren. reach and effectiveness of regulation, intrinsic obligation to all stakeholders So, the concerns of shareholder the concept of shareholder welfare calls that takes precedence over shareholder welfare about corporations go well on corporate managements to consider returns and accordingly should seek to beyond their market value. Shareholders a broad range of factors that affect the protect and serve those interests together of a company are ordinary people who welfare of their investors. What’s more, with the long- and short-term share- are concerned about money, but who Luigi and Oliver suggest that mutual holder interests. also have ethical and social concerns. funds have a major role to play in focus- The problem with such an approach, They want managers to remain focused ing management’s attention. Mutual however, is that it leaves management on shareholder interests, but recognize funds must manage a variety of finan - with an impossible task, and no guidance that those interests extend to society and cial risks, covering long-term as well for decision-making. Managers have no the environment. Similarly, the fiduciary as shorter time horizons, and general clear way to advance all interests for duties of institutions to their beneficia - welfare considerations must be part of the simple reason that most managerial ries should be to their general welfare, this risk assessment, if only because of decisions involve trade-offs that make not just to their financial wealth. the threat of new government regulation some stakeholders better off but others i Th s view recognizes that the Fried - and intervention. worse off. As a consequence, the stake - man doctrine rests on two erroneous But this raises the question of holder theory is likely to lead to very assumptions. The first is that one can whether mutual funds would, in weak or confused corporate governance, easily separate philanthropy from the practice, actually be able to implement with accountability to everyone ending productivity and wealth-increasing activ- this notion of shareholder welfare. In up as accountability to no one. It’s hard ities of companies. The second mistaken a more recent paper, Luigi and Oliver to rank performance against all those assumption is that government regula- discuss the likely effectiveness of the stakeholder interests, and this means tion will suffice to constrain potentially two main investor responses to offend- confused incentives. Notice also that the harmful activities of companies. Luigi ing companies: “exit” and “voice.” Since Minnesota statement said that directors and Oliver pointed to robber barons, exit amounts to investors simply selling “may,” not “must,” consider other stake- such as Carnegie, and the Rockefellers their shares in the oe ff nding companies, holders, so the statute permits but does and Vanderbilts, whose establishment of such selling does little more than create not prescribe. Stakeholder theory aims charitable foundations came after, and profit opportunities for two kinds of to prescribe here, to substitute “must” have been viewed as a kind of expiation investors: less socially responsible ones, for “may”; and to the extent it succeeds for their exploitative treatment of their or shareholder activists intent on actually in getting its way, it is likely to fail in workers. engaging with the company to address its goal of creating value for, and thus It is very difficult, indeed impos - their problems. serving the interests of, all stakeholders. sible, to constrain all harmful corporate Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 45 ROUNDTABLE But where Luigi and Oliver express ment—ownership is no guarantee of the rights of shareholders, and gover- considerable optimism about the effec - socially responsible behavior. nance focuses on resolving the “agency tiveness of such engagement, I don’t fully This brings us to the corporate problem’ of aligning managers” interests purpose alternative. Since this notion share their confidence. They assume, for with those of their shareholders. example, that all shareholders would be means different things to different The law should define the duties to “pivotal,” in the sense of being likely to people, it’s not surprising that corpo- deliver on that corporate purpose along support the activist campaign. But I find rate purpose statements strike many as the lines of what I just described in the this assumption inconsistent with Luigi’s merely verbiage. A simple answer to U.K. Companies Act. It is also a feature own finding, in a paper published in the the question, “What is the reason for of the Pact Loire that’s been put forward 1990s, that such pivotal shareholders being of this company?” is likely to be in France, and of the Public Benefit represented less than 50% of all share - something like “to make the world a Corporation in the United States. holders. And given the trend toward better place.” Regulation is not just about complying global indexing, this percentage has My idea of purpose is seeking profit - with the rules of the game, but aligning probably declined sharply from those able solutions to the problems that you purpose in ways designed to ensure the levels in the last two decades since then. and I face as individuals and as societies, continuation of companies’ social license There is also a problem on the without adding to problems for either to operate. Ownership is not just about investment side with multiple layers people or the planet. That brings clarity protecting and exercising the rights of of control and ownership diluting the to the notion of corporate purpose, and the shareholders, but also upholding ability of even the most welfare-promot- that clarity brings credibility. their responsibilities, particularly in ing investors to influence what goes on But, as important as the clarity of promoting the purpose of companies. at the level of the firm. And there are corporate purpose statements is working This notion of corporate purpose is also questions about how shareholder to ensure that such purpose gets enacted not a rigid code of social conduct that is activism and takeovers might pressure by and within companies. Interest- intended to be monitored and imposed companies away from, instead of toward, ingly, the second paragraph in the U.K. by a purpose police. It is meant to the pursuit of purpose. Companies Act says that companies can encourage a plurality of purposes—one Even more signic fi antly, it’s impor - substitute the notion of purpose for the achieved through innovation or experi- tant to recognize that the concept of idea of promoting success for the benet fi mentation that helps companies find shareholder welfare is still based on an of their members, and therefore boards new ways to profit while or even by limit- extrinsic view of interest, in the sense and top managers can promote the ing negative externalities. To this end, that corporate managers take account purpose of the company, and take full corporate performance should be evalu- of stakeholder interests only insofar as account of the interests of all the other ated both in light of existing standards they affect the interests of sharehold - parties as well. and metrics, and by adapting such ers. And these interests could diverge So, that’s one element in terms of metrics to incorporate relevant indica- greatly. Consider, for example, Purdue implementing corporate purpose. But if tors of a company’s success in making Pharma, the Sackler family, and the law is clearly important in defining the good on its purpose. The aim here is opioid epidemic to which Oxycontin duties of directors, there are other key to promote sustainability by directing has given rise, or the Porsche-Piech elements that include rules and enforce- companies toward activities that benefit, family and the V W “Dieselgate” ment of regulation, ownership rights and rather than harm, other parties. scandal. In neither of these cases were responsibilities, governance, the align- What’s more, this corporate purpose problems avoided by the presence of ment and accountability of the boards, notion might be viewed as combining “pivotal” as opposed to dispersed share- performance measurement, incentives, the concepts of enlightened shareholder holders—including, in V W’s case, the and resource allocation. Law addresses value and of shareholder welfare. state government of Saxony—whose the duties of directors to shareholders Achieving corporate purpose comes by while regulation provides the “rules of inu fl ence and intervention might have managing the company for the welfare prevented the social problems that the game,” and the extent to which they of its shareholders while regarding the arose. In sum, family—and govern- get enforced. Ownership determines likely long-term consequences for the 46 Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 ROUNDTABLE welfare of its stakeholders. And another longer. For companies governed by millennials and Gen Z members joining industrial foundations, we find that one of the benefits of this combina- the workforce. tion is a lower cost of capital because about 30% of them survive for at least But these points of agreement the company faces lower risks and, as 40 years, as compared to only about notwithstanding, I find myself troubled a consequence, can reasonably expect 10% of their widely owned counter- by several questions about Colin’s a longer life as a viable, independent parts. concept of corporate purpose. Is it going concern. With that, let me now turn things mainly a moral precept intended to What I think emerges from this over to Luigi. guide individual conduct, or is it also comparison is that enlightened share- meant to guide managers and improve holder value provides a minimum Shareholder Welfare vs. how their companies are run internally? standard of what might be deemed Shareholder Value Or is it a set of policy prescriptions for acceptable, whereas the notion of stake- Luigi Zingales: Let me start by thanking corporations that should be mandated holder theory remains unworkable Jordi, Marco, and the other organizers to help them carry out their larger role and impractical as a guide for corpo- for the opportunity to respond to Colin. in society? rate governance. The reason so many I think that Colin is trying to rein- My impression from listening to purpose statements are merely verbiage vent capitalism, which although a near Colin’s comments is that he intends a is that the thinking about purpose has impossible task for an ordinary person, little bit of all three. As much as I admire been vague, and the verbiage provides a is a dic ffi ult undertaking even for some - Colin, I continue to find Kant’s categori - means of covering over the void. On the body as talented and accomplished as cal imperative—that you should behave other hand, by bringing precision to a Colin Mayer. as you would want others to do—a purpose that involves addressing specific Let me start by saying that I agree better guide to individual conduct. problems faced by particular groups in with Colin completely on three points. Indeed, I would call it the best guide; in society, one can embed that purpose e fi Th rst is that corporate governance is economists’ terms, it should be viewed in corporate practice. That would also crucial in shaping the capitalist system, as the general equilibrium idea of moral encourage more relevant public policies and that we do not spend enough time precepts. But whether most people and corporate laws that would encour- thinking about this. Capitalism, since follow that precept is a different story age companies to fulfil their corporate the beginning of the 20th century, has altogether—and I think most people purpose. been corporate capitalism; that is to say, it know where I stand on that question. One good example comes from has been very much shaped by the largest Why is Kant’s imperative better? It Denmark, where the industrial founda- corporations. doesn’t require that we define concepts tion laws have encouraged some of the The second point on which Colin like profitability or purpose, or most successful companies in Europe. and I agree completely is that the Fried- “problems of people and planet.” Kant’s Along with Bosch in Denmark, man doctrine of shareholder value imperative is basically just a general Northern European companies like maximization is outdated. The social equilibrium consistency argument that Bertelsmann, Ikea, and Velux are all mission of the public corporation today we economists can readily understand. owned by industrial foundations. Those goes beyond maximizing its own profits, So, if corporate purpose isn’t really foundations provide the “lock-in” of even when that is properly interpreted the best guide to individual conduct, corporate purpose I have described. as maximizing its long-run value to its is it the best guide for corporate They provide board oversight of and shareholders. managers when running companies? accountability for the achievement of As economists, we tend to look at The third, and probably our most corporate purpose. Among the many important point of agreement is our trade-offs along the production possi - accomplishments of such compa- common belief that people are motivated bility frontier. Indeed, we are obsessed nies is that, although their financial by more than money. Purpose is a power- with trade-offs, and with finding the performance is comparable to that of optimal, or value-maximizing, trade- ful motivating factor, and Colin’s use of similar-sized companies in the same offs. Colin appears to be suggesting the intrinsic motivation language has industries, they tend to survive much proven to be especially appealing to the that his approach is somehow capable Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 47 ROUNDTABLE of pushing out that frontier, creating enjoy an exorbitant privilege—namely, circulation declines, the number of more with less. For example, if you limited liability vis-à-vis tort claim- journalists declines, local political cover- ants. But this advantage accrues only find a way to motivate workers more age declines, fewer people vote because effectively, you end up with higher to those enterprises that incorporate. they are not informed, and politicians productivity with possibly even lower So, if Colin’s focus was on the type of become more extreme. None of these costs, say from reductions in turnover. externality that affects our claimants, his changes is a good thing. Now, all this might well be conclusion would make perfect sense. So, the question arises, is Craigslist doable—a way to maximize companies’ If you believe companies dump too producing profitable solutions or is it value while also perhaps even working much toxic waste in the river because profiting from producing problems? I say to limit negative externalities. But if they have limited liability for the harm it is prot fi ing from producing problems that’s the case, I find it hard to under - they cause, then his proposed regulation despite its declared goals. stand why entrepreneurs and VCs makes sense. In sum, there is an important differ - have yet to adopt corporate purpose? But as I understand them, Colin’s ence between stated intentions and Maybe they haven’t yet read Colin’s concerns are about things like global actual results. And how would we tell paper, and once they do, they will go warming, inequality, racism, and other the difference before the fact? That is in that direction. But, as Colin himself issues that do not generate financial why I’m concerned about mandating a has mentioned before, U.S. businesses liability, or at least not yet. if you want corporate purpose. can now choose to organize as Public to mandate social purpose to fix these Colin defines capitalism, at least Benefit Corporations, and similar problems, why would you require it traditional capitalism, as an economic legal entities exist in most developed only for the corporate form? Should I system of private ownership of the countries. But very few entrepreneurs be exempted from caring about global means of production and its operation choose such different organizational warming if I choose to operate as a for profit. I think about it somewhat forms—and the question is why? limited partnership? differently. In my version, actual When I put that question to one Second, is Colin’s idea feasible? ownership is not essential. You can entrepreneur who claimed to be pursu- Craigslist is a company that is famous also lease the means of production. It ing an explicit social goal, he said that for its social purpose. Craig, the founder does not really make a difference. Colin the traditional corporate form preserves of Craigslist, is dedicated to the public and I work for universities, which are his access to the broadest range and good and, in fact, he formed a founda- nonprofit organizations—but they are largest number of investors—and that tion to own the business, as did the nonetheless private organizations; they such access gives him a lower cost of northern European companies Colin are not owned by the state. capital. And I will come back to that mentioned earlier. The foundation’s To me, the essence of capitalism point later. But to repeat my point, goals include promoting trustworthy is freedom of enterprise. Freedom though corporate purpose may qualify journalism, protecting voting rights, of enterprise also means freedom of as a managerial guide in some aspects, and everything that Colin likes—and I incorporation. But if social purpose is its validity remains to be seen. too like, by the way. mandated, there must be somebody That brings us to the third possi - Interestingly, though, a recent paper screening that purpose. Who is that? bility: corporate purpose as a general has shown that Craigslist has accom- Who decides what is a legitimate social policy prescription, perhaps even with a plished exactly the opposite of what purpose and what is not? mandate? But if that’s the case, then we its stated goals indicated they should During the fascist era in Italy, the do. Although most people think that savings and loans were organized as need to ask three questions: Why is this journalism was killed by Google and proposal limited just to corporations? Public Benefit Corporations and their Facebook, it was actually Craigslist How feasible is it? And are there signi- fi social purpose included donating to the that killed local journalism by taking cant risks or downside associated with young fascist organization. Today, we do adopting and mandating such a policy? away its classified advertising revenues. not view that as a good social purpose. Let’s start with the corporation. This paper documents that, when But the more powerful the state, the Colin is well aware that corporations Craigslist enters a market, newspaper more it restricts alternative forms of 48 Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 ROUNDTABLE competition. I think that if we kill be listened with great precaution and ought tions, such as limited partnerships and freedom of enterprise, we end capital- never to be adopted till after having been applies as much to private as to public ism as we know it. long and carefully examined. corporations. Take the case of Novo Nordisk, And the idea that it is contrary to a company that Colin has repeatedly My parting message is a warning: freedom of enterprise is also completely used to demonstrate his concept of Beware corporations bearing gifts. misinformed. Indeed, corporate purpose corporate purpose. Novo Nordisk is a can be expected to encourage greater Danish pharmaceutical company and Clarifying Purpose plurality and variety of form. Nor does one of a triopoly that controls 96% Mayer: Thanks, Luigi, for the it require a corporate policeman to of the insulin market. Novo has used comments. Let me respond by saying determine what is acceptable. If a firm this market power to increase insulin that I think your arguments can be is profitable and its profits are defined prices dramatically. Between 2001 and summed up as the belief that the enact- in terms of not producing problems for 2017, insulin prices for U.S. customers ment and implementation of corporate others, then economists would view it as increased somewhere between 671% purpose are infeasible, the concept is not “Pareto-improving.” So, you don’t need to 724%, depending upon the type of in fact being practiced as promoted, it a regulator to decide what a purposeful insulin. There is an enormous margin gives rise to serious distortions, and it company is. between the prices of the active ingre- undermines freedom of enterprise. But Finally, my argument about dient and the insulin product sold to let me start by saying that this last objec- Novo Nordisk is precisely that the diabetics. Though the active ingredi - tion—that the concept is meant for use cross subsidy that Luigi has pointed ents for both types of insulin go for only by public corporations—is not at to is not the right way of trying to $6.50/kilo in the U.S., they are sold for all what I’ve been proposing, and what I address the problems. Indeed, that is $48.20/kilo for one type and $34.20 think most people today understand by why Novo Nordisk is looking to find for the other. corporate purpose. ways of solving diabetes that do not Is Novo Nordisk subsidizing But let’s start with the first of Luigi’s involve insulin at all. What I find customers in developing countries by questions: is corporate purpose a state- impressive here is that the company charging higher prices in developed ment of individual morality? There is is effectively volunteering to canni - countries, as Colin seems to suggest, or clearly a moral dimension to corporate balize its own past profit stream by is it simply using its market power to purpose, particularly its urging compa- seeking alternative treatments, such maximize its profits and using corpo - nies to avoid profiting from producing as changing people’s lifestyles. The rate responsibility as a veneer for price problems. And I would view that as insulin pricing problems in the U.S. gouging? essentially the equivalent of a Kantian demonstrate exactly why one should This may be what is called law, a categorical imperative. not want to subsidize some at the “greenwashing.” And even if the As for Luigi’s observation that few expense of others. Luigi has interpreted pharmaceutical company is subsidiz- companies are incorporating as public purpose in a quite contrary manner. ing people in poor countries, as Colin benet fi corporations, I should note that The idea that purpose is something claims, whose objective function is it the number of smaller companies that that should be resisted simply because maximizing? Who is Novo Nordisk to have adopted the public benefit form has some companies will abuse it—use it as decide that poor midwestern farmers in recently increased. It’s dic ffi ult for exist - a stalking horse to distract the media the U.S. should subsidize a rich African ing corporations to shift to the public and regulators—should not allow us to in Nigeria? benefit form because doing so requires a overlook socially purposeful behavior So, let me close by reminding us supermajority shareholder vote. But to by companies with genuine commit- all of what Adam Smith wrote in The say that corporate purpose is essentially ment to important goals. Companies Wealth of Nations, a policy prescription that is being applied like Novo Nordisk, whatever their past only to limited liability firms is wrong. offenses, are arguably not greenwash - The proposal of any new law which On the contrary, the notion of purpose ing; but trying to find ways of helping comes from businessmen ought always to people around the world. should indeed apply to other organiza- Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 49 IESE ECGI CONFERENCE ON CORPORATE PURPOSE SESSION II: Company Valuation and the Effects of ESG Factors Xavier Vives: I’m Xavier Vives of the ing and research on these questions. decisions involving ethical dilemmas. IESE Business School, and I want to Patrick has had a distinguished career Having become an avid reader of these welcome you to the second session of in Europe as well as the U.S., and has columns, I’ve come to realize that it’s this conference on corporate purpose. been president of the American Finance rarely obvious what the ethical course This session is on company valuation and Association, among other organizations. of action is in concrete settings. And so the ee ff cts of ESG factors. These factors He is a leading expert in corporate gover- by bringing ethics into the corporate are increasingly important to investors nance and a pioneer in the development governance picture, we have to recog- and company managers. Although some of contract theory, which has made him nize that we are introducing complexity. investors have started to pay attention to an authority on the optimal allocation But I will argue that we should not be these factors, it is still not known how of control rights between contracting put off by the complexity of ESG issues big their impact has been. The Church parties and the firm. More recently, and the question of corporate purpose. of England pension fund, among others, Patrick has turned his attention to the Instead we should help companies states clearly its commitment to the Paris impact of climate change on companies identify and respond ee ff ctively to their agreement on climate change, but is not and their markets and investors. most pressing ESG issues—and in ways true for most institutional investors. The discussant for this session will that both address social and environ- Rising temperatures and climate be Sophie L’Helias a widely recognized mental problems and enable companies change frame the debate. Recent international governance and ESG to continue serving the interests of their examples of acute weather variability, expert with considerable experience investors. such as the fires in Australia and Califor - with shareholder activism in Europe, the Climate change is perhaps the funda- nia, have raised public consciousness U.S., and Canada. Sophie is President of mental reason why we have to bring ethics about this issue. LeaderX Xchange, a co-founder of the back into the picture. It is the biggest Some climate-related risks seem International Corporate Governance challenge facing us in the 21st century. obvious to us now. For example, today a Network (ICGN), and an independent If we simply continue pursuing tradi- company producing diesel cars is asking non-executive director on several corpo- tional approaches to shareholder value, in for trouble, but this has not always been rate boards. which all externalities are assumed to be the case. And we need to better appreci- Patrick, the virtual floor is yours. the responsibility of governments, we will ate the complexity of risks. ESG risks be on a road to disaster. It is in the interest have technological, regulatory, and Is the Market Pricing ESG Risk? of all shareholders today to let corpora- political dimensions that companies Patrick Bolton: Thank you, Xavier, for tions enlarge their objective function or need to understand more fully and those kind words. mission, look more broadly at the impact manage more effectively. Before I start with my presentation, of their operations, and work to limit the In this session, we will examine the I want to provide some context by risk to the planet posed by climate change. question of whether carbon emissions commenting on the first session with A major obstacle, however, is the represent a material risk that is reflected Colin Mayer and Luigi Zingales that absence of a sufficiently broad consensus in asset prices and stock returns. Do we just heard. about the risks associated with climate financial markets fail to recognize and When discussing the purpose of a change. The Paris Climate Agreement therefore underprice carbon risk? Can corporation, we must recognize that it of December 2015, which assembled socially responsible investors do well by is a call for ethical behavior. But ethical nearly all the main actors that can make doing good? And can investors generate behavior is not easy to define; it’s not a difference in curbing emissions, and alpha by incorporating ESG metrics along nearly as straightforward as, say, the that resulted in new national, regional, with traditional financial fundamentals? objective of maximizing shareholder and corporate commitments to reduce Patrick Bolton, who is Professor of value. carbon emissions, has been a major Finance at Columbia Business School, Every Sunday newspaper has boost in raising awareness and building will now summarize his latest think- columns discussing specific cases and a consensus. Importantly, this agree- 50 Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 ROUNDTABLE Table 1 Carbon Emissions: Correlations S1CHG S2CHG S3CHG LOGS1TOT LOGS2TOT LOGS3TOT S1CHG 1 S2CHG 0.485 1 S3CHG 0.555 0.503 1 LOGS1TOT 0.040 -0.004 -0.045 1 LOGS2TOT -0.020 0.045 -0.061 0.736 1 LOGS3TOT -0.047 -0.046 -0.059 0.808 0.824 1 ment brought the business and financial carbon-emitting companies and buying dramatic improvements in renewable investment worlds into the picture for low-carbon emitters? The conclusion energy efficiency and that’s going to the first time. For example, BlackRock, from our analysis is that the answer to continue. Carbon capture technology the biggest asset manager in the world, this question is “no,” even if bets against may also improve, but there is still a lot has taken a clear position on the impor- oil and gas companies pay off as they of uncertainty about its economic feasi- tance of addressing climate change. Yet, have in recent years. bility and scalability. we continue to see considerable skepti- What is new about our work is cism, especially in the U.S. Indeed, in that we use company-level informa- A Closer Look at Our Study a recent article in the Harvard Business tion on carbon emissions and examine So, what do we mean by carbon emis- Review, Eccles and Klimenko wrote, the economic mechanism behind stock sions? A first basic classification is returns. In simple terms, our main between direct and indirect emis- The impression among U.S. business finding is that carbon emissions repre - sions. Direct emissions are divided into leaders is that ESG just hasn’t gone sent a “transition risk” for corporations. Scope 1 and Scope 2 emissions. Indi- mainstream in the investment community. To achieve the goals set by the Paris rect emissions are labeled Scope 3; they And, more recently, the CEO of Exxon said Agreement, we need to find ways to are emissions resulting not only from individual companies setting targets and get all companies that emit carbon to the production of inputs for the compa- then selling assets to another company so reduce their emissions substantially. But ny’s finished products, but also from the that their portfolio has a different carbon this involves major changes to business downstream use of such products. For intensity has not solved the problem for the models, the introduction of new technol- example, in the auto industry, selling a world. ogies, and exposure to regulatory risk. car results in a lot of indirect emissions e Th silver lining of the COVID-19 through the use of the car. The question for our panel today pandemic, if there is one, is that it has So that’s what our study looks at— is this: Is there value in pursuing ESG contributed to the reduction in carbon Scope 1, Scope 2, Scope 3 emissions goals? The short answer to this question, emissions around the world. at the level of an individual publicly based on my research with Marcin e b Th ad news, however, is that we traded company. We have data on Kacperczyk at Imperial College, is a will have to maintain the same rate of carbon emissions for 14,468 such “resounding yes.” Our work provides decline in carbon emissions we achieved companies in 77 countries, representing clear evidence that carbon emissions this year until 2050, and maintaining roughly 99% of total market cap. Along pose a material risk to investors—risk that rate of reduction will be a great with yearly levels of emissions for each that is already being ree fl cted in stock challenge. company—expressed as tons of CO — returns. Carbon transition risk is tied to we also look at the year-to-year growth Another related question is whether both the risk that future emissions may in emissions and emission “intensity,” the stock market prices carbon risk be substantially curbed, and to chang- which is tons of CO emitted divided efficiently ? ing investor awareness of this problem. by sales revenues. Or is there an arbitrage opportunity An important aspect of transition risk Now, as can be seen in Table 1 to profit by shorting shares of high- is technological change. We have had taken from our “Global pricing of Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 51 ROUNDTABLE carbon-transition risk” paper, one of between carbon emissions and stock emissions, we found that there is a lot of variation across industries. But our first findings worth noting is that returns by identifying some third factor these three measures are not highly affecting both. what is also striking, as can be seen in correlated with one other. In particu- Moreover, the carbon premium Figure 1 taken from our forthcoming lar, Scope 1 intensity has a correlation could not be explained by prot fi ability Journal of Financial Economics article, is of only 0.49 with the Scope 1 level of or earnings surprises. In other words, the substantial variation within indus- emissions. we ruled out the possibility that the try. In fact, there is almost as much How do we explain that? In the returns for high-emitting companies are variation within as across industries. process of normalizing, you are effec - high because the companies themselves Since carbon emissions are reported tively mixing all different kinds of become more prot fi able. on a yearly basis and the stock returns companies. Some companies have large What’s more, and somewhat are monthly, we used a pooled regres- sales and high emissions, some compa- surprisingly perhaps, we found that the sion specification to explore how a nies have low sales and low emissions. As premium is not explained, and appears company’s stock returns were affected a consequence, the use of emission inten- to have largely been unaffected, by by its carbon emissions, controlling for sity turns out to be a very noisy measure. announcements of divestments by large as many relevant variables as possible But what are our key findings? Our prominent institutional investors, such (including year, month, and industry main finding is that carbon emissions as university endowments. What we fixed effects). do appear to ae ff ct actual and expected did find, however, is that much of the What you can see in the first three stock returns; during the relatively recent carbon premium can be explained by an columns of Table 3 taken from our period 2005-2017, the stock returns increase in what we call “investor atten- “Global pricing of carbon-transition of high-carbon emitters significantly tion,” and the accompanying change risk” paper is how average monthly exceeded those of low-carbon emitters. in investors’ perception of risk. The returns are affected by the level What this means is that market inves- simplest way of explaining this finding of the three different categories of tors effectively require higher returns is that the P/E ratios of companies with carbon emissions: the level of Scope for holding high emitters to compen- higher emissions tend to fall over time 1 emissions, Scope 2 emissions, and sate them either for bearing the greater to reflect their higher perceived risks, Scope 3 emissions, all measured in carbon risk or avoiding companies which in turn provides higher stock logs. Each of the three coefficients with high emissions. In other words, returns for those investors who choose is positive and statistically signifi- high emitters can be viewed as having a to hold the riskier stocks. And for those cant, and the coefficient is even more higher required rate of return. A higher of us concerned about climate change, significant and larger when we include required return in turn means a higher this is good news, in the sense that industry fixed effects. “cost of capital,” and thus a lower value climate change is now perceived as a Our findings thus suggest that other things equal. material risk for investors. what matters most is the carbon This finding holds for all three emission variation within industries as categories of emissions across all A Closer Look at the Data opposed to across industries. We also countries. We take this as evidence of In testing these relationships, we had found, somewhat surprisingly, that an emerging “carbon premium”—a access to two fantastic data sets. The the carbon premium as a function of relationship between carbon emissions first is FactSet, which is widely used by emission intensity was neither statisti- and cost of capital that is economically finance professionals and contains equity cally significant nor very large. That’s as well as statistically signic fi ant. returns as well as an array of corporate an important finding in light of the We further investigated whether characteristics. The second is Trucost, fact that the asset management indus- which provides high-quality carbon carbon emissions could be a proxy for try and institutional investors have other, commonly identified predictors emission data at the corporate level. been paying a lot of attention to this of firm-level returns, such as the size of As reported earlier in Table 1, variable. Carbon intensity is simply not which shows carbon emissions across the firm, book to market ratio, and so a good measure of exposure to transi- industries for all three measures of tion risk. on. But we could not explain the link 52 Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 ROUNDTABLE Figure 1 Carbon Emissions: Correlations Panel A: Unconditional data 0.6 0.5 0.4 0.3 0.2 0.1 200601 200609 200705 200801 200809 200905 201001 201009 201105 201201 201209 201305 201401 201409 201505 201601 201609 201705 wscope1chg wscope2chg wscope3chg Panel B: Within industry-variation 0.45 0.4 0.35 0.3 0.25 0.2 0.15 0.1 0.05 200601 200609 200705 200801 200809 200905 201001 201009 201105 201201 201209 201305 201401 201409 201505 201601 201609 201705 wscope1chg wscope2chg wscope3chg Take the example of ExxonMo- carbon emissions and are increasingly “Global pricing of carbon-transition bil and Chevron, two companies that exposed to “stranded asset” risk, which risk” paper, we found that the carbon have sought to boost their green creden- is proportional to the level of their premium has increased somewhat after tials by touting their carbon-intensity emissions, not their emission intensity. the Paris agreement of 2015 though it reductions. Any such performance Let me close with a word on inves- has not been a big change. The biggest does not take away the fact that they tor awareness about climate change. As change is in Asia. Investors are increas- are responsible for a huge share of can be seen in Table 4 taken from our ingly concerned about climate change. Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 53 ROUNDTABLE Table 3 Carbon Emissions and Stock Returns: Full Sample The sample period is 2005-2018. The dependent variable is RET. The main independent variables are carbon emission levels (Panel A) and the percentage changes in emissions (Panel B). We report the results of the pooled regression with standard errors clustered at the firm and year level. All regressions include year -month fixed effects and countr y fixed effects. In columns (4) through (6), we additionally include industry-fixed effects. In columns (7) to (9), we instead include firm fixed effects. ***1% significance; **5% significance; *10% significance. LOGS1TOT (LOGS2TOT ; LOGS3TOT) is the logarithm of firm-level scope 1(scope 2; scope 3) carbon emissions measured in tons of CO2e. S1CHG (S2CHG; S3CHG) measures the percentage growth rate in carbon emissions of scope 1 (scope 2; scope 3) (winsorized at 2.5%). Panel A: Levels DEP. VARIABLE: RET (1) (2) (3) (4) (5) (6) (7) (8) (9) LOGS1TOT 0.029 0.066*** 0.140*** (0.022) (0.016) (0.044) LOGS2TOT 0.096*** 0.118*** 0.154** (0.030) (0.027) (0.056) LOGS3TOT 0.118*** 0.174*** 0.620*** (0.032) (0.037) (0.180) Controls Yes Yes Yes Yes Yes Yes Yes Yes Yes Yr/mo fixed effects Yes Yes Yes Yes Yes Yes Yes Yes Yes Country fixed effects Yes Yes Yes Yes Yes Yes No No No Industry fixed effects No No No Yes Yes Yes No No No Firm fixed effects No No No No No No Yes Yes Yes Observations 746,642 746,797 747,290 736,851 737,006 737,499 746,615 746,770 747,263 R-squared 0.150 0.150 0.150 0.151 0.151 0.151 0.176 0.176 0.177 Panel B: Percentage Changes DEP. VARIABLE: RET (1) (2) (3) (4) (5) (6) (7) (8) (9) S1CHG 0.500*** 0.515*** 0.586*** (0.089) (0.091) (0.086) S2CHG 0.301*** 0.307*** 0.354*** (0.062) (0.065) (0.071) S3CHG 1.342*** 1.364*** 1.628*** (0.257) (0.266) (0.230) Controls Yes Yes Yes Yes Yes Yes Yes Yes Yes Yr/mo fixed effects Yes Yes Yes Yes Yes Yes Yes Yes Yes Country fixed effects Yes Yes Yes Yes Yes Yes No No No Industry fixed effects No No No Yes Yes Yes No No No Firm fixed effects No No No No No No Yes Yes Yes Observations 746,738 746,749 747,290 736,947 736,958 737,499 746,711 746,722 747,263 R-squared 0.150 0.150 0.151 0.152 0.151 0.152 0.177 0.177 0.177 54 Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 ROUNDTABLE We found that all over the world they ESG factors that are aligned with and to bring about change, improve gover- are worried about carbon transition contribute to the company’s purpose, nance, and increase shareholder value. risk, and their concerns are increas- When companies improve their ESG Studies show that bad governance tends ingly ref lected in stock returns. So factors, that often indicates greater to create a share price discount, while that companies that have high carbon resilience and stronger financial perfor - good governance tends to deliver a emissions are facing a higher cost of mance. But when ESG factors show premium. capital. poor performance, or a lack of align- Good governance provides the Xavier, let me end with that. ment with the company’s purpose, it framework and processes that protect suggests non-financial risks that can companies against a wide range of Vives: Thank you, Patrick for this have a financial impact and point to shocks and risks, thereby making them interesting presentation. Now, we a less resilient company that is likely more resilient. Consistent with Patrick’s will hear from Sophie L’Helias, who to underperform during economic or study, market research suggests that as I mentioned is President of Lead- industry downturns. while investors generally don’t reduce erX Xchange and co-founder of the The E in ESG stands for environ - their required returns for well-governed International Corporate Governance mental topics. It encompasses the companies, they do require higher Network. energy and other resources the company returns from poorly governed compa- Sophie, the virtual floor is yours. uses, the waste it produces, and the nies to compensate for the additional resulting consequences for the planet risk. This is why I find Patrick’s study so An Activist Investor’s Take on ESG and living beings. The E includes compelling: his findings expand inves - Sophie L’Helias: Thank you very much, carbon emissions and climate change, tor expectations from governance, or Xavier. I want to congratulate Patrick though it is not limited to those topics. the “G” is ESG, to climate, or the “E.” for this excellent paper and its success e Th S encompasses all of a compa - Only a few years ago, ESG investing in validating the assumption that ny’s stakeholders in the communities was limited to a few investors focused many of us have long operated under— where it operates, directly and indirectly. on socially responsible impact invest- namely, that markets recognize and S includes labor relations, diversity and ing. They were the pioneers of ESG incorporate information about non- inclusion, suppliers, customers, local investing. The assets they managed financial risks such as climate change communities, etc. Every company were a few billion dollars, not enough into their pricing. This study is very operates within a broader society, and to have a meaningful impact across all positive in that sense. has many different stakeholders that industries and in all markets worldwide. Though I am not an academic, drive its purpose. Today, ESG investing represents more I have worked with investors, includ- e Th G is governance, the internal than $30 trillion. And it is the fastest ing a number of activist investors, on system of practices, controls, and proce- growing investment category in the governance and ESG issues. I have also dures a company uses to govern itself, to United States as well as Europe. developed investment methodologies make effective decisions that meet the There are several reasons for this using non-financial ESG metrics such expectations of its stakeholders, includ- transformation. as gender diversity and human capital. ing its shareholders. The first is a broad societal shift ESG is critical because it goes to the Every company has a governance toward purpose and having a meaning- core of long-term sustainable growth system, and many academic studies ful impact. People are looking for and corporate resilience, It increas- have shown that good governance purpose in what they do and how they ingly reflects where we are, and what generates alpha. All this seems indis- invest; and investors are responding to putable. Activist investors identify we want, as a society. their clients’ demand. The second shift is new and acces - And ESG factors could be viewed governance vulnerabilities in companies as the building blocks of corporate that underperform. Some hedge fund sible data. Patrick mentioned earlier that he had to impute some of his purpose. Once you define your purpose, activist investors take short positions in then you must focus on the specifics such companies. Others, however, take pre-2005 data because it was not avail - and identify meaningful and material long positions and launch campaigns able. Now that markets are collecting Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 55 ROUNDTABLE Table 4 Carbon Emissions and Stock Returns: The Role of Investor Awareness The dependent variable is RET. The main independent variables are carbon emission levels (columns 1-4) and the percentage changes in emissions (columns 5-8). We report the results of the pooled regression with standard errors clustered at the firm and year level. Panel A reports the results for a sample covering the period January 2014-November 2015 (two years before Paris COP 21 conference). Panel B reports the results for a sample covering the period January 2016-December 2017 (two years after Paris COP 21 conference). All regression models include the controls of Table 7 (unreported for brevity), year-month fixed effects, and country fixed effects. In selected columns, we additionally include industry-fixed effects. ***1% significance; **5% signifi- cance; *10% significance. Panel A: Pre Paris DEP. VARIABLE: RET (1) (2) (3) (4) (5) (6) (7) (8) LOGS1TOT -0.032 0.019 (0.023) (0.018) LOGS3TOT 0.007 0.096* (0.038) (0.050) S1CHG 0.731*** 0.722*** (0.119) (0.119) S3CHG 1.924*** 1.891*** (0.338) (0.345) Controls Yes Yes Yes Yes Yes Yes Yes Yes Yr/mo fixed effects Yes Yes Yes Yes Yes Yes Yes Yes Country fixed effects Yes Yes Yes Yes Yes Yes Yes Yes Industry fixed effects No No Yes Yes No No Yes Yes Observations 109,394 109,578 108,143 108,327 109,394 109,578 108,143 108,327 R-squared 0.090 0.090 0.098 0.098 0.091 0.092 0.099 0.100 Panel B: Post Paris DEP. VAR.: RET (1) (2) (3) (4) (5) (6) (7) (8) LOGS1TOT 0.095*** 0.096*** (0.031) (0.025) LOGS3TOT 0.209*** 0.265*** (0.043) (0.043) S1CHG 0.527*** 0.509*** (0.100) (0.105) S3CHG 1.611*** 1.584*** (0.237) (0.247) Controls Yes Yes Yes Yes Yes Yes Yes Yes Yr/mo fixed effects Yes Yes Yes Yes Yes Yes Yes Yes Country fixed effects Yes Yes Yes Yes Yes Yes Yes Yes Industry fixed effects No No Yes Yes No No Yes Yes Observations 192,678 192,810 190,047 190,179 192,678 192,810 190,047 190,179 R-squared 0.048 0.049 0.053 0.053 0.048 0.049 0.053 0.054 56 Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 ROUNDTABLE the data, new ESG factors are being investors shrinks, the remaining inves- lar offers a very powerful framework for the transition to a lower-carbon uncovered. For example, in assessing tors have more leverage to set better economy. It has given investors and human capital or corporate culture, terms. That is what we see in the market companies common language and investors may use employee turnover today, and what the findings of Patrick’s rates that indicate an ability to retain study suggest. outlined an effective governance frame - and attract talent. As such data are Patrick also stressed the importance work to build a climate transition plan. collected, studies will show the extent of investor awareness and mentioned Finally, I would like to comment on to which there is a correlation between Climate Action 100+, an investor Scope 3 emissions, which were excluded employee turnover and stock returns. consortium I engaged with at the time in Patrick’s study. Scope 3 is an impor- In addition to the growing volume of their launch. Prior to the establish- tant measure because some industries’ of available of data, new technology ment of Climate Action 100+, around indirect carbon emissions are greater has made its way in financial services the time of the COP21 Paris accord, a than their direct emissions. Moreover, and the investment arena, lowering small group of the world’s leading inves- companies that simply transfer carbon- the entry barrier for new entrants to tors and co-founders of climate Action emitting activities through asset sales to offer expanded services to retail inves - 100+, met in New York to develop a another company are not helping the tors along with the ability to choose common language and framework for environment. their investments according to their engaging companies on climate change. Another recent development personal preferences and ESG values. I managed the discussion among these supporting Patrick’s argument is that A 2015 study by Deutsche Bank investors and saw their sense of urgency carbon and other ESG regulations summarizing the findings of over to get companies address this financially are increasingly creating new disclo- 2,000 academic studies of ESG and material issue that poses an existential sure requirements for investors. EU stock market performance reported threat. What we have observed in the regulations in particular are targeting that 63% of the studies uncovered a few years since then is not just greater investors’ environmental and carbon positive correlation, 8% of the studies investor awareness, but more impor- footprint and regulating marketing reported a negative correlation, and tantly, a common objective to get of ESG investment products to limit the remaining studies found none. companies to address climate change “greenwashing.” Investors are increas- Academic studies have also clearly with actionable plans and disclosure ingly asked to measure and disclose demonstrated the importance of frameworks proposed by Climate the carbon footprint of their invest- distinguishing between material Action 100+ and other members of the ment portfolios. The impact of these and immaterial ESG factors: Some financial community. regulations is driving investors to sell topics clearly have a greater impact on That brings me to a point I shares of companies that increase their corporate performance and value than would like to raise that, although not portfolios’ carbon footprint or engage others, depending on the geographic mentioned in Patrick’s paper, clearly their portfolio companies to take region and the sectors in which a supports his position. New ESG and action and reduce it. To attract inves- company operate as well other topics climate disclosure frameworks have tors, companies with a high carbon specific to each company. emerged that include the EU regulatory footprint will need to deliver a higher Take Patrick’s study, which screened framework, the GRI, the TCFD (Task rate of return to compensate inves- out a large number of companies that Force on Climate-related Financial tors for the greater risk and associated are high-carbon emitters. If a company Disclosures), and the SASB (Sustain- social and reputational costs of owning ability Accounting Standards Board) is avoided by investors who don’t want their shares. to own its shares, the company will have in the United States. For this reason alone, I would not a smaller investor pool from which it es Th e organizations have provided be surprised to see the carbon premium can raise capital. It is logical therefore valuable guidelines for companies and Patrick identie fi d signic fi antly increase over time as more investors understand that the company will have to offer a investors to identify, measure, and disclose material ESG topics such as premium to those investors willing to the risks and the cost associated with climate change and ESG more gener- buy its shares. When a pool of potential climate change. The TCFD in particu - Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 57 ROUNDTABLE ally, access quality carbon and ESG enced by how companies communicate between the U.S. and European inves- with the raters, what companies say— data, and hold companies and their tors because there are other important board accountable for ESG outcomes. and are encouraged to say—as opposed differences between those two groups So, thank you very much. And, to what they actually do about climate of investors. again, I encourage those who have not change. Our study attempts to circum- What we can say, though, based on done so to read Patrick’s compelling vent this issue by looking directly at our subsequent study, is that as a result paper. objective measures of emissions while of the more extensive energy transi- ignoring the ESG ratings. tion underway in many European The Temptation of Greenwashing countries, you find lower risk premia Vives: I want to thank Sophie for L’Helias: I agree entirely with Patrick. associated with carbon in Europe than her comments and for the broader There are a number of organizations in the U.S. context she has provided. I thought her that provide ESG ratings, and stud- comments about Climate Action 100 ies of the ESG ratings themselves show Vives: Sophie, is that consistent with were particularly important. But having surprisingly low correlation among what you are seeing? said that, I would like to learn more them. Even when the rating agencies about the link between purpose—that are looking at the same ESG factors— L’Helias: Yes, though the tide is turn- is, companies’ taking an ethical stance— which they often don’t—the ratings ing. Patrick noted that the United States and the financial reality of pricing of risk. or scores can vary wildly for the same withdrew from the Paris Agreement in I think it would be a mistake to assume company. I believe that raw ESG data 2016. that markets will catch up quickly once communicated by companies without However, that did not stop compa- carbon emissions data is available. It is an opaque filter developed by third nies and investors in Europe, the tempting to believe that investors can parties is extremely valuable for both U.S., and other markets from taking carry on as they did before, just with investors and companies. By disclosing action. LeaderX Xchange and the better data and the ability to determine a information, companies take owner- Millstein Center at Columbia Law premium for carbon risk. It usually takes ship of their data and their results. School surveyed 130 investors and time for investors and the broader world Disclosure limits the risk of possible board directors in North America and to understand the real environmental and distortion or error by third parties that Europe, with two-thirds of respon- social impact of company operations. find other means to collect ESG data dents confirming that climate change Having now arrived at the question that may not be as reliable.. I expect had a material impact on business and answer part of our session, I want to see more transparent data platforms operations. to raise a question that I think is on the that invite companies to disclose, minds of many people: To what extent investors to collect, and researchers to Do Investors Value Carbon are corporate responses to these ESG analyze, thereby bypassing the ESG Offsets? factors just window dressing—that’s data aggregators whose methodolo- Vives: We have another question for to say, greenwashing. Shouldn’t we set gies may have biases that skew results. Patrick: Do your results imply that more quantifiable objectives to check companies that purchase carbon offsets, the materiality of the actions of both U.S. vs. European Pricing of ESG rather than reducing emissions opera- companies and investors? Vives: Peter Strömberg has asked if tionally, also enjoy a reduction in their there is hard data to support the belief cost of capital from a lower-carbon Bolton: That’s an excellent question that European investors have been more premium? and it really ties these first two panels concerned about climate risk than U.S. together. Greenwashing is a concern, a investors in recent years? Bolton: That is a great question and real issue. it relates to a point that Sophie made earlier. It is one thing to take active Greenwashing is such a temptation Bolton: I wish I could give you a clear steps to reduce your emissions and for companies in signic fi ant part because answer to that but it is dic ffi ult to isolate ESG ratings seem to be excessively inu fl - differences in the carbon premium quite another to sell your highest-emit- 58 Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 ROUNDTABLE ting assets or to buy carbon offsets, and If people are key to a company’s dented. We conveniently forgot about investors understand that, too. success, then employee turnover and the Spanish f lu. I think COVID is gender equality are critical. A growing teaching us that nature matters, and we Vives: Okay, and a follow-up question: number of investors eventually recog- have to take nature seriously. how would a sudden increase of pricing nize that and take those factors into of the carbon offset affect stock returns? account when they decide to invest in L’Helias: I agree completely. I would add And is there a conjoined effect involving a company’s stock. The more investors only that the pandemic has shown us waste treatment, water use, disembod- want to invest in a company’s stock, the the need for resilience. ied turnovers, and gender equality along higher the share price, and vice versa. with carbon emissions? Vives: ESG and climate change are Climate Change and Vulnerability about being mindful, being purposeful, Bolton: Absolutely. This is a very impor - to Pandemics it’s about being prudent and sustain- tant issue. The short answer is, we don’t Vives: Last question, this one my own: able, and it is about integrating all of have that data. Maybe Sophie has Do you see any interaction between these human factors and environmen- looked at the other ESG impact vari- reducing climate change and protect- tal factors. Practically speaking, the ables. ing against pandemics? pandemic has shown companies what a crisis on a global systemic scale will L’Helias: Bolton: Climate change makes the risk look like. Climate change is a long-lived LeaderX Xchange found evidence of pandemics greater because climate global systemic risk, but a pandemic is analyzing raw data of a positive relation- change, for example, through defores- only a temporary global systemic risk. ship between better gender outcomes tation accelerates the transmission of Or let us hope so. and firm performance, but we did not viruses from animals to humans. So, test that data against carbon emissions there is a direct link. As Patrick mentioned at the outset, We must bear in mind that the materiality matters. COVID pandemic is not unprece- Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 59 IESE ECGI CONFERENCE ON CORPORATE PURPOSE SESSION III: Corporate Purpose and the Theory of the Firm Jordi Canals: Welcome to the second The third reflection gets inspiration Joan Enric Ricart: Welcome to this day of our conference. I want to start from Chester Barnard and Ken Andrews, session on “Corporate Purpose and the today’s proceedings by providing a bridge two of the founding fathers of contempo- e Th ory of the Firm.” The format of this between yesterday’s sessions, particularly rary corporate strategy.3 As Ken said “the session will die ff r slightly from others in Patrick Bolton’s empirical findings of a judgment of what a company might do, this conference. Professor Bengt Hölm- link between carbon emissions risk and what a company can do, what a company strom and Paul Polman will each have 25 equity pricing, and today’s sessions. To wants to do, and what the company minutes to present their ideas, followed set the stage I will begin with three state- should do den fi es the firm’s purpose and by a short debate that I will moderate. I ments by distinguished scholars who have shapes its strategy.” Ken Andrews helps think this debate should provide a nice thought about purpose from the perspec- us think about purpose in terms of a continuation of the debate between tive of strategy and leadership. company’s “boundaries,” the resources Colin Mayer and Luigi Zingales we The first comes from Chris Bartlett and capabilities that it has at its disposal, heard yesterday. Bengt, the virtual floor and the late Sumantra Ghoshal. In their and the aspirations of its top management is yours. influential book on strategic manage- and employees for the company. ment published in 1997, 1 they wrote e Th first of our two sessions today is Coase-Friedman Doctrine and that “Purpose is the statement of a on corporate purpose and the theory of Corporate Purpose company’s moral response to its broad the firm, and it will be led by Nobel laure - Bengt Holmström: Thank you, Joan, responsibilities, not an amoral plan for ate and MIT Professor Bengt Holmström. thank you Jordi, and thanks to the exploiting commercial opportunities.” We have asked Bengt to try to integrate organizers for inviting me. It is a great I find this statement really useful because current notions of purpose with the honor to be here. Since I will be speak- it addresses what purpose should include contemporary theory of the firm that he ing from the perspective of the theory and what it should exclude. It raises the has contributed so much to over the past of the firm, you should not expect question: How do we apply this concept three decades. much practical advice. My aim is more of purpose to organizations and to assess- After Bengt’s presentation, we modest: to present some concepts that ments of performance in organizations will hear from Paul Polman, a former may be helpful in thinking about that embrace this concept? corporate chief executive officer who whether corporate governance prac- The second comes from Juan has actually brought purpose to a large tices should be changed to deal with Antonio Pérez López, a professor at IESE organization. As CEO of Unilever from current challenges our society is facing and dean between 1978 and 1984, who 2009 to 2019, Paul started out with a and, if so, how. den fi ed purpose as meeting “specic fi real very ambitious notion of purpose and I want to make two main points needs that an organization wants to serve went on to adopt the use of some key in this comment. First, that corpo- through its products and services.”2 He ESG factors included in the Unilever rate governance has been evolving added that achieving purpose should Sustainable Living Plan that have become over time, adapting itself to corporate include designing and putting in place a standard in the field. This session will and social needs and public opinion. indicators of ee ff ctiveness and ec ffi iency, be chaired by Professor Joan Enric Ricart Current trends are no exception to and promoting cooperation, fostering of IESE. Henry Tricks, The Economist this general pattern. Second, and more learning, and building trust among the Schumpeter Writer, will manage the provocatively perhaps, I will suggest different parties to the organization, dialogue between Bengt and Paul after that Friedman’s 1970 argument for especially employees. their presentations. ma ximizing profits—for which read And with that, I will turn the floor “shareholder value”—finds partial over to Professor Ricart. support in the way companies have 1 See S. Ghoshal and C. Bartlett, The Individual- ized Corporation: A Fundamentally New Approach to responded to current social concerns. Management, Harper Business, 1997. My tentative conclusion is that calls 2 J.A. Pérez López (1993), Fundamentos de 3 K. R. Andrews (1971), The concept of corporate for wholesale changes in corporate Dirección de Empresas, Ed. Rialp, Madrid. strategy, Irwin. 60 Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 ROUNDTABLE the workers are treated, how well governance are premature. There are huge social challenges that face us. the products are received by the serious problems confronting us, some They will necessarily have to do much of the heavy lifting. consumers, and how companies uphold of unprecedented scale and complexity social values. In idealized conditions, such as climate change. But we should Even within this relatively short try to deal with these problems within history, we can see how corporate if parties can bargain and contract our general governance and economic governance adapts to the concerns of costlessly, the outcome will be efficient framework using the legal and regula- the day, both economic and social. It in the sense that the preferences and tory tools we have available and adding is not that we are steadily ascending exit options of all stakeholders have new ones as needed. To do this effec - towards some ideal form of corporate been considered. This central insight tively, we need to understand how the governance. Instead, the movement is Coase’s, and it underpins Friedman’s system has been working in the past: is more like a pendulum, where logic. its logic, its successes, and its failures. focus shifts back and forth between In practice, transactions costs To illustrate how corporate gover- broader stakeholder concerns and make bargaining costly. Information nance has evolved, consider the past narrower shareholder objectives. It asymmetries and enforcement costs, 50 years. The prevailing doctrine in is important to appreciate that both for instance, create frictions that the 1970s was “stakeholder value.” regimes have served society in some interfere with bargaining. In the Corporate annual reports in those form. The 1980s switch to shareholder theory of the firm, transactions costs days emphasized what the company value restructured and invigorated the have been extensively used to interpret has done for workers, communities, economy, providing broad benefits observed patterns of contracting and and other stakeholders. Shareholder along with some undesirable outcomes. organization. My interpretation of value was rarely if ever mentioned. This Today’s ESG movement has provided evolving corporate governance practices began to change in the 1980s. Share - a critical call to arms against major uses the same approach. I imagine holder value maximization became the social threats and corporations have that they maximize the net value to new motto in the wake of successful responded by embracing ESG goals. all stakeholders—the total available hostile takeovers and restructurings. How well corporations can translate “pie.” As circumstances, objectives, and Executives joined the movement, social pressure into effective actions frictions change, the value-maximizing attracted in large part by lucrative this time remains to be seen. practices change. option contracts. These worked well What’s the basis for the hypothesis I want to stress that for this initially, because there was much to that these movements serve a social mechanism to work, it is crucial that restructure. But these option contracts purpose? The best I can do is refer managers work to maximize firm were poorly designed and eventu- to Friedman’s argument in support value. If corporate managers become ally led to scandals that eroded social of shareholder value maximization, indifferent to or are prevented from trust. Today we are seeing a return to which many of you are familiar with. trying to maximize investors’ wealth, stakeholder value again, but something He argued that since shareholders are the system breaks down, including that’s different from the 1970s. One residual claimants—which means that the benefits and assurances it offers might call the new regime “stakeholder the other stakeholders receive f ixed non-investor stakeholders. By caring value plus.” payments—the corporate managers about the welfare of shareholders, you e p Th lus refers to the rise of ESG as who represent them will make choices are maximizing total surplus. an increasingly important component that consider the total benefits and The Case for Stakeholder Voice? of corporate governance. In the past, costs to all stakeholders. If the decision corporate governance was primarily is bad for a worker, the firm has to But this view also raises ques - tions. Henry Hansmann, my former about the relation between sharehold- compensate her for the loss or else she ers, boards, and management, and will leave. colleague at Yale, has made the point what would be most efficient economi - It is the right to exit, using that if it is in the interests of sharehold- Hirschman’s language, which forces cally. Today, corporations are expected ers to take care of other stakeholders to shareholders to consider how well to get actively involved in solving the maximize their wealth, the same argu- Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 61 ROUNDTABLE ment could be made on behalf of any to equity capital. Raising equity for theorem” in finance. But we also see worker-operated firms is limited, stakeholder. For example, why not let family firms self-destruct from internal because the investors as risk-bearers workers be in charge and allow them to tensions. These are examples where the need voice. Cooperatives can and do maximize their wealth subject to inves- Coase theorem fails! tor utility constraints? We usually just raise debt capital, of course, but high Hansmann’s argument about the assume that investors are in charge debt levels also create risk that operates costs of voice is an important way of because we call them “owners.” But as a significant constraint. operationalizing Coase’s view that there are companies in which employ- Hansmann’s argument for the institutions are designed to reduce ees rather than investors are the prevalence of joint stock companies, transactions costs, particularly in the owners, such as cooperatives. The fact then, is that shareholders have a relative form of costly “haggling.” It is hard for that investor-owned companies occupy unity of interest. Of all the different many observers to accept that workers such a prominent place in our econ- stakeholders that make up the corpo- have relatively little say. What I have omy suggests that it brings substantial ration, shareholders are by far the most just explained, using the insights of advantages. What are they? homogeneous group. If investors can Hansmann, is that if workers have Hansmann’s analysis focuses on buy and sell their shares easily, their reasonable outside options—notably the costs associated with giving greater interests as a group are pretty well viable exits—the shareholders and decision rights, or “voice,” to different aligned. Wealth maximization is a clear their representatives as residual claim- parties to the corporate contract—for common objective. As a general rule, ants will look after the well-being of example, by putting labor representa- shareholders are united by their prefer- the workers, too, while avoiding costly tives on public company boards—and ence for higher rather than lower share internal tensions. Both groups will be how that cost is likely to vary in prices, provided the firm is complying better off as a result. other forms of organizations, such with laws and regulations. as nonprofits. When explaining the By comparison, the costs of collec- The Case for More success and dominance of the public tive decision-making in worker-owned Shareholder Voice company, he shows how the costs enterprises tend to be large. Workers What about demands for shareholder associated with voice are minimized have different backgrounds; they work voice of the kinds now being made by by concentrating voice in sharehold- for different reasons; they differ in age Oliver Hart and Luigi Zingales? Up ers and the boards who represent them. and education. These differences matter to this point I’ve talked as if manag- At the same time, he points out that less if they are paid a fixed wage. But ers represent shareholders perfectly. not-for-prot fi s, cooperatives, and other when they have a stake in the firm and Well-designed executive compen- firms that are not joint stock compa - a voice in how the firm is run, decisions sation contracts can align interests, nies typically have a much narrower become compromises that are likely to though not perfectly of course. Hart focus, including members who are conflict with the long-run efficiency and Zingales have recently intro - committed to a shared interest that and value of the organization. Tensions duced another layer of complexity by goes beyond value maximization. arise even in small partnerships, which noting that stock prices do not neces- This is important because shared frequently dissolve. sarily capture the social concerns that interests make reaching consensus Similar issues arise in family- shareholders may also want managers and decision-making easier in these owned companies, where the possibility to take account of in their decision- “non-public” enterprises. But this also to trade shares is either severely limited making. limits the types of activities for which or non-existent, and so family members So, why not give shareholders more of a voice—not just through such member- and employee-owned lack liquidity. Disputes commonly arise as the family grows. Listing on board representation, but also direct companies are well suited. Of course, there are other reasons shareholder voting? We could have the stock exchange or selling the firm for the dominance of the public either to a subgroup of the family or to them vote, for example, on how much company. Perhaps the most obvious an outsider can resolve conflicts in the weight to give ESG criteria in company is that public companies have access spirit of the famous Fisher “separation policies and decision-making. 62 Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 ROUNDTABLE think changing capitalism dramatically—and I think Luigi agrees—seems utterly unwarranted at this stage. Nevertheless, there are improvements that can be made to corporate governance on the margin that do not involve massive structural change. I think there is a need for better information so you know what changes are socially good or bad and can measure consequences. – Bengt Holmström Let me suggest two arguments cial standing—and possibly the social can lose large amounts of value. Being against this idea. The first is that giving preferences, too—of the other people ESG-conscious is a win-win. What is extensive voting rights to shareholders in the building; and they will insist on good for society is, in the long run, will make the group more heteroge- knowing even more about you. good for companies, too. neous. Hansmann’s insight about the Win-win cases seem straightfor- costs associated with heterogeneity Turning Social Concerns into ward. The big question is whether makes me skeptical about extending Corporate Action companies are willing to—or should— shareholder “voice” beyond major In thinking about major changes to sacric fi e long-term value for the benet fi issues such as control changes. corporate governance, it is important of broader social goals. When asked I would be even more wary of to understand how social concerns get about this, institutional investors do proposals to give shareholders voting integrated into the existing corporate not seem willing to make such sacri- rights over divisive social issues. Should governance system. I began by noting fices. One reason is that it can be very Walmart’s shareholders be asked that corporate governance has histori- hard to know whether an action that whether to sell weapons in Walmart cally shifted in response to stakeholder lowers the value of a company does stores? Though voting might sound concerns and that corporations have enough social good to warrant the like a good way of resolving a compli- indeed found it value-maximizing to losses in value. cated issue, once you start asking your do so. Based on this logic, one could This points to a problem with shareholders for decisions on a range of have predicted that corporations will relying on social pressure as a guide such issues, you lose one of the valuable respond to the ESG concerns—and so for corporate decision-making. Social features of investing in public compa- they have. interest groups have been instrumental nies—shareholder anonymity. Today, corporations compete for in getting corporations and politicians With expanded voice, the joint customers, workers, and other patrons to pay attention to climate change stock company would risk becoming by expressing their commitment to the and other social issues. But the signals politicized. As a shareholder, one does environment, to gender equality, and from social media are qualitative, not not typically want to worry about how other high-profile social issues. Institu - quantitative. It is far from obvious to the other shareholders might vote in tional investors are especially concerned me that some social interest group that future eventualities. Frequent voting about ESG. They see signic fi ant reputa - becomes popular on social media will would induce uncertainty not just for tional risks in failing to respond to the be able to determine what is good or the shareholders but also management. prevailing expectations for socially bad. I believe in the wisdom of crowds, e Th se conflicts are familiar to residents responsible behaviour. Because of to some extent, but also in its opposite, of housing cooperatives. Before buying social media, missteps can quickly let’s call it the fallibility of the crowd— a New York coop, one needs to know upend even billion-dollar corporations. those cases in which crowds are not a good deal about at least the finan - Within days or even hours, companies providing us with a balanced view of Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 63 ROUNDTABLE social preferences. As Milton Friedman activities using artificial intelligence, A Former CEO’s Perspective on pointed out, spontaneously organized machine learning, and other digital Purpose pressure groups do not directly pay for technologies. Today we can collect Paul Polman: I was frantically taking what they want, unlike consumers or and store massive amounts of data, notes as Bengt talked. I really appreci- workers who have shown themselves monitor compliance using satellites ate his perspective which comes from willing to make economic sacrifices and sensors, and process and present deep thought and understanding of our to express their social concerns. He this information in useful ways to economic system. And I can relate to should have added that his caretak- investors and decision-makers. quite a lot of it. ing logic will not work unless all the As an example, Upright, a Finnish In a perfect market, to the extent affected parties are fairly represented at start-up, uses AI to assess the net we have had one, the system would the “bargaining table.” environmental and social impact give us what we deserve. But we need While corporations will play a of common activities, like eating to compare the ideal market to the central role in solving today’s ESG a hamburger or drinking from a realities of our current market and then problems, public pressure is a very plastic bottle. Upright has 44,000 discuss what needs to evolve, and what indirect and imperfect way of engaging companies in their database that AI does not. I agree we should not throw and guiding corporations in this task. has scanned from a mass of documents out the existing system entirely and try Some socially valuable actions manag- and scientific articles. The system will to build something entirely new. But ers can figure out and implement, give the net impact of McDonald’s because what we currently have isn’t but there are also many challenges in on various social factors such as the quite working, we need to start with a putting appropriate weights on various environment, public health, education, reality check. ESG categories. and so on. The system uses only Let me begin with a little story. I What we really need is more and public information about companies. trained as an economist at university better information for all stakehold- Institutional investors can put their in the Netherlands and, thanks to the ers, including institutional investors. own weights on these factors to get a Dutch government, I could get my Taking climate change again as an net score of a company’s overall social education, and I am still grateful for that. example, the first critical step is to impact and how it compares with other My father was a factory worker and had measure who pollutes and how much. companies in the database. Upright six kids, so he did not have much money. This explains the involvement of recently began distributing their But when I graduated from university, central banks in the fight against impact measures in partnership with he gave me a little porcelain plaque that climate change. Financial institutions NASDAQ. I still have. At the time I wondered why can force companies to provide more With such measures we can run he gave it to me, and I didn’t appreciate accurate information about sources markets that find prices to guide this right away. But I kept it in my drawer and levels of pollution and make this corporate decisions and stimulate and now look at it quite often when I am information part of corporate account- innovations. We do not need radical at my desk. It simply said in Dutch: “An ing systems. new forms of corporate governance to economist is someone who doesn’t know Private efforts to measure ESG deal with today’s social problems. The what he doesn’t know.” compliance are also proliferating, way forward is to make better use of What he was trying to tell me was with rating agencies providing scores the tools and institutional structures we to approach issues with a little bit of that are supposed to help investors and have available and improve them with humanity, and with humility or modesty. consumers to assess corporate progress. the help of digital technologies. And My perspective is from the practitioner It’s unclear how well this works, but it’s we also need more efficient government side of business, and what I see right now, a start. I am encouraged by the strong regulations that harness corporations unfortunately, is that things are not quite interest that doctoral students around for the social good. working the way we had anticipated. I the world have shown in finding a Th nk you very much. will not argue whether Milton Friedman ways to measure the total social was right or wrong. What I will say is impact from corporate and human that he developed his perspective in a 64 Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 ROUNDTABLE o company long-lived company was founded to maximize share- holder value. They were started for specic fi purposes. Lord Lever did not found his company to maximize his own wealth. No, he was driven by the issues of hygiene in Victorian Britain when one out of two babies born did not live past the rfi st year. He wanted to invent products that solved hygiene problems. – Paul Polman different time and in the U.S., which people on an unhealthy planet. We are When Milton Friedman was born, had a different vision of how the world not getting what we want and expect we relied on governance codes that should function than perhaps some of from governments, financial markets, made companies behave responsibly. us who grew up in different places in and business, despite the best will and Right now, we have governments that Europe had. He was writing in 1970, mechanisms that were supposed to work. cannot even come together and reach when governments were functioning and If too many people in the world feel agreement on the basic issues of how we when the planetary boundaries were not they are not included or cannot partici- treat people with COVID, or what we so transparent. We must acknowledge pate, they will ultimately rebel. A world should be doing as we travel around, or that the system we inherited from that without inclusive and sustainable growth how we should help countries that are era undoubtedly did a tremendous job. cannot last. still left behind or suffering from things Over the last few decades, it lifted many In the last 40 years, we have done that we have inflicted upon them. Global more people out of poverty than at any more damage to our planet than in the governance is broken. Many of our insti- time in history. It has actually been a whole history of the planet combined. tutions were developed at the time of good time to have been born: people live Over two thirds of species have disap- Bretton Woods in 1944 and have never longer, have healthier lives, have more peared. About a million more are about been adjusted. No company would have possibilities. You would love to be physi- to disappear. Climate change will create survived that long without making major cally young and in spirit in today’s world. a billion refugees. Our poverty levels go adjustments to changing conditions. But the reality is, the way our up again and the numbers go on. Shareholder primacy works in theory, economic system has provided growth So, again, I start from the practi- but no longer in practice. We have too is simply not sustainable. We cannot cal side: what is wrong here and what many different shareholders with too have endless growth on a finite planet. should we adjust? It does not make many different opinions about the This year, in 2020, we marked Earth any sense to debate whether we should multitude of possibilities for maximiz- Overshoot Day on August 22nd, in retain capitalism. But just as Franklin ing return. We have created far more recognition of the fact that every day Roosevelt created the New Deal that money than when Milton Friedman we are now using more resources than allowed the U.S. to pivot to a period was writing. We have created financial the planet can replenish. We are steal- of prosperity, I think we desperately instruments worth $500 to $600 trillion ing from future generations. Our annual need another new deal. While many of in a world with a real economy that is climate change is projected to be rising at the things that Bengt said will work for less than a $100 trillion. And all that over 3%, imposing enormous costs. Our responsible companies with responsible money is chasing returns and becoming inequality is going up. And the global leaders and responsible governments, we shorter and shorter-term. There is much financial crisis was just another recent do not have enough such responsible more distance between the underlying symptom of our shortcomings. It shows, institutions. Collectively, the numbers shareholders and what the agents for above all, that we cannot have healthy do not add up. those shareholders are doing on their Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 65 ROUNDTABLE behalf. They seek different things and was driven by the issues of hygiene in Why are these shareholder-owned companies disappearing? The average have die ff rent opinions about what they Victorian Britain when one out of two expect from companies. This mismatch babies born did not live past the first life of a publicly traded company in the is confusing, and the confusion can be year. He wanted to invent products that U.S. was 67 years when I was born. It is seen as much at the board level as at the solved hygiene problems. In his case, now less than 17 years. We are driving shareholder level. those included Lifebuoy and Sunlight these companies into the ground. It is So, broader corporate governance bar soaps. In fact, the man never really not that everything moves faster and that needs to evolve with a sense of urgency had money. He was always reinvesting companies ought to have a shorter life. because climate change and the fate in his business. He built houses for his This development cannot be explained of the planet will not wait. They are workers before he had his enterprise by technological change. Most of these sending us invoices to be met now. The fully running. He introduced pension public companies have disappeared in the business that understands the need for plans in the U.K. and guaranteed jobs last 10, 15, or 20 years. change will be the business that will be for those workers who went to war What’s more, the average tenure of successful. I won’t talk about maximiz- when they came back. Not only that, a CEO has fallen to less than four and a ing shareholder return because this is he paid the wives when the men were half years. No wonder that their incen- a real discussion with a pressing time gone. Unsurprisingly, Lever’s company tives are shorter term and they make frame. We will maximize all stakehold- was among those that sent the largest the most of it when they are there. No ers return if we have more room and can number of volunteers. He believed wonder they cater to the shareholders work for the longer term. If we focus only in something that was called shared who make the most noise, and extract on maximizing shareholder return, and prosperity. as much cash as they can from their the n fi ancial market makes decisions on So creating and running great businesses for short-term advantage. a shorter and shorter-term basis, as many companies is not about maximizing When I was CEO of Unilever, we CEOs will say, then the system is going shareholder wealth. The reality is that got a hostile takeover bid by Kraft- to implode. Bengt rightfully said the many if not most people in this world Heinz that made it very clear to me that system was not designed that way, but will never have an opportunity to become a variety of legal and generally accepted it certainly is behaving that way. If you a shareholder. It is a duty and an obliga- business practices needed to be addressed doubt it, consider that some 95% of the tion for any responsible citizens, in quickly or all humanity would sink in the profits reported by U.S. companies in the whatever function you are, even if you same global boat. We have a system that last 10 years were returned to their share- run a company, to ensure that you have a focuses on the few billionaire investors holders in the form of dividends or stock net positive impact in this world and that rather than the billions of people that you repurchases. Very little was reinvested in you optimize the net return and take care serve and employ. Our system is focused the business. Collectively, the airlines of all your stakeholders. Interestingly, only on creating shareholder value rather have used 95% of their free cash flow to shareholders would be much better off than cultivating the values need to create buy back shares over the last 10 years. than they now are if their companies were value itself. We have a system that aims Now they are desperately asking for help. managed in this way. only for profit rather than creating Companies have failed to invest in The number of U.S. publicly traded purpose-driven systems that produce their future. And we have not invested in companies over the last four decades has profit. These are fundamental issues in our people either. Nor have we created fallen in half, dropping from over 8,000 moral leadership and in the standards a very inclusive economy. COVID has to 4,000. I know there is a new economy needed to run these companies. made it clear that our social network is developing, and that many companies So, our current governance system broken. As citizens, we have a collec- are choosing to stay private. But the does not encourage the right individual tive responsibility to make this work. going or staying private movement is behavior. We do not live in an ideal world excluding a lot of people from value No long-lived company has dedicated and the changes we needed to make to creation. We are depriving a lot of itself just to maximizing shareholder the governance system are formidable. people of good pensions who cannot value. Lord Lever did not found Unile- We need to lengthen the decision-making ver to maximize his own wealth. He invest directly in such companies. time horizon of the financial markets to 66 Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 ROUNDTABLE give us time to address issues like climate capital. But if you pay attention to social the global consumer goods industry to change, poverty, and food security. We and environmental capital as well, then work together to stop deforestation, we need to decarbonize this global economy. I think capitalism is very well placed to will pay the price. If we cannot get the We need to create what I would call a optimize that. global consumer goods forum together regenerative economy. Currently, only When I was born, 85% of the to prevent obesity, the costs to our health 9% of what we produce is reused; the value of a company was explained by care system will go out of proportion. rest is thrown away, incinerated, or ends the current accounting methods. Now Companies need to take responsibility up in the oceans. it is only 18%. Yes, we have moved to of their total footprint in society. And finally there is the huge social a service economy and, yes, there are Corporate Social Responsibility is problem of income inequality. The some other changes, but the effects of the no longer sufficient. “Less bad” cannot system is working for a few but clearly intangible assets that today make up over be the standard. We need partnerships not for many. The people will ultimately 80% of a company’s market value can in between the different stakeholders rebel against the system when too many fact be quantified and measured. We can because we have this gap in governance. people feel that they are not included or measure culture, we can measure value We need to bring together a critical mass benefit from that system. If it were not chain responsibility, we can measure of people to get the change ultimately for COVID, we would have the whole treatment of people. needed. We cannot solve climate change world demonstrating. At present, our companies are collec- with only the 25% of companies that are So, the issue is, first and foremost, tively just not scoring very high on these now moving in the right direction and one of leadership. We have never been measures. The good news is that we are have science-based targets. so forewarned about something that now discovering that companies that Today, to be sure, business has is going to happen that we need to do treat people better, pay more than the another reason to step up to these social something about. We have solutions to minimum wage, have plans to combat challenges. For the first time, the finan - most of the dangers that put the future climate change, and treat suppliers cial market is really waking up to ESG of humankind at stake. We know how better also tend to have more engaged at a level we have never seen before. to produce food without cutting down workforces, greater innovative success, During COVID, more ESG funds were the forest. We know how to produce and higher prot fi ability. The bad news is founded because fund managers saw toilets yet one and a half billion people that such companies and changes are not the demand for them, and not simply still must resort to open defecation. We operating at the scale that we need, so because they were persuaded of the ESG know how to create wealth and could we have to find ways to accelerate such view themselves. also ensure that it is distributed a little change. So, you might say, the free market bit more. So, along with leadership, we must works. But, my response to this is: No, All these things are known. What adjust our performance measurement it has not worked, because the changes we are missing is willpower. Do people systems to include environmental and have come far too late and not at the really care? And do we have the right social capital as well as financial capital. scale and intensity we need. If sharehold- leaders? When we looked recently at the And the third thing we need are die ff rent ers were really responsible, why didn’t top companies in the world, we found forms of partnership to hold governments they demand that companies tackle the that 40% of them have had three or more accountable. Businesses need to work for issues of climate change or ensure that CEOs in the last 10 years. What are the the common good and to understand we had fair representation on our boards boards doing? Who are they selecting? that, by investing in others, they make or in our management? Why didn’t they These are critical questions we need to themselves better off ultimately as well. oppose slave and child labor? answer. We do not have the right leader- Henry Ford understood this very well. This is this higher level of corporate ship at the scale that we need. We need to do the same but on a vastly change that we now need. We must upgrade our corporate governance, The second thing we need to do larger scale. is to start measuring what we treasure. We need companies to work leadership, and moral codes. If we can If you pay attention to only financial together on these areas that relate to also inu fl ence governments in the right capital, people will optimize financial the future of mankind. If we cannot get directions, then we have a wonderful Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 67 ROUNDTABLE world to live in. But if we fail now in problems” and setting the company’s stuck their heads in the sand and lost 50% of their shareholder value in the this, we will be failing humanity. That purpose around their own values. Can we start with you, Bengt? is why it is so important to put purpose last two years while green energy gained at the center of a company’s mission, 50%-60%. There are now Nordic wind the top of its list of priorities. Purpose Holmström: To answer your question, it’s and solar companies with bigger market comes from your values, your beliefs. very important to understand why we left caps than Exxon. Neither shareholders Companies that are driven by stronger stakeholder value in the 1970s and 80s. nor management were persuaded of the purpose, that are anchored in strong We needed to find a way to move capi - importance of climate change. In fact, values and beliefs will be the companies tal from so-called “sunset industries” to oil company management was actively that will succeed in the long run. The “sunrise industries.” In the U.S. this was boycotting the whole debate on climate ones that do not will all disappear in accomplished through takeovers and change. So did airline management. In the graveyard of dinosaurs. And I will stronger financial incentives. As a result, fact, they were negotiating to be excluded stop there. there were massive numbers of mergers from the Paris agreement. and acquisitions and restructurings, and Polman: Bengt is right. How can we Stakeholder Capitalism to a single-minded focus on shareholder exclude some industries and still expect Shareholder Capitalism and Back value. to solve a global problem? It is an unfor- Henry Tricks: Thank you, Paul—and Why are we now seeing a shift back tunate reality that we miss responsible thank you, Bengt. Those were both toward a stakeholder focus? Because management at scale. extraordinary presentations. I thought popular attitudes changed and corporate So this begs the question: how should it was fascinating that Bengt starts by governance changed accordingly. People we intervene with the outliers. The bulk making a very provocative address in today, and I include myself among them, of the investors want good long-term favor of the Coase-Friedman model of see these issues as much more important returns for their pensioners. Rather than shareholder primacy, albeit with stake- than we used to. Paul just spoke of them say “maximize,” I prefer to say we need holder enhancements. And it’s funny to with great eloquence. And we read about to optimize long-term. think that that is now provocative. Not them daily. Social media have enabled For Unilever, it was not prot fi per se long ago, it was the established view but activists like Greta Thunberg to have that was uppermost; it was the long-term it does sound interestingly provocative great impact. She suddenly came on the cumulative growth of the company that these days. Paul, in his remarks, made it scene and a lot changed. counted. That builds the share price. I clear that there is also a failure of govern- But I do not know what most could easily maximize prot fi and kill the ment and that it is up to companies to companies could have done apart from company over a 5- or 10-year period, make purpose central. recognizing the social changes around while being viewed as a hero CEO until Let me ask each of you two related them. Nevertheless, at the same time, the fall. But I would have been doing questions. Bengt, you made it clear I congratulate and admire Paul for neither the company nor society a favor. that the enhanced shareholder value Unilever’s progressivism. Unilever has The financial market in the aggregate idea is now part of the times. We have benefited many people by going in that wants good longer-term returns for their moved from stakeholder to shareholder direction. Paul saw how to invest die ff r - pensioners. But institutions also increas- to now enhanced shareholder or stake- ently but not everybody is capable of ingly understand that their pensioners holder again. Could you explain why following him. If not everyone is of the must be able to live in the world they that movement has happened? Is it same caliber as Paul, we have to provide retire in. because, as Paul suggests, there is this other mechanisms to ensure that we all There are very few CEOs who seek global governance failure that it is up move in the right direction, and not out the right investors or go to the inves- to companies to step up to the plate? have to wait for Greta. There were even tor base and explain what they’re trying And if that is the case, I would like Paul a few industries that were continuously to accomplish. There are about 600 different companies that provide ESG to explain how CEOs could do that denying climate change: the airlines, the car industry, and the fossil fuel industry, without appearing to try to play God, measures but standards differ, there is a implying: “I know the answer to these unsurprisingly. The fossil fuel industry lot of greenwashing and so the system 68 Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 ROUNDTABLE suffers from a lack of clarity. Creating nies convince governments that they’ve recognize when a backlash starts to build, uniform standards across asset owners, got the problem under control because because that can have outsized effects asset managers, and asset creators is an on shareholder value. They need to be they are driven by pro-social purpose that absolute must. And CEOs must also regulators will let them get away with aware of the total impact their company walk the talk themselves. Look at their whatever they want to do? has on people and address the relevant own compensation system and investor issues. So, if Facebook, for example, does relations practices. I stopped quarterly Holmström: There is a risk because the not get involved in privacy issues, or in reporting the day I came in and moved regulatory system is highly imperfect. limiting hate speech, then they’re failing compensation system to the long term Most notably, governments have been to fulfill their duties and responsibilities for everybody. unable or unwilling to put in place effec - to society. Ultimately, public companies We can also work with our boards to tive CO taxes. But I see the main force need society’s approval as well as their be sure they understand their fiduciary for change coming from four groups: shareholders’. And society includes, of duties. In most jurisdictions in the consumers, public opinion, regulators, course, their own employees. In the case world, it is not true that maximizing and institutional investors. I have only of Amazon, Je B ff ezos got interested in, shareholder wealth is the only fiduciary admiration for Paul in recognizing these and started moving on, climate change duty boards have. Much has already failings, but it has always been the case only when 8,000 employees threatened been written about this. Even in the that some CEOs have insights not shared to walk out. That should not have U.K., company code 172c makes it by the broader public or even other been necessary. Jeff Bezos should have clear that firms have responsibilities CEOs. To engage the broader public, we anticipated that reaction from his work to multiple stakeholders. It is now also need robust ESG measures. And with the force. becoming part of European law. help of advances in AI, I think we can see I work with quite a lot of boards that we are on the right track. Holmström: Speaking of Amazon, it’s on a daily basis, and I’ve heard many Nevertheless, I continue to believe interesting to me that the most valuable board members say “I don’t want to get that wealth maximization, the Coasian companies today are those that have involved in ESG. It’s too much risk for mechanism, is fundamental to a success- made a point of ignoring the market and me.” First of all, you have to ask your ful economy. Take the case of a company downplaying reported earnings. Steve board members what they stand for? Are like Amazon. In a sense, Unilever was a Jobs never talked to investors. Larry Page they helping the company or are they template for Amazon given Unilever’s and Sergey Brin focused just on building only protecting their own reputation or focus on the customer and long-term the best search machine. So it is funny risk? If boards find ESG too risky, then orientation under Paul. Amazon has that the CEOs who seemed least atten- you should consider changing them. done fantastically well using much the tive to the financial markets have created Only 7% of the boards have people same approach. Yet, when one looks at the most shareholder wealth. In some there that are climate competent. You Amazon now, we also wonder about the sense, that is also completely consistent would never run your audit committees social impact it has had in terms of, for with what Paul has been telling us about like that. example, the loss of small businesses in Unilever. In quite a number of cases, So, we need to speed change to get rural communities. And this brings to the most socially responsible companies the critical mass to address these issues, mind the question of trade-os ff . I would have also turned out to be the ones most otherwise we will never succeed. And we like to ask Paul how you conveyed to prized by their investors, by our suppos- will then be doing our children a great your board that one particular impact edly shortsighted financial markets. was worth accepting, whereas another disservice, letting them down. impact was not tolerable? How did you Tricks: I’m afraid we are out of time, so we have to call an end to a fantas- Tricks: Bengt, a question on regula- make such trade-os ff ? tion. Isn’t it the role, to a certain extent, tic session. It has been a privilege to be of regulators and governments to be Polman: CEOs and board members part of this panel, and thanks Paul and handling these externalities and social must take responsibility for the entirety Bengt very much indeed for your contri- problems? Is there a risk that if compa- of their business models. And they must butions. Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 69 IESE ECGI CONFERENCE ON CORPORATE PURPOSE SESSION IV: Corporate Purpose, Ownership, and Performance Ernst-Ludwig von Thadden: Good after- sor of Strategy and Innovation at the standard of living goes up. One major noon, I’m Ernst-Ludwig von Thadden, a Questrom School of Business at Boston challenge to study this empirically arises professor of Economics and Finance at University. Caroline is also a leading from “greenwashing,” the propensity of Mannheim University and a fellow of expert on corporate social responsibility some senior managers to see advantage the ECGI, the co-organizer of this event. and is uniquely positioned to comment in conveying the appearance of purpose I am grateful to be asked to chair this on Claudine’s work. without delivering the substance. One most interesting session, whose subject With that, let me turn things over sees a great deal of what Colin described is corporate purpose, ownership, and to Claudine. yesterday as “twaddle.” Before becoming performance. We will discuss some of an academic, I worked in consulting for the issues that Bengt and Paul raised Purpose, Meaningful Work, and 10 years, and about half of that time was earlier, and see what two distinguished Firm Value spent in Silicon Valley. Unfortunately, academics can tell us about these diffi - Claudine Gartenberg: Thank you all nonsense purpose statements are quite cult questions. so much. As Ernst just told you, I’m common in the Valley. I want to start by quoting Karel Claudine Gartenberg, I teach at the Here is a recent example—one that Lannoo, the distinguished leader of the Wharton School, and have done empir- I’m pleased to have called out to my CEPS, the European think tank whose ical research on corporate purpose for MBA students long before it actually formal name is the Center for European nearly ten years. My plan is to review the imploded. If you read WeWork’s Policy Studies. In commenting on the n fi dings of some of that research today. pre-IPO filings about their purpose, it last session featuring Bengt Holmstrom And before I start, let me mention my was what one of my former colleagues and Paul Polman, Karel said: “Most collaborators in this effort. They are at NYU used to call “yoga babble.” academics are still behind and they George Serafeim at Harvard Business The statement proclaimed, “We are a cannot adapt to the new challenges in School, Andrea Prat at Columbia, and community company committed to their paradigms.” What’s more, he goes Shun Yiu, one of my graduate students maximum global impact. Our mission on to say, “markets are radically wrong.” here at Wharton. is to elevate the world’s consciousness.” But my expectation is that this next General interest in the idea of corpo- It’s impossible to know what this stu ff session will provide persuasive evidence rate purpose has increased substantially means, yet virtually every company that scholars in fact have been able to over the last few decades. Since publica- has some form of a public purpose adapt and respond to new paradigms or, tion of the seminal Bartlett and Ghoshal statement. And as I said before, the as Bengt Holmström might have put it, paper in 1994, there has been a dramatic abundance of such cheap and vacuous that markets are quite good at recogniz- increase in the number of published talk makes empirical investigation ing constraints and doing the best they articles on corporate purpose. And difficult. can to operate within them. And let me surveys of millennials consistently show So let us define first what we mean start by telling you a little about our that a sense of purpose remains at the top by purpose. One definition I like is a distinguished participants: of what they look for in the workplace. statement by Rebecca Henderson— We will hear first from Claudine At the same time, other studies have who will speak tomorrow—and Eric Gar t enb er g, who is Professor of reported that the importance of finding van den Steen at HBS. They define it Management at the Wharton School meaning in one’s vocation increases not as “a concrete goal that reaches beyond at the University of Pennsylvania, and a only with one’s age, but also appears profit maximization.” The defini- leading expert on corporate purpose and to have been increasing generally over tion we use in our research is “a set of what it means for concrete issues such time, presumably at least in part as a beliefs about the meaning of a firm’s as employee satisfaction and corporate function of economies achieving greater work beyond quantitative measures of behavior. wealth. Seeking a sense of purpose in financial performance.” The meaning Claudine’s presentation will then be one’s work appears to be a universal of a firm’s work is sufficiently broad to discussed by Caroline Flammer, a profes- tendency, especially as one’s wealth and capture purpose for our intent. Corpo- 70 Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 ROUNDTABLE believe that this session provides persuasive evidence that scholars have been able to respond to new paradigms and, as Bengt Holmström might have put it, that markets are quite good at recognizing constraints and doing the best they can to operate within them . – Ernst-Ludwig von Thadden rate purpose enables a shared sense of So, how do we share this sense of Motivating the fundraisers was meaning around a common endeavor. meaning within companies? What hard because the callers were not paid e Th words “shared” and “meaning” is our shared endeavor? One of my much and suffered frequent rejections are both important here. Victor Frankl, favorite examples involves Legos. A lab from people unhappy about getting a mid-century social scientist and study divided the lab participants into calls during dinner. Turnover among the Holocaust survivor who wrote about two groups to build Bionicle Lego men. callers was high and morale usually low. his experiences, concluded that we are Each group was paid the same piece rate, In designing his study, Grant arranged not motivated primarily by money or the same money. Although the finan - for one group of call center workers material objects, but by a fundamen- cial rewards were identical between the to meet with some of the scholar- tal need for meaning in our lives. That two groups, the researchers treated the ship students who benefited from the meaning may come from family or Bionicle Lego men of the two groups fundraising and ask them about their religion, or from one’s vocations and very differently. They took the Lego studies. Although they met for only work, but meaning is the motive force men of one group and displayed them five minutes, those callers were far of who we are as individuals. in such a way that the results of their more successful over the next month, And this idea has even made its way efforts could be seen easily. But when spending more than twice the time into economics, a putatively value-free the other group constructed a Lego on the phone and raising nearly three discipline, to some degree. As Keynes man, the researchers took it apart and times as much money. Another study of wrote in 1936, “If human nature felt no threw the Lego pieces back into the box. radiologists found that those who met satisfaction (profit apart) in constructing And that simple die ff rence ae ff cted with patients directly produced longer a factory, a railway, a mine or a farm, the productivity of the two groups write-ups and more accurate diagnoses there might not be so much invest- significantly. The group that could see than those who were simply given test ment merely as a function of cold the fruits of their work was 50% more results to work from. calculation.”1 productive despite receiving the same I think most people can see how That qualification “profit apart” financial reward. So, endowing work this works at the individual level. But is quite important. We need a sense with even a modicum of meaning explaining how to make this work at the of meaning in what we do to truly be engages people in greater eo ff rt. company level has proven dic ffi ult. We motivated. Social psychologists and One much-cited study by Adam have had a lot of theoretical discussions marketing academics know this at the Grant published in 2007 studied the and case studies, but not made much individual level. And there have been a productivity of university fundraisers empirical progress. multitude of lab studies on the impor- at a call center who were cold calling There are at least three important tance of meaning, some of them by my potential donors to the university.2 reasons for this. The first is that purpose Wharton colleague Adam Grant. is a highly intangible idea. The second 2 Adam Grant, Elizabeth M. Campbell, Grace Chen, is the difficulty of measurement, and Keenan Cottone, David Lapedis, Karen Lee (2007), “Im- 1 John Maynard Keynes, The General Theory of Em- pact and the Art of Motivation Maintenance: The Effects ployment, Interest and Money, Palgrave Macmillan, of Contact with Beneficiaries on Persistence Behavior,” es, 103: 53-67. 1936. Organizational Behavior and Human Decision Process- Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 71 ROUNDTABLE ur studies suggest that having employees with a strong sense of purpose is correlated with higher long-term perfor- mance. And companies with more committed owners appear to have a stronger or clearer sense of purpose and to make different choices about governance, performance measures, and time horizon. – Claudine Gartenberg the third is what we academics call employees was based on the premise through in our study, appears to be “identification”—that is, disentangling that it is employees’ collective attitudes causal. Companies in the top decile in purpose from all the other aspects of the that determine how credible purpose is purpose clarity have an operating return company. These are large, thorny empir - at the firm level. on assets that is 4% per annum higher ical issues. We have made some progress So what did we find? The first thing than companies in the bottom decile. on the measurement side. We know our is that employees’ sense of purpose And the top quintile in terms of clarity metrics are not perfect, but we use what declines with rank in the organization. is also associated with about a 7% alpha we call a “preponderance of evidence” The second thing we find is that there annual stock return; that is, the compa- approach to try to disentangle purpose are two primary kinds of purpose in nies outperform the broad market by from the other aspects. organizations. We call the first high- 7%. That 7% is quite remarkable. In a recent study,3 George Serafeim, purpose-camaraderie. In this version, By way of comparison, Alex Andrea Prat, and I asked the question: employees find meaning in their work Edmans reported finding in a 2011 what do we know, and what more can and feel the organization is somewhat study that the Fortune Best Companies we learn, about the link of purpose like a family. The second type we call Top 100 list that is derived from the and performance in large commercial purpose clarity. We infer clarity from overall GPTW data earns a 4% annual - enterprises? Our measure of purpose employees’ responses to questions that ized stock return. It is also of the same was intended to reflect the meaning that had the word clear in them. This classi- magnitude of other studies of intangible employees find in their job. We used a fication came straight out of the data; we drivers of firm success, such as the 4.6% variety of survey questions to measure did not impose this name on the data. for high R&D capital reported by Lev the strength of purpose. We have data In such cases, employees say they find and Sougiannis in 1996, the 6.1% for from about half a million employees for a high sense of meaning in their work, r fi ms in the top quintile of R&D flows this first study, which looked at some have a clear view of what they need to reported by Chan, Lakonishok, and 500 public U.S. companies. do to be successful, and believe that Sougiannis in 2001, and the 8.5% for Companies that we deemed success- management has a clear view as well. firms with strong governance reported ful in propagating corporate purpose What we find, then, is that purpose by Gompers, Ishii, and Metrick in a were those whose workforces said they per se has no relation to performance. 2003 study. n fi d a strong sense of meaning in their If anything, the correlation is negative Another major finding of our study work. This was our way to separate those as it relates to performance. We also is that the connection between purpose companies with real purpose from those n fi d high-purpose-camaraderie to have and performance is driven entirely by with vacuous statements. Our focus on zero correlation with performance. the middle ranks of the company. If But clarity of purpose turns out to be it is only senior executives who feel highly predictive of performance in a a sense of purpose, the relationship 3 Claudine Gartenberg, Andrea Prat, and George Serafeim, “Corporate Purpose and Financial Perfor- way that, after all the tests that we go between purpose and performance is mance,” Organization Science, 30(1), pp.1-18, 2019. 72 Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 ROUNDTABLE zero to weakly negative. If only hourly holding periods of their institutional weak sense of purpose, or whether it was investors, which for U.S. investors employees feel a sense of purpose, there the lack of purpose that was attracting today averages around nine months. is no correlation with performance. shorter-term owners. And it appears to But when the middle ranks of employ- After classifying our sample companies’ us that a bit of both is going on, and that ees feel a high sense of purpose clarity, institutional shareholders into two the causality thus runs in a circle. There those companies outperform. In sum, groups—“dedicated holders,” those appears to be both a “sorting” or self- there is no connection between stated with highly concentrated portfolios selection effect—that is, the tendency of purpose and performance unless that and holding periods of at least two years, investors or their agents, the managers, purpose is clear and credible, and unless and “transients,” those holding lots of to choose certain kinds of ownership or it is found to be so by the middle ranks stocks for average periods of less than governance structures--and a treatment of the organization. six months—we then subtracted the effect, which are the consequences, or What accounts for differences in number of transients from the number causal ee ff cts of such choices. purpose across companies? To answer of dedicated shareholders to arrive at a In sum, purpose appears to comple- this question, we undertook another measure of long-term ownership. Using ment and contribute to or reinforce survey with a dramatically expanded this measure, we then found that our performance in the sense that having sample of 1.5 million employees at over measure of long-term ownership was employees with a strong sense of 1,000 companies over a longer time positively correlated with corporate purpose is correlated with higher long- period. We found significant differ- purpose. term performance. And companies with ences between publicly traded firms, We also found that companies more committed owners appear to have private firms, and other private compa- controlled by “less committed” inves- a stronger or clearer sense of purpose nies owned by private equity. We found tors—a group that often includes hedge and to make different choices about employee’s views of corporate purpose funds and activist investors—are also things like governance, performance to be weaker in public than in private more likely to choose outsider CEOs measures, and time horizon. companies, and that this die ff rence was and CEOs with finance backgrounds. But that said, there does seem to be a most pronounced within the salaried Such companies also do more corporate paradox between activist and hedge fund middle and hourly ranks, as opposed restructuring, particularly more mergers investors wanting prot fi s but apparently to senior executives. Purpose was also and acquisitions, and have larger pay making decisions that appear to weaken lower in PE-owned firms than among gaps between the CEO and the average the sense of corporate purpose among other kinds of private firms. Among employee. employees. Although we cannot prove public companies, we found the sense of But all these findings raise the it den fi itively from our study, we think purpose to be weaker in companies with question of causality: do hedge funds it has something to do with a charac- high hedge fund ownership, but higher and activist investors weaken corporate teristic Bengt Holmström explored in for companies with disproportionately purpose, or are hedge fund activists his Nobel Prize-winning work—namely, large shares of long-term investors. attracted to low-purpose firms because “observability.” Outside active investors In sum, greater ownership commit- they see opportunities for significant with an average holding period of, let’s ment appears to be associated with improvement? My husband works say, nine months get involved with a a stronger sense of purpose among for a hedge fund, and he will tell you company and engage in highly visible employees. In public companies, the that they look for companies that are actions. They may kick out the CEO, sense of purpose tends to weaken as one underperforming, and where there is force some restructuring actions, and moves down the organizational hierar- considerable room to increase efficiency change the compensation structure. chy—but this is not the case in private and value. And I’m inclined to agree What is not observable by outsiders, r fi ms, where middle- and lower-ranked with that. however, are the effects of such visible employees profess a notably stronger My co-authors and I went to great changes on the sense of purpose in the sense of purpose. lengths to try to g fi ure out whether less middle ranks of the employees. We Our measure of ownership commit- committed investors were somehow have proprietary survey data on this but ment in public companies was the causing—or at least contributing to—a Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 73 ROUNDTABLE investors do not. So observability may looks at the identic fi ation problem that authors used the survey conducted by makes this research so challenging. the Great Places to Work Institute, have an eec ff t on purpose. The larger question posed by this Let me start with the two elephants. which has been used by other research- conference is: “Can purpose deliver The first elephant in the room is about ers to examine corporate culture4 and better corporate governance?” Our the meaning of “purpose.” As Claudine employee satisfaction.5 In their 2019 findings suggest that there may be a pointed out, it is very hard to capture study, Claudine and her co-authors substantial role for institutional inves- purpose. What does corporate purpose George Serafeim and Andrea Prat tors in reinforcing purpose. Long-term really mean? measure corporate purpose by focusing ownership is related to a strong sense To their credit, the authors are very on four specic fi questions. of purpose among employees. Share- clear in den fi ing purpose as “a concrete 1. Does your work have special holder concentrations have gone up as goal or objective that reaches beyond meaning? Is it more than just a job? has private equity ownership. SPACS, profit maximization.” And they also 2. Do you feel good about how you special purpose acquisition compa- make clear that such a purpose need not and your employer contribute to the nies, are now taking private companies be explicitly pro-social. So, this defini - community? public, but it is unclear how the priori- tion hypothetically includes weapon 3. Do you feel a sense of pride when ties of the new shareholders die ff r from manufacturers that aim to produce you look at what you accomplish? those of the older ones. I think there the most effective deadly weapon, and 4. Are you proud to tell others that may be an important role for institu- cigarette companies that aim to produce you work here? tional investors in encouraging credibly the best smoking experience possible, or It is important to note that these implemented purpose. perhaps the most addictive cigarette. four questions relate to employees’ So, I will stop there and turn things Now, I doubt this is what the perceptions about the meaningfulness over to Caroline. authors believe corporate purpose to of work, regardless of the purpose or be, nor is it what most people think mission of the company. Purpose-Driven Employees, when they hear corporate purpose. In their follow-up study, Claudine Meaningful Work, and Corporate I believe what the authors aim to say and her co-author George Serafeim use Performance is that corporate purpose relates to a a slightly different measure for corpo - Caroline Flammer: Thank you so much company’s mission, and its contribution rate purpose—one that added two more to the organizers for this fantastic to society and the natural environment questions to the original four and that conference. And thank you Claudine for that goes beyond profit maximization. relate to management clarity. your accounts of two fascinating studies. This is often called “corporate social One specific suggestion I would I find much to like about Claudine’s responsibility.” offer to the authors is to better align studies. They are both very interesting But this raises the question: how their theoretical construct with what and multi-disciplinary. They offer a does corporate purpose really differ they actually measure —namely, richness of insights about employees’ from other familiar concepts such as “employee work meaningfulness and perception of the meaningfulness of corporate mission or social responsibil- management clarity.” Also, I think the their work, and, perhaps most impor- ity or ESG? How, for example, should authors should be more consistent when tantly, they offer relevant implications a board of directors think about a measuring this construct across all their for practice. I encourage managers, firm’s purpose? Is it a substitute for or studies. Because it is so hard to capture boards of directors, and investors to a complement to the firm’s mission and corporate purpose—and employee pay attention to these intangible factors. its CSR? So, I suggest the authors try work meaningfulness and management to be more precise and explicit about In my discussion I will focus on four 4 Luigi Guiso, Paola Sapienza and Luigi Zingales, what corporate purpose means and main comments. The first I refer to as “The Value of Corporate Culture,” Journal of Financial doesn’t mean, and how it differs from “The Two Elephants in the Room and Economics 117(1): 60-76, 2015. 5 Alex Edmans, “Does the Stock Market Fully Value the Big Picture.” The second is about other well-known concepts. Intangibles? Employee Satisfaction and Equity Prices?” the underlying channels. The third is on The second elephant in the room Journal of Financial Economics, 101(3): 621-640, is the measurement of purpose. The investor influence. The fourth and last 2011. 74 Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 ROUNDTABLE he existing literature suggests that “voice” is likely to be more effective in triggering positive changes in corporate behavior than “exit.” It would be interesting to understand exactly how investors inu fl ence their portfolio companies in a way that affects employees’ perception of their work meaningfulness. – Caroline Flammer clarity—in a metric, it is important to efficiency and value, we may want to Another question raised by these be as clear as possible about what you investigate whether these factors might findings—and this is my third obser - are measuring and use the same measure be more valuable and cheaper than vation—is how and to what extent across studies. the other mechanisms. I think there do investors influence their portfolio Now, let me bring these two is a lot of unexplored potential here, companies? We know they can do so elephants into the bigger picture. On and I encourage the authors to discuss passively through ESG screening or one end, we have corporate purpose and the bigger picture that we gain from integration and, more actively, through mission at the firm level. On the other, the insights of the collective body of shareholder engagement and proxy we have employee work meaningful- research and its importance for practice. voting. The existing literature suggests ness and employee satisfaction6 at the Let me now turn to my second that “voice” is likely to be more effec- individual level. And in the middle, we comment pertaining to the underlying tive in triggering positive changes in have something called corporate culture7 channels. In their 2020 study, Claudine corporate behavior than “exit.” It would and management clarity. What I find and George Serafeim examined how be interesting to understand exactly striking, and reassuring, about all these different types of ownership relate to how investors influence their portfo - studies is that they tell a very coherent employee work meaningfulness and lio companies in a way that affects story. Corporate culture, meaningful management clarity. They found that employees’ perception of their work employee work, and employee satisfac- work meaningfulness and management meaningfulness. tion all appear to be positively associated clarity is stronger in private firms than Last but not least, let me say with financial performance. in public firms; and, intriguingly, this something about the empirical analy- e Th findings of this overall body of difference was more pronounced for sis. Claudine has already mentioned literature has some important impli- lower- level employees. the endogeneity concerns that arise cations. First, corporate culture and This raises several questions. First, when comparing, for example, public employee work meaningfulness and what is the underlying mechanism and private firms. The authors used a satisfaction are valuable, and managers between ownership and employee matching technique to overcome this and investors can benefit from paying attitudes? How does the ownership challenge. Because most private firms attention to them. Second, to the extent structure influence employees’ percep - are much smaller than public firms, they that these intangible factors add to the tion of their work meaningfulness? sought to match private and public firms broader bundle of governance mecha- Second, why are lower-level employees of similar size. But however sensible, nisms that help companies increase such as technicians or janitors more that approach is tricky because private responsive? Third, to what extent are firms are typically much smaller than 6 Alex Edmans, “Does the Stock Market Fully Value such employees aware of the firm’s public firms. For example, it may be that Intangibles? Employee Satisfaction and Equity Prices?” ownership structure and higher-level unusually large private firms are so well Journal of Financial Economics, 101(3): 621-640, 2011. policies? These are questions worth run and successful that they can afford 7 Luigi Guiso, Paola Sapienza and Luigi Zingales, exploring, perhaps by interviewing to remain private despite their large “The Value of Corporate Culture,” Journal of Financial employees at die ff rent levels. size; and to the extent that it is the case, Economics 117(1): 60-76, 2015. Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 75 ROUNDTABLE the matching could produce mislead- importance, what the company was all We were able to strip out employee ing results. To address this endogeneity about, and what the long-term goal was. engagement from aggregate meaning- problem, the authors could use a quasi- fulness across the firm by using an natural experiment that compares firms Von Thadden: I have two questions exploratory factor analysis that enabled that IPO’d successfully with those that from the audience: What role does us to “orthogonalize” the vectors that filed for IPO but had to withdraw for the concept of “shared values” play in fall out of this survey. In layman’s “quasi-exogenous” reasons and, as a the corporate governance debate? And terms, this means that overall happi- result, remained private.8 how would a company create a mean- ness is stripped out of our analysis. To conclude, overall, I think these ingful KPI system to increase employee We have not just been measuring are very interesting studies. This is engagement in corporate performance? happiness or satisfaction, but more multi-disciplinary work that bridges specifically the sense of meaning that academic silos. They offer a richness Gartenberg: We are fairly agnostic employees feel about the way their jobs of insights about employees’ percep- about shared values. The line between contribute to society or, at least, to the tion of the meaningfulness of the work academic research and advocacy is not stated mission of the company. and oe ff r important implications for all clear; what might be socially beneficial parties, including managers, boards of to me might not be so to you. Employ- Flammer: I totally agree with Clau- directors, and investors. ees of Smith and Wesson might feel they dine. I think the authors circumvented a Th nk you. are defending freedom and the Second the question about shared value versus Amendment but that might not feel corporate purpose elegantly. The Gartenberg: I agree that the mechanisms very pro-social to me. But if the employ- beauty of these studies is they have should be studied. In a longer version ees feel meaning in their work, then that real data about employee work mean- of our second paper, we present case qualie fi s as purpose in our work. So, in ingfulness. studies that show owners’ different pref - that sense, our findings are somewhat The question about meaning- erences when running companies. For agnostic about values. ful KPIs is good. I would like to find example, after Bain Capital took Toys- There is, however, one empirical indicators related to the concerns Paul R-Us private, they changed practices at result that is less agnostic. That is the Polman mentioned earlier. How can the store level in terms of shifts, perfor- relationship between CEO pay and we engage not just managers, but also mance metrics, the work structure, and average employee pay. There is very lower-level employees, in longer-term the messages they gave to employees strong evidence that the more the CEO thinking and more sustainable business and people outside the company. We is paid relative to the most common practices? Can we find ways to link also studied a performing arts company salaried role, the weaker the sense of executive compensation to social and I cannot name but that would be famil- purpose, especially, again, among mid- environmental performance criteria and iar to almost everyone watching this and lower-level employees. longer-term performance outcomes? webinar. It was bought as a vanity proj- With respect to meaningful KPIs, When you think about new KPIs, you ect by a very prominent hedge fund I would say that we need to look at must focus upon KPIs that capture owner. But as soon as the company more data. As Caroline mentioned, these longer-term values. I have done was bought, its message changed from one weakness of our study is that we research on precisely these questions.9 “we are involved in the fine arts,” to measure aggregate meaningfulness as “we’re an awesome real estate play.” purpose. That is also an unavoidable consequence of the data desert we That completely changed the messages 9 Caroline Flammer, Bryan Hong, Dylan Minor, sent down to the employees about their found ourselves in. We do not have great “Corporate Governance and the Rise of Integrating Corpo- rate Social Responsibility Criteria in Executive Compensa- measures of purpose. So the more data tion: Effectiveness and Implications for Firm Outcomes,” that is produced and publicly available, Strategic Management Journal, 40(7): 1097-1122, the better o w ff e will be. 2019; Caroline Flammer and Pratima Bansal, “Does a 8 See Shai Bernstein, “Does Going Public Affect Long-term Orientation Create Value? Evidence from a Re- I will say, though, that our data is Innovation?” Journal of Finance, Volume 70, Issue 4, gression Discontinuity,” Strategic Management Journal, pp. 1365-1403, August 2015. predictive of a lot of different things. 38(9): 1827–1847, 2017. 76 Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 ROUNDTABLE Gartenberg: Let me comment on rela- added to the German DAX, an index and forced Google, Amazon, and I think tional contracts. A relational contract is of the top 30 German publicly listed to some degree Microsoft to withdraw a kind of “repeat game” type of contract firms. People loved to work there, and from some of their defense work on that is meant to encourage long-term its corporate atmosphere and corporate facial recognition technology for border thinking and avoid opportunistic culture was much admired. control. behavior. And your contracting prob- Unfortunately, this firm turns Another company called Palantir lems are the greatest among middle out to have been a complete fraud. Its picked up that technology. Interest- managers. It is easier to handle CEO business model was built on decep- ingly, Palantir is also a purpose-driven compensation by linking it to stock tion and accounting misstatements. So, company. It is just a different purpose returns and other corporate metrics. although Wirecard seemed to have a lot from most of the rest of Silicon Valley. At the factory floor level, you can use of purpose in terms of employee identi- Different companies will aggregate piece rates or link to whatever metrics fication with management goals and different social preferences. I think you have. It is in your middle profes- employee satisfaction, the firm turned information disclosure and voice are sional ranks where you have the largest out to be a complete fraud. two important mechanisms for allowing contracting problems and, arguably, And this begs the question: how do group preferences to coalesce. The alter - where a lot of the intangible value we distinguish good corporate purposes native would seem to be some central comes from. So, our paper may allow from bad ones? How do we decide what arbiter who would decide what social purpose to be used as a solution to the purpose actually is? Nothing in our purpose should be and that makes me a contracting problem inside of firms. empirical research seems to answer that. little bit uncomfortable. Von Thadden: In the last few months Gartenberg: In my MBA class we talk Von Thadden: I will now draw this one of the most fashionable companies about Google and the tech walkouts in session to a close. Thank you, Caroline in Germany collapsed in a very ugly Silicon Valley last year over collabora- and Claudine, for such an interesting way. Wirecard provided digital payment tion with government on defense work. discussion, one that ties nicely back to services. It grew very quickly and was Employees decided to exert their voice Bengt’s and Paul’s. Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 77 IESE ECGI CONFERENCE ON CORPORATE PURPOSE SESSION V: Unpacking the Purpose of the Corporation Marco Becht: Good afternoon, I’m ing, at least in part, the higher perceived of Law and Economics. Jill is a prolific Marco Becht, Professor of Finance at risk associated with media scrutiny and contributor to the “purpose literature” Université libre de Bruxelles, and Exec- political and regulatory reaction. So, and is also a board member of the ECGI. utive Director of the ECGI. For those that’s the negative externality. On the of you just joining us, let me briefly positive side, Claudine Gartenberg Jill Fisch: Thanks, Marco, and let me summarize our proceedings thus far. presents the findings of her work with also start by thanking the ECGI and In our first session on corporate George Serafeim and other colleagues other conference organizers for includ- purpose two days ago, Colin Mayer and showing that companies with “clarity ing me in this special program. Luigi Zingales made the case for rethink- of purpose,” especially in their middle Our featured speaker today is ing, and modifying, the Friedman-Coase ranks, outperform their less purpose- Rebecca Henderson, who is the John view of maximizing long-run share- driven counterparts. and Natty McArthur University Profes- holder value. But in yesterday’s session, But up to this point, we have not sor at Harvard Business School and an Nobel laureate Bengt Hölmstrom heard much about the financial services expert on innovation and organizational disagreed forcefully, arguing that today industry. Banks and financial markets change. Rebecca’s research explores the we are still very much experiencing the have of course played critical roles in the major role the private sector can play in social benefits of the efficiency that progress of capitalism. Without banks building a more sustainable economy. comes from the Coase system, and that to move capital from England in the In a pair of recent books that call for wholesale changes in capitalism at this 19th century, railways could not have a “reimagining” of capitalism, she point are unwarranted. Paul Polman, been built in America. And without pays special attention to the challenge the former CEO of Unilever, then financial markets, we would not have of climate change and the role of the responded by disagreeing with Bengt, the instant transmission of information private sector in dealing with it. noting that much needs to evolve. across the globe. Rebecca’s presentation will be Along with undeniable increases in At the same time, of course, we followed by comments from Jordi global wealth and living standards, the also know that financial services, and Gual, who is Chairman of CaixaBank, last 40 years of economic gains have also banks in particular, have contributed to a large Spanish bank with a highly inflicted more damage on the environ - problems. The financier J.P. Morgan did unusual ownership structure and corpo- ment than the entire history of mankind move capital from England to America, rate mission, as well as a Professor of and, in this sense, we are now borrowing but he also facilitated the horizontal Economics at IESE Business School. from future generations. merger of companies into gigantic trusts Previously, Jordi was CaixaBank’s execu- Consistent with Bengt’s endorse- that were then broken up by Antitrust tive director of strategic planning and ment of market-based capitalism, two action. And banks played a similar role chief economist, and he has written a of our speakers have also presented in finanzkapital in Germany, creating number of excellent books on banking suggestive evidence that investors cartels at the expense of consumers. and other subjects. recognize “externalities”—positive as Financial crises seem to recur with Welcome Rebecca, welcome Jordi. well as negative—when valuing compa- almost predictable regularity; but the Rebecca, the floor is yours. nies. Patrick Bolton, for example, by most recent one, in 2008-2009, had a showing that high-carbon emitting shattering effect on public confidence Reimagining Capitalism companies earn higher returns over long in capitalism and financial institutions. Rebecca Henderson: Thanks, Jill, and periods of time, demonstrates that such Our next panel will touch on some thanks to the ECGI for a fantastic companies have a higher cost of capital, of these questions, and I will now turn conference. I am very excited to be here. or what amounts to the same thing, things over to the moderator of this I want to start by talking about why a lower multiple and overall value for session, Jill Fisch. Jill is Professor of Law purpose might matter. Several previ- the same earnings stream. This return at the University of Pennsylvania Law ous speakers have discussed whether premium can in turn be seen as ree fl ct - School, where she heads the Institute a strong sense of purpose can really 78 Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 ROUNDTABLE drive firm performance, and whether I suggest that there are three major the push toward a cleaner environment firms will evolve successfully without reasons for this discontent. First, we are and increase human welfare, such prices outside action. I want to persuade you seeing massive environmental degrada- must reflect all real costs. Electric power of two things. First, we need systemic tion and singularly failing to address it. is of course valuable, but the burning of change to reimagine and save capital- California remains literally on fire. I am coal to generate ten dollars of electric ism. Second, purpose-driven firms can sure you remember the fires in Australia power also causes, on average, at least play an important catalytic role in this last year. This summer Bangladesh was eight dollars of unpriced harm to human transformation. 30% underwater with a third of its land health because burning coal emits toxins As Jill was kind enough to mention, area covered by the sea. We are already like mercury, lead, and particulates. My I have recently published a pair of books seeing massive floods, accelerating fires, colleagues at Harvard’s School of Public on this topic, and the most recent one is and the possible collapse of agricultural Health say that burning coal results in called Reimagining Capitalism in a World systems in more vulnerable places like U.S. healthcare costs equivalent to five on Fire. It is not an academic treatise, Africa. We have huge environmental or six percent of the GDP a year. But it is a work of rhetoric that makes the problems and accelerating inequality. these costs are currently “negative exter- case for transforming capitalism; it So, yes, capitalism is a fantastic nalities” that are not priced into what says that this process of transforma- wealth generator. A billion people consumers pay for electricity. As a conse- tion is already underway, and that the have been brought out of poverty in quence, the usual welfare theorems do purpose-driven firms are central to what China. But in much of the developed not apply and many prot fi s are coming we see happening. It is full of fun stories world, growth in wealth and income at the expense of massive social and but also deeply rooted in the work of has been concentrated at the top of the health damage. We need our govern- hundreds of researchers. I draw on the social pyramid. Indeed, social mobil- ment to price such externalities. latest research to make my case. ity in the U.S. has fallen consistently This is not a radical idea. It has long Why is system-wide change needed? over the last 20 years. The average been supported by most economists, As Paul and Bengt reminded us, capital- U.S. adult cannot expect their children and even social thinkers as libertar- ism has been tremendously successful. I to do better than they are doing now. ian as Friedrich Hayek. We need free routinely open discussions of my book We have huge social and environmental politics to balance free markets and by saying that free markets are one of the issues. This creates social unrest and a strong civil society to sustain both. great inventions of the human race, an disquiet, leading directly to declining Having the rule of law, a free press, unparalleled source of innovation and trust in elites and institutions. respect for minority rights, and a voice prosperity. I say this because so many of Business school professors or for employees all sounds conventional, the groups I speak to ask: “Why should business people often say to me: “But but they are all critically important and we reimagine capitalism? Why don’t we wait Rebecca. These are public goods should be central concerns for business. just throw it out?” problems. They should be fixed by Business people tend to think, “OK, And these are not people on the government.” And, indeed, these are no problem. Why do we need to worry fringes, by the way. massive collective action problems that about purpose and other stu? ff As long In February 2020, when we asked may only be fully addressed by strength- as the government prices in externali- the first-year class of Harvard Business ening our institutions. Prosperous free ties, we can just put our heads down and School if capitalism was broken, fully societies rest on three foundations. The maximize prot fi s.” half said yes. Most people under 30 in first is free markets. Free markets are Why we do we need business the U.S. now claim to prefer socialism at the heart of freedom and prosperity, to act, to help address these social to capitalism. Perhaps, they mean only but to remain free and fair, they need problems? The short answer is, because that they want decent health care, but effective supervision by democratically our governmental institutions are not that result is not a good sign for those elected, transparently accountable, and performing very well and because in of us who are fans of capitalism. What capable governments. the short term, business is better placed is going on? Why do we need systemic Climate change illustrates this to deal with many of these problems. change? clearly. For market prices to encourage Collectively, business enterprises have Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 79 ROUNDTABLE hy we do we need business to act, to help address these social problems? The short answer is, because our govern- mental institutions are not performing very well and because in the short term, business is better placed to deal with many of these prob- lems. Collectively, business enterprises have a deep economic interest in solving problems like climate change, racial exclusion, and inequality. – Rebecca Henderson a deep economic interest in solving social problems. Purpose-driven compa- people, significantly reducing environ - problems like climate change, racial nies have a central role to play. I den fi e mental impact and effecting change in exclusion, and inequality. e e Th vidence purpose-driven companies as those that their industries. And at HBS we have suggests that economic growth is stron- are authentically committed to a goal put together more than 300 cases featur- ger and more sustainable in societies beyond profit maximization even as they ing companies pursuing these kinds of with strong, democratically account- still generate adequate returns for their opportunities. able governments that provide the investors. I believe that you can have a Once one company shows that institutional guardrails that enable goal beyond profit maximization and there is money to be made, many prot fi maximization to work its magic. do very well financially. We all have to others follow. Elon Musk’s focus on Business thus has strong incentives to breathe to live, but breathing is not the electric vehicles has certainly acceler- strengthen our institutions. point of life. For purpose-driven firms ated the transformation of the world’s My mother was an entrepreneur, making money and creating long-run automotive industry by probably five and I myself have 25 years of cumula - value for their investors are essential, or six years. Individual firms can have tive experience on major corporate but they are means to an end, not the real impact in industries that are in boards. And I remain convinced that goal of the firm. the middle of transformation such as economic growth is the only way to solve Purpose-driven firms are ideally electric power, electric distribution, the social problems we face. We need poised to exploit what my colleagues transportation, agriculture, construc- massive innovation and millions of new Michael Porter and Mark Kramer have tion, infrastructure, and food, as distinct jobs. Capitalism is the only thing that is called the “shared value opportunity.” from agriculture. going to get the job done. But even if the That is, to solve big problems and make But why then is purpose necessary? economic rewards are evident, we still money at the same time. We are now If there is money to be made, won’t have a huge collective action problem to seeing enterprises at billion-dollar scale everyone be doing it? Many people overcome. People and companies have to embracing solutions to large social believe that capitalism will just do it as be persuaded to make voluntary contri- problems and making money while long as there is a financial reward. But I butions to the outcome—investments they do so. disagree. I was Eastman Kodak Profes- of time, energy, and, in some cases, Walmart is one of my favorite sor of Management at MIT for more capital for which the payoffs are neither examples. They added a billion dollars than 20 years. Although completely immediate nor certain. to their bottom line by reconfiguring coincidental, the association with So, faced with this enormous their trucking fleet to reduce fuel use Kodak was also deeply ironic because collective action problem, how do we and greenhouse gas emissions signifi - I spent the first 20 years of my career get where we need to go? We cannot cantly. Changes made by Walmart have studying firms like Kodak, General simply click our fingers to solve big transformed the lives of millions of Motors, and Nokia that recognized the 80 Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 ROUNDTABLE world was changing, but were unable ments that may not pay off right away. many historical examples of voluntary to respond effectively. To be authentically purpose-driven, you collective action working to overcome As a result, I am one of the world’s must at least occasionally value purpose “the Tragedy of The Commons.” 1 We experts on the difficulty of transforming over prot fi . My position is that compa- know that there have been times when large organizations. When faced with nies can be purpose-driven and thrive in voluntary self-regulation has proved shrinking markets, the large established competitive markets—and in so doing, immensely successful in solving the companies—we call them the “incum- they are also much more likely to be collective action problem. That is the bents”—often go through almost innovative and creative. good news. The bad news, however, is psychological stages of decline, starting Some of my research has focused on that the examples have been so few and with denial. Then people acknowledge the critical role of trust. For example, in far between. So, while we know it can be that change is happening, but say that work with Professor Robert Gibbons at done, we also know it is quite dic ffi ult. they cannot find ways to respond that MIT on what economists call relational It is particularly hard to sustain volun- will allow them to make money. And contracts and everyone else calls trust, tary self-regulation at a global level. then, even as change does create profit we found that organizational perfor- So what can be done? We need a opportunities, the incumbents say they mance can be significantly improved focus on the long term and make a strong are too busy to pursue them. if firms build relational contracts with economic case for cooperating, but we During over 20 years of research, their employees. also need to find ways to monitor others’ when I examined those firms that had People understand that individual behavior and to sanction those who managed to respond and outperform, I companies can be innovative, but we “cheat.” Interestingly, there is increas- found that they were purpose-driven. By need broad-based systemic change ing evidence that if you include people performance, I do not just mean financial because action by individual firms will with an “irrational” commitment to performance. I mean innovation, creativ- not be enough. Most firms can reduce doing the right thing in the mix—that ity, and productivity. In every industry their carbon emissions by 30% to 40% in is, begin with pro-social players—it is a we have looked at, we have found that ways that are NPV-positive, but further lot easier to build cooperation. Purpose- the 10% most productive firms are, on gains are very hard to achieve unless driven firms will be critical to launching average, more than twice as productive you are in Texas and have cheap wind and sustaining these kinds of coopera- as the lowest decile of firms. We cannot power right outside your window. In tive efforts. But you must also be able explain all the differences among firms industry after industry, we see compa- to sanction those that fail to live up to within the same industry, but it is very nies saying, “We would all benefit if we their commitments. Otherwise, some clear that very high-performing firms addressed these massive social problems will defect and cooperation will fall apart. have different management practices. collectively.” For example, Paul Polman’s Who outside government could They have much higher levels of commu - Unilever committed to buying only impose sanctions? Investors could and nication, much more decentralized sustainable palm oil, but then discov- would be motivated to do so for at least power, and much higher levels of trust. ered it was 20 times more expensive than two reasons. First, because focusing All of which is to say that manage- the old kind and no one was willing to on these big problems has the poten- ment really does matter. Purpose pay for it. But they still had a brand to tial to create a road map to growth produces qualities associated with higher protect and needed to secure supply for and employee engagement, ESG may organizational performance—alignment the long term. So, they persuaded buyers provide a road to alpha. Second, because of performance measures and incentives, of more than 70% of the world’s publicly very large investors are too large to intrinsic motivation, and high levels of traded palm oil to commit to buying only trust. Over the last two days, we have sustainably grown oil. 1 See, for example, Elinor Ostrom, Governing the Commons: The Evolution of Institutions for Collective heard several presentations suggesting The good news, then, is that the Action, Cambridge, UK: Cambridge University Press, collective action problem, or “the that sometimes purpose leads to higher 1990 ISBN 978-0-521-40599-7; and Elinor Ostrom, prisoner’s dilemma” as it’s sometimes Larry Schroeder, and Susan Wynne, Institutional levels of financial performance, but incentives and sustainable development: infrastructure called, can be solved. The economic sometimes it does not because pursuing policies in perspective, Boulder: Westview Press, 1993. historian Elinor Ostrom has shown 978-0-8133-1619-2. purpose is expensive and requires invest- ISBN Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 81 ROUNDTABLE diversify away major systemic risks like lobbying hard for the reversal of court ism,” particularly negative externalities climate change and political instability, rulings like Citizens United, which has and very skewed income distributions. the very largest investors may have a flooded the American political system She is worried, as we all should, that the suc ffi iently powerful economic incentive with money and is bringing the entire harmful ee ff cts of capitalism may under - to solve the collective action problem— system into disrepute. I provide three mine the political legitimacy of the free and because there are not that many of major historical examples of business- market system, which on its own has them, they may be able to reach agree- government collective action in my done so much to raise global standards ment and cooperate. book: Denmark in the 19th century, of living. How might that work? Purpose- Germany in the 1940s, and Mauritius I will focus on her two central driven investors could give us a whole in the 1960s. In each of these three points. The first is that companies have range of new ESG performance metrics. cases, representatives of the private a moral duty to mitigate these harmful Billions of dollars now flow into ESG sector, faced with the collapse of the effects. The second point is that this is funds. This change will not happen society, sat down with government and not only a moral obligation, but it is also overnight. It took 50 years to build with representatives of labor to rebuild in their own long-run economic inter- modern financial accounting, and we will the society’s institutions. est. The idea is sometimes expressed as need at least five or ten years to find ways o Th se of us who are academics and “doing well by doing good.” And let me to link purpose to financial and operat - researchers can contribute to this in elaborate a bit on this. ing performance measures. But change many ways. Let me close by saying, it’s Saying we have a moral obliga- is underway and it has momentum from just the right thing to do. Thank you tion to act is quite a strong statement. purpose-driven firms, leading with exper - very much. Such a statement calls for a rethinking imentation and investor communication. and possibly a complete reformulation Purpose-driven “universal inves- Jill Fisch: Thank you, Rebecca, that was of the purpose of the company. More tors” could also drive systemic change. fantastic. You gave us an awful lot to specifically, it asks companies to think I had the pleasure of working with Hiro think about. Jordi, you’re up next. long and hard about each of its impor- Mizuno, Chief Investment Officer at the tant stakeholders and, in this sense, to GPIF, Japanese Government Pension Call for “Type 2” Firms embrace a kind of “stakeholder” theory Fund, the largest pension fund in the Jordi Gual: Thank you very much. It is of the firm. Companies must take their world, with $1.7 trillion under manage - a pleasure to participate in this exciting stakeholders into account for their own ment. He came to believe that he had a conference. I truly feel at home today, sake, as Colin said earlier, not merely as fiduciary duty to address climate change having been a member of the board instruments but as ends in themselves. and social inclusion because doing so of ECGI and a faculty member of Rebecca’s second major point is that, would ensure good long-run returns for IESE Business School. Thanks, Marco even if it is not in the interest of each Japanese pensioners. and Jordi, for putting this conference r fi m to correct the externalities individ - And Mizuno is not alone. Genera- together. ually, it is in their collective interest. But tional changes in the big family firms are Let me start by conceding that I there is a collective action problem that pushing in this direction. Groups like am unlikely to do justice to the work makes it challenging for companies to Climate Action 100+, with $40 trillion of Professor Henderson, having read internalize the externalities. Rebecca of investments, focus on the 100 largest only a summary of her book. But let argues that when take governments fail carbon emitters in the world, demand- me offer a few thoughts in response to to take action, the private sector should enforce cooperation and self-regulation ing the emitters produce road maps and her presentation. milestones to a low-carbon future. Rebecca starts by recognizing the that has the effect of “internalizing” tremendous possibilities of capitalism But can business help rebuild our those externalities. institutions? Would this increased as an engine of wealth creation—and I find Rebecca’s second point to be I concur completely in this. She also concentration of wealth—and power— somewhat contradictory with her first. emphasizes the potentially adverse lead to good citizenship or crony If you can internalize the externalities capitalism? I believe business should be ee ff cts of what she calls “global capital - and solve the collective action problem, 82 Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 ROUNDTABLE he limitation of [Rebecca’s] second approach is, as I suggested, its view of stakeholders as instruments, means to an end, not ends in themselves. In the case of regulation, companies are forced to do the right thing; and in the case of enlightened shareholder value, they do it because in the end it will maximize long-term shareholder value. But there is a fundamental tension between these two approaches that needs to be recognized and addressed. – Jordi Gual you can achieve the “r fi st best solution” government regulation. Type 1 restric- can Type 2 firms compete with Type 1 with proper government regulation. tions today include those imposed by firms, which do not choose to bear the And if you can do so voluntarily with ESG indicators that institutional inves- same social and environmental costs some sort of enlightenment share- tors watch as well as the reputational borne by Type 2 firms? holder value motivation, so much the pressure exerted by consumers and the It will take some time, but I believe better. The limitation of this second political system. Type 2 firms maximize that in imperfectly competitive markets approach is, as I suggested, its view of financial and non-financial value for where excess rents can be generated, stakeholders as instruments, as means the sake of all stakeholders that work some Type 2 firms can create sustain - to an end, not ends in themselves. In in, collaborate with, or buy from the able competitive advantage thanks to the case of regulation, companies are firm, often trading off one stakeholder the contribution of all stakeholders and forced to do the right thing; and in benefit against another while ensuring generate adequate returns for investors. the case of enlightened shareholder that the company still earns the cost of Colin Mayer has developed the commit- value, they do it because in the end it equity required by the markets. In the ment framework which captures this will maximize long-term shareholder case of Type 2 firms, although all stake - idea, and so have, to a certain extent, value. As the Financial Times put it in holder groups have an interest in the Michael Porter and Mark Kramer with response when the Business Round- long-run success of the firm, conflicts their shared value approach. Table published their letter in 2019, among stakeholders continuously arise There are two obstacles to the “In companies we face the tragedy of and must be addressed. Even when you success of Type 2 r fi ms. First, corporate the corporate commons, and we should succeed in creating aggregate value, law imposes restrictions on the develop- solve it ourselves instead of waiting for you still have competing stakeholder ment of stakeholder firms. Second is the governments to do so.” But there is a claims to that value and the rules for challenge of resolving conflicts between fundamental tension between these two distribution are far from obvious. The the interests of different shareholders. It approaches that needs to be recognized enlightened shareholder value paradigm is hard for diverse shareholders to agree and addressed. is of little use here and those conflicts on common, non-financial goals. Such Let me try to clarify this basic will have to be resolved somehow. an agreement is easier in the presence of trade-off. Imagine a world where you The financial goals of Type 1 firms a “reference” shareholder. have two distinct kinds of companies, are relatively straightforward, but Type 2 To support my case, let me just close and let us call them Type 1 and Type firms must somehow obtain a minimum by mentioning the special arrangements 2. Type 1 firms maximize long-term risk-adjusted return to satisfy investors, at our company, CaixaBank, which we shareholder value subject to the restric- and then try to satisfy the rest of its manage with a stakeholder approach. tion of capital and labor markets and stakeholders. And the big question is, CaixaBank has a “reference” shareholder, Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 83 ROUNDTABLE a nonprot fi foundation that owns 40% government and concentrate on making firms today to commit to being Type 2 firms. But there is a whole gray area in of the bank and has been undertaking money. The other approach, which is essentially Paul Polman’s, says to move social work for more than 100 years. the middle. You focused on purpose- The combination of such a founda- everyone onto the stakeholder model.” driven firms as responses to collective tion with the usual presence in public I come out, confusingly, somewhere action problems. But if some of my capital markets has allowed us to pursue in the middle. I do not believe that firms are out there trying to deal with long-term value strategies. The founda - business passivity will result in the kind climate change, and some are interested tion supervises management to make of regulation that will enable Type 1 in wealth and income inequality, and sure that our “shared,” socially oriented r fi ms to maximize prot fi s while leaving some are focused on social justice and principles are upheld, while we maintain the rest to government. So, doing diversity, I’m not sure how we either a continuing dialogue with the capital nothing is unadvisable. solve the collective action problems markets to ensure that our enterprise At the same time, depending on the or provide the impetus for necessary model, which is somewhat unusual, is region of the world, it is also unrealistic regulatory change. fully understood. and unadvisable to allow or encourage So, I believe our situation is desper- Unfortunately corporate gover- everybody to be Type 2 firms. It would ate; we have unaddressed public goods nance guidelines and most corporate put far too much discretion in the hands problems and I am looking for some law are designed for the conventional of managements that have already been solution, for any solution. I agree with shareholder-owned corporation, and running Type 2 models—though that you: I do not think an end-state economy sometimes it is difficult to accommodate might work in countries like Japan or where everyone is a Type 2 firm is the within the same legal rules other owner- Germany, which have strong institutions solution for the reasons you laid out. It ship structures. I strongly believe that it that constrain and support the actions of won’t be viable because investors will would be good if the positive aspects of managers in running their firms. still be bottom line oriented, and capital having a diversity of enterprise models What I would propose, then, is that markets won’t provide funding for all were to be more fully recognized in the Type 2 firms that can only survive these firms. We must change the rules corporate governance legal frameworks. currently in certain markets with certain so that investor-oriented, bottom line I will stop there. Thank you. business models be allowed and encour- driven firms cannot continue generat - age to become drivers for achieving the ing massive negative externalities. For Fisch: Rebecca, do you want to respond conditions that will push Type 1 firms me, it is not a free market if firms can fix to Jordi briefly before we get to the ques - to internalize the externalities. But to the rules to suit themselves. That’s just tions. allow such companies to survive in not fair. And I fear we may go to very competitive markets, we need political dark places if we don’t move, that we’re Profit with Purpose: Toward an and regulatory change, and the right going to left or right-wing populism Intermediate Solution kind of pressure—and perhaps some and neither is good for business or for Henderson: Thanks, Jordi, for that forbearance—from the capital markets. society. I think Paul Polman was saying insightful summary of the issues that Purpose-driven firms can be important something similar. we face. And let me use your language catalysts in doing that. That said, I do Now, I also hear people like to suggest an answer. not believe trying to move everyone to Colin saying that such changes, if People today are recommending stakeholder capitalism is, in the long done properly, would actually end up what are basically one of two ways to go run, feasible. contributing to the bottom line. But forward. One says we should continue to I understood Colin to be saying for whatever reason, shareholders and, rely on conventional value-maximizing that it is desirable to have firms with a mostly, managers seem skeptical about Type 1 firms, and we just need govern - diversity of purposes. And diversity of and resistant to this possibility. They know change is necessary but they do ment to fix the rules. This approach purposes suggests some sort of spectrum assumes that it is not the business of not know how the market will react. of approaches to me, not necessarily just business to “internalize the externali- Maybe purpose is a tool that they can Type 1 and Type 2. We already have the use for getting buy-in from different ties”; we will leave that responsibility to public benet c fi orporation, which allows 84 Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 ROUNDTABLE stakeholders to do something that they do. We do not have to call it purpose; Henderson: Yes, I agree with you acknowledge has to happen anyway. it is just what good business decision- completely on this. making is about. As Jordi said, I do believe there is a fundamental moral case and authen- It’s becoming clear to many boards Fisch: There are many kinds of share - tic purpose, but even authentically that they need to shift because the holders in the world and several ways purpose-driven firms can uncover world is changing. Second, those of us to structure ownership. o Th se will ae ff ct prot fi opportunities that purely finan - who focus on purpose never tell firms the ability to achieve purpose. Having cially focused managers cannot find. we work with to ignore profits, but a charitable foundation as a substan- So, yes, I am saying both things are rather they should also be scanning tial shareholder may strengthen your possible. I published a piece called the world for social problems they can commitment to purpose. In the U.S. we “Climate in the Boardroom: Struggling address while seeking prot fi . see some shareholder and hedge fund to Reconcile Maximizing Shareholder I had the good fortune of facili- activism that could qualify as purpose Value with the End of the World as We tating Paul Polman’s strategic retreats driven. That seems consistent with the Know it.” What I am describing is the for the first few years of his tenure at story you tell. It may be a hedge fund reality I see faced by the managers I Unilever. He would give fabulous talks, that intervenes with a hide-bound board work with, who although forced to be saying the world is burning and we to recognize the importance of this ESG focused on the bottom line, are also need to do such and such. His senior stuff. That sort of activism can be very authentically purpose-driven—and the team would look at him and say, “Paul, powerful. big surprise here for many in all of this we still have to manage the deodor- One thing I worry about is how is their discovery that being authenti- ant business.” One of the strengths to deal with the shareholder drive for cally purpose-driven often turns out to of a leader like Paul is his ability to purpose when the shareholder is itself be good for the bottom line. negotiate the tension between compet- an intermediary, and when its ultimate I spent the early part of my career ing demands. He manages to pursue beneficial owners may have conflicting trying to persuade economists that both inner purpose and the bottom views about purpose. I had the good inertia was real. My first academic line. It is not an either/or approach, fortune to go to a conference a couple of paper was called “Underinvestment it’s a dynamic process. weeks ago on this idea that investment and Incompetence in Response to intermediaries are in fact agents for their Radical Change.” The editor of the Gual: I agree that the advice in Rebecca’s principals. And that in some cases they prestigious economics journal to book falls somewhere in between Type have a duty to pay attention to these which I sent it, sent it back saying, 2 and Type 1 in the terminology that I issues. If your agent, say it’s the Japanese “Rebecca, you have written a paper used. My preference is that all compa- government, wants you to focus on the about how the moon is made of green nies, at some point, become Type 2. long term and climate change because cheese, and economists have paid too But in very competitive industries this they think that is part of their fiduciary little attention to the motion of cheesy is difficult and I can see that we need duty, how do you respond to that? Leo planetoids.” both types. I believe that policy should Strine and Patrick Bolton have written Thanks to the revolution in behav - remain open to alternative corporate fascinating papers in this area, and I ioral economics, we know that there structures so that different models can think we need to talk much more about are persistent cognitive and percep- compete in the marketplace as well as in agency costs in the investment manage- tual biases. Thanks to huge amounts labor and capital markets. Under that ment business. kind of competition, the incentives of work in organizational and social But since I’m now compelled to call psychology, we know that groups would be right. Board members, as well a close to the session, let’s leave that for refuse to admit new reality and to shift as investors and employees, would join another meeting. Thank you, Rebecca, in response. And mobilizing authentic companies which have purposes that and thank you, Jordi. That was a fantas - they like, and neither the law nor the purpose to bust through these kinds of tic discussion. capital markets would prevent them barriers may be either instrumental or the most purpose-driven thing you can from achieving their purpose. Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 85 IESE ECGI CONFERENCE ON CORPORATE PURPOSE SESSION VI: How Should Boards of Directors Deal with Corporate Purpose? Jordi Canals: Welcome to this final tors, corporate purpose, and corporate a real troubleshooter during the 2008 session of the Corporate Governance governance. And let me say a few words financial crisis. Conference. During our three days, about each of them. These three highly experienced we have generated plenty of ideas, and We will hear first from Baron- board directors, chairmen, and chief possibly even a new paradigm, but we ess Denise Kingsmill, who has been executive officers will help us think still have a few questions to answer. a member of the House of Lords since about purpose and how it could serve to Rebecca Henderson, Jordi Gual, and 2006. She has had a distinguished improve the quality of corporate gover- Jill Fisch have helped us think about career in law, was a partner in one nance. Boards of directors are absolutely very important topics that built upon of the leading U.K. law firms, and essential in this debate because they have what we heard in the first two days of has been a board member of several the final say in and responsibility for the the conference. international companies over the long-term direction of the company, for More specifically, we have been past 15 years, most recently Inditex making specific strategic choices and discussing whether companies and AIG. acting as intermediaries between inves- should adopt statements of purpose, Next we will hear from Juvencio tors, the top management team, and whether such statements should be Maeztu, who has been deputy CEO of the many important stakeholders in the required and enforced by corporate INGK A, the retail arm of IKEA, since organization. Indeed, because of direc- law or not, and whether we can find 2018. IKEA is a very interesting case in tors’ critical role, it is important to get a balance between the shareholder part because it is owned by a founda- their perspective on what might work primacy and the stakeholder manage- tion. Different types of ownership and what will not work. ment paradigms. We also explored result in different types of governance. So with that, I will now ask each in detail the externalities created by Juvencio has had a long career of the three panel members to share our free market economies in terms at IKEA, holding senior leadership their views on corporate purpose and of the impact on the environment, positions in emerging markets, includ- the evolution of capitalism around the on the workforce, on social inequal- ing India, where he was the CEO and world. ity, integration, inclusiveness, and on led the establishment of IKEA and its Denise, will you please get things the impact of first-world companies on operations. started? developing countries. And we now face Our third panelist will be José the challenge of designing and putting V i ñals, who is the chairman of A Public-Private View in place new metrics to support more Standard Chartered, a leading inter- Baroness Denise Kingsmill: My perspec- sustainable growth over the next few national bank with a long history in tive is a little unusual in the sense that years. not only Western Europe, the Ameri- I have one foot in the political field and We have heard a number of cas, and Asia but also in emerging the other in commercial business. We interesting presentations by leading countries in Africa and Latin America. should be thinking about how to avoid scholars and CEOs, but in this final In addition to his distinguished career corporate financial failure and the loss session we want to focus more on how in financial services, José has spent of jobs, about how to engage employees boards of directors should think about a good part of this career in public in corporate purpose, and the criti- purpose. Do some of the solutions and service. He was the deputy gover- cal role of customers. This is important prescriptions suggested make sense for nor of the Bank of Spain for many because I see capitalism at risk of fail- boards? Could they be implemented? years and helped lead the European ing in the U.K. And do they hold out the best paths to Union into a single currency and the I sit on the Economic Affairs future progress? European Central Bank. He also was Committee of the House of Lords that To help answer these questions, we director of financial institutions and is undertaking an inquiry into what have three outstanding individuals on capital markets at the International government policy on COVID-related today’s panel about boards of direc- Monetary Fund where he proved to be issues should be, and about employ- 86 Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 ROUNDTABLE e should be thinking about how to avoid corporate n fi ancial failure and the loss of jobs, about how to engage employ- ees in corporate purpose, and the critical role of customers. This is important because I see capitalism at risk of failing in the U.K. – Baroness Denise Kingsmill ment post-COVID. Our somewhat nice attached to the side of the busi- The fourth dimension is leadership. right-wing government is trying to ness; it must be integrated in the way Among a company’s and its directors’ maintain employment by subsidizing you want to run the business. most important strategic decisions are companies struggling with the COVID I see the challenge as having five the people they hire and empower with crisis. Many companies are failing and fundamental dimensions. The first is decision-making authority, and how even more are now on the edge. This is ownership. In our case, we are owned they evaluate and reward the perfor- relevant given the previous discussions by the INGKA foundation that was mance of these operating managers. about how fragile capitalism can be and established by Ingvar Kamprad, the This kind of leadership is the begin - why it requires a strong underpinning founder of IKEA. Most of our profit ning and the end of everything. At of government support. after tax is reinvested in the business. INGKA, we measure performance based That relates very much to corpo - Dividends fund the charitable activities on four criteria: (1) creating value for rate purpose because of its relationship of the IKEA foundation. I don’t mean the company (business performance and to the workforce and human capital, to imply that companies must be owned financial resilience); (2) creating value generally. Purpose must be customer by foundations to have a purpose, but for consumers (affordability, accessibil - oriented and customer based. Boards, long-term commitment to purpose ity, and satisfaction); (3) creating value managements, and employees must begins at the shareholder level. for people (equality, diversity, inclusion, share and uphold their organization’s The second dimension is gover- coworker competence, leadership, and corporate purpose. There is no point nance, not just about the legal satisfaction); and (4) creating value for in having nice words in your annual procedure, but about how to infuse the planet (CO reduction and positive report if your people do not live up to a sense of purpose throughout the impact on the planet). All four criteria and carry out the purpose that you’ve organization that ends up guiding a play important roles in evaluating our committed to. wide variety of corporate decisions. In people. You will not be viewed as a good big companies, thousands of managers performer in the company unless you Canals: Thank you, Denise. Juvencio, make decisions every day and, collec- are successful in delivering all four kinds would you like to offer your thoughts tively, those decisions will determine of value. about these issues? whether the company achieves purpose. Finally, the fifth dimension is finan - The third dimension is values. cial resilience. Financial resilience is a Purpose at IKEA Values are the lifeblood of the system. precondition for sustainability. INGKA Juvencio Maeztu: I think the basic chal- IKEA is committed to eight values, at has clear rules about cost consciousness, lenge here is figuring out how to avoid least two of which are closely related: maintaining minimum financial liquid - conflicts between corporate purpose and cost consciousness, or efficiency, and ity and strong balance sheets and thus standard business practices. To do that, care for people and the planet. Efficiency is a precondition for making decisions companies must be built for purpose supports sustainability in the sense that in the short term that support the long and that requires a powerful vision. it involves using fewer resources to term; leading the company based on Purpose cannot merely be something deliver goods and services. generations rather than quarters. Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 87 ROUNDTABLE think the basic challenge here is figuring out how to avoid conifl cts between corporate purpose and standard business practices. To do that, companies must be built for purpose and that requires a powerful vision. Purpose cannot merely be something nice attached to the side of the business; it must be integrated in the way you want to run the business. – Juvencio Maeztu Canals: Thank you, Juvencio. Let’s now are authentic or meaningful; they are interests of society. In fact, you can’t turn to José. As the chairman of one of just PR exercises. Then there is the real do one without the other—and in this the largest financial institutions in the purpose, the authentic kind that den fi es sense, the interests of the private sector world, how do you see this debate on the soul of the organization. This is criti - and society at large are perfectly aligned. purpose from the perspective of a large cal internally because everyone in the e Th hard part, of course, is keeping this bank? organization needs to understand where unity of interest and long-run goals you want to go and how you expect to in mind when negotiating over the Purpose at Standard Chartered get there. Being clear about what you conflicts that are bound to arise. And José Viñals: When we talk about purpose want to achieve and how to get there let me stop there. at Standard Chartered, we are talk- is essential for your employees and for ing about something that profoundly your investors. Both groups want to Implementing Purpose affects the long-run viability as well as know, and they need to know for your Canals: Thank you, José, for your the market value of the organization. organization to prosper. thoughtful comments on purpose and It is about making organizations more Many people appear to believe that corporate governance. During the past human and behaving in the long-term nonfinancial performance and values two days, we have heard a lot of debate interests of humanity. Banks got a bad are inconsistent with strong financial about the usefulness of adopting a name during the last financial crisis, and performance, and that the two are inevi- statement of purpose. Some speak- we as bankers now understand and are tably at odds with each other. But that ers thought it was very useful, others responding to the need to change that. is not necessarily the case; in fact such believed otherwise. But all three panel- Organizations and companies have conflicts are relatively rare in my own ists in this session agreed that purpose a purpose just as individuals do. Why experience, where I’ve found that the is very important for management and are we here? What are our values? Why things you do to achieve purpose tend governance of the company. do we have a social license to operate as to produce better financial performance So, how do we unpack and unbun- a company? How are we going to make over time. dle purpose into operational and the world a little bit better? How are As Rebecca Henderson and Jordi strategic decisions that make sense for a we going to do that and make money Gual told us earlier today, the bottom specific company at a specific moment at the same time? These are all critical line need not be at odds with doing in its history? questions. things in the ultimate interests of I would like to ask Denise for her I distinguish between two types society. Companies should aim to perspective. Denise, you have a long of purpose: nominal and real. Many achieve both objectives because, most experience dealing with environmental companies have adopted apparent, or of the time, long-run profitability and and social issues at companies. How nominal, purposes. I call them nominal value can be achieved only by serving, do you bring this conversation into the because they are “in name” only, they not by undermining, the long-term strategy of the company when the board 88 Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 ROUNDTABLE of directors debates long-term orienta- to people at an affordable price. I see We knew that discontinuing the financing of coal would reduce our tion? similarities between the way we devel- revenues in the short term and that oped our corporate purpose as a start-up there would be some political conse- Kingsmill: My most recent experience bank and how a very large company has has been with Fintech start-ups, which also held true to its original purpose. quences as a result. But at the same has been very interesting. I was the time, we also announced that we would first chair of the online banking busi - Canals: José, how do you ensure that make substantial financing available ness, Monzo, which is very successful what you say about purpose and the for clean and renewable sources of in the U.K. and now expanding into long-term orientation of Standard & energy in those same markets. Two the United States. As we sat around Chartered Bank is actually taken into years later, we have found that our my kitchen table, we asked ourselves account by all the senior executives you revenues have not gone down. This was why we were setting up a bank. We deal with? also the only situation where we had a believed we wanted to make banks How does a chairman lead the conflict between what we thought was better and to help people. Gradually, process so that the outcome is purpose good for revenue and what we thought over time, we settled on being the best as well as profits when managers are was good for our social purpose and retail bank and focusing on providing under pressure to reach die ff rent finan - corporate purpose. We managed that the best service for our customers— cial goals? transition quite nicely and our business and our purpose has helped convince is now in a much better place in terms our investors, too. Viñals: I will answer with two exam- of ESG. We created a relatively large bank ples. We exist to improve the lives of with four million customers in a very the people in those countries which do Canals: Juvencio, you are the CEO of short period of time. As we proceeded, not yet have the standards of living that a large, complex company. You need we saw that our corporate purpose people in advanced economies have. to deal with both a supervisory board was becoming clearer. Rather than That is a powerful purpose that affects and your top management team and just wanting to make a better bank everything we do. to make sure that IKEA and INGK A account—a better mousetrap, if you Purpose is a necessary condition deliver what they have promised. You like—we realized we also wanted to help but it also needs to be translated into have had the advantage of a founder people manage their money better and a strategy. The strategy is proposed by who had a very clear sense of mission to make their money work for them, the executives and approved by the and purpose. How do you now make particularly for people who did not have board. It is very important that you sure purpose is followed when you very much. have the right individuals throughout discuss strategic issues, investment deci- I found it quite interesting that the organization for the right purpose sions, and enter-ing new markets with the founding board became more and to be implemented. your colleagues? more aware of our greater purpose as Our internal discussions have been we went along, and began to understand made easier because we share so many Maeztu: We do in couple of ways. The what our customers really valued. Our assumptions about purpose. One of the first is making sure that values are a purpose grew and developed, and the key objectives of Standard Charter is to living reality for us. Strong values are same can be said for some long estab- comply with the UN’s sustainable devel- not only an inspiration but also the lished companies where the founders are opment goals, or SDGs. For example, in equivalent of a map and compass for us when we face dilemmas. still involved. 2018, we decided to discontinue new Mr. Ortega established the amazing coal financing in emerging markets and And we try to be as clear as possible company Inditex (Zara) in 1963, and it developing economies. These countries about our goals. For example, by 2030, now has 8,000 stores across the world. still need to grow to provide their people we have committed to making 100% It has grown and developed but still with good standards of living, but their of the materials we use from renew- able or recycled resources. Today, we adheres to its original mission of provid- sources of energy are often still “brown” are at 60%. We now also produce ing well-made, well-designed garments sources of energy. Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 89 ROUNDTABLE e should not exaggerate potential conifl cts between purpose- oriented goals and n fi ancial performance because there are many more synergies and complementarities than are commonly imagined. As was mentioned in the fascinating discussion between Rebecca and Jordi, the bottom line need not be at odds with doing things in the ultimate interests of society. You should aim to achieve both objectives because, most of the time, protfi ability and the long-term interests of society align. – José Viñals more energy than we consume and we deciding on and making clear the their values and purpose at the forefront produce that from renewable sources company’s values, and integration of of everything that they do. Sadly, some such as sun or wind. We intend to the business with those values—are do not. operate only electric vehicles (EV) in fundamental to long-run success. There should be greater transpar - five years. By next year there will not be ency about who the investors are in a pay gap between men and women in Commitment to Purpose a company. Often, shares are held in the company and we now have as many Canals: I have a question for Denise that entities that do not have a clear identity female as male employees. And we I think is quite relevant here. and therefore it is not clear where have not only sustainable production Listed companies all have some legal their priorities lie and if the compa- goals but also responsible consumption requirements in terms of accountability. ny’s purpose is important to them. It goals and that means we have to create In your experience as a board member, would also be better if pension funds awareness among consumers, too. do you feel more pressure coming exercised more responsibility in relation We are committed to getting more internally from the notion of purpose to purpose. than one billion people to live within or more from the capital markets and I feel lucky that the companies on the limits of our planet. No one wants investors, many of whom now demand whose boards I sit have highly devel- to destroy the planet but many people a higher level of transparency and oped senses of purpose that they live do not know how to. We are commit- accountability in terms of ESG factors and breathe every day. There are too ted to helping them with solutions for from listed companies? many companies for whom it is just an a better life at home like home solar, afterthought. energy efficiency, water reduction, and Kingsmill: Things are changing as food waste reduction. And finally, it shareholders demand more nonfinan - Greenwashing must be affordable to many people. If cial information. While financial issues Canals: Juvencio, there is a question sustainability is just a luxury for the remain the priority, sustainability, in its for you about greenwashing. In this few, it will never fly. broadest sense, is increasingly becoming context, greenwashing could involve As a first step toward meeting these as important. statements of mission that are simply goals, I am happy to say that last year, The pressure to do the right thing PR exercises. Some critics of the Busi- when we grew by 6.5%, we also reduced comes much more from the culture of ness Roundtable Statement in August our carbon footprint by 4.3%. We are the company. Some companies under- 2019 claimed that those CEOs were decoupling our economic growth from stand the importance of purpose and conducting a very sophisticated PR exer- our environmental footprint. I think others have not developed a clear under- cise, and some went even further, saying that meeting these two challenges— standing of purpose. Some maintain that CEOs were trying to prevent addi- 90 Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 ROUNDTABLE tional regulatory requirements from the Viñals: Juvencio made the very impor- and, increasingly also, in the European U.S. government. tant point earlier that progress towards Union. This indirect approach can be e q Th uestion is, how do you ensure a desired destination matters very very helpful in pointing out shortcom- substantive commitment to purpose? much. We use “Sustainable Develop- ings in governance. How do you make sure that what the ment Goals,” or SDGs, to put our ESG board and the top management team goals into practice. SDGs include data, Doing Well by Doing Good at Ikea say about the purpose of the company metrics, and disclosure. These help Canals: Juvencio, Ikea has a tradition of trickles down to lower levels to be demonstrate how we are moving toward being consumer friendly and environ- something authentic and felt by most meeting ESG goals and investors can mentally friendly. Ikea also tries to sell employees? follow that. Our publicly available posi- as many goods as possible. How do you tion statements state very clearly where manage the trade-off between economic Maeztu: First, companies must be able our red lines are and our sustainabil- growth and environmental impact?” to show genuine progress. Reporting ity targets. We publish a sustainability is built not only on transparency, but summary every year that explains the Maeztu: Ikea is able to influence its on progress. Nobody will challenge progress we have made toward our vari- entire production value chain. This you if you are not perfect but people ous SDGs. gives us some power but also imposes will challenge you if you are not trans- responsibility. The good news is that parent or do not show progress. You Should ESG Be Mandated? using renewable or recyclable materials must have a plan, monitor that plan, Canals: Denise and José, you both have and having climate friendly operations and verify progress. Second, compa- many years of experience in public is also good business. It has turned out nies must integrate this plan with their policy and regulation. Should corpo- that it is good for business to be a good business model. For example, when we rate law in major jurisdictions require business. So there are many ways of first sold LED light bulbs, they were statements of purpose? achieving economic growth without priced at 9€. Today, we sell only LED causing environmental damage. light bulbs and the price is around one Kingsmill: Yes, such statements should euro. We also launched the “plantball” be required. I have pushed hard for a Canals: Your comments remind me of a as a meatball substitute. It has all the public interest test in regulations that well-known article by Professor Michael protein you need but with 96% less of should be more than just blackline law. Porter on the importance of regulation the environmental footprint, is afford - A public interest test would address to environmental issues. By studying able, and tastes fantastic. corporate purpose, sustainability and a number of industries in a number Such advances will never happen, the environment, human capital, and of countries, Porter found that raising though, if you do not have thousands customers. environmental standards often helps of leaders who are really engaged. The companies become much more innova- most important advocate of the corpo- Viñals: Well, I have a different view. tive and develop better business models. rate strategy does not work in corporate Having spent many years in the public Over time, companies often discover communications, it is your coworker. domain, I believe that purpose is that it is possible both to create wealth something that needs to develop endog- and have a cleaner environment. Evaluating ESG Investments enously within companies, rather than Canals: Here is a question from the being imposed exogenously. That said, Corporate Culture and Purpose audience for José: “We have lots of tools public policy could guide and assist Canals: Denise, how should boards of to project how certain decisions will companies in carrying out their purpose, directors attempt to shape and nurture ae ff ct prot fi ability and n fi ancial perfor - for example, by promoting common a strong culture of sustainability? mance. How do we get a similar tool reporting standards on environmental, set for assessing decisions affecting for social, and governance matters. As one Kingsmill: Directors must familiar- nonfinancial performance and specifi - example, regulators conduct external ize themselves with what is going on cally, for ESG factors?” board effectiveness reviews in the U.K. the shop floor and in the factory. They Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 91 ROUNDTABLE in this n fi al session we want to focus more on how boards of directors should think about purpose. Do some of the solutions and prescriptions suggested make sense for boards? Could they be implemented? And do they hold out the best paths to future progress? – Jordi Canals cannot simply sit in the boardroom. The the right thing. And that means doing related to sustainability is resilience. We only way to understand what’s happen- it always and everywhere, even when no don’t know where the next shock will ing in an organization is to visit different one is watching. Let’s earn our money come from so we must be able to with- places. I have been through flour mills, the right way. We have a board commit- stand many kinds of dic ffi ulties. electricity generating plants, construc- tee that oversees cultural conduct. tion sites, and many die ff rent factories, Canals: José, some final ree fl ctions? because that is the only way to learn Closing Thoughts Viñals: I think that business has a great what’s going on. Directors must speak Canals: Since we are near the end of opportunity now to participate in the to the people on the shop floor, in the this session, I will now ask each one creation of a new social contract that shops, in the hotels, and in the restau- of our panelists to share with us some emphasizes sustainability, social inclu- rants. Only then do you understand the final reflections on purpose. How would sion, and resilience. Purpose is the true corporate culture. you advise other senior executives and soul of the organization. Let’s make institutional investors attending this organizations more human through Canals: José, you have recent experi- conference to think about purpose? Let’s purpose. ence trying to transform some of the start with Juvencio. I would ask investors to do three values and elements in your bank. Any things: advice on how corporate culture can Maeztu: I would emphasize that purpose 1. Be very demanding in asking help make better governance decisions is never simply a nice statement writ- companies to show concrete progress and management decisions? ten on the walls of the company. Real towards full fi ling their purpose. purpose involves deep understanding 2. Think long term. Short term will Viñals: Yes, culture is critical to purpose. of that purpose and connecting that to take us nowhere. A few years ago, we had an enterprise- all decision making. I agree completely 3. Put your money where your wide process to rethink and redefine with José, that culture and values are the mouth is. If you really think that ESG our purpose. It was both a bottom-up right place to start. When the COVID or SDG is the right answer, vote with and top-down exercise. We surveyed pandemic hit us, we did not already have your shares. Either exit companies the whole organization, including a complete roadmap to navigate the not heading in the right direction or board members and executives, and crisis, but we did have a strong compass use your power in the annual general then put together a purpose statement in the form of values and purpose. meetings to push companies in the that says, “Prosperity and banking for direction you think they should go. better lives.” We have banks in 60 coun - Kingsmill: Sustainability must be part of tries, employ and serve people from 120 a company’s purpose. The purpose must Canals: Thank you very much, José, nationalities by providing many services look to the long term and must have a Denise, Juvencio. This has been a fantas - and products. moral element to it as well because we tic session with lots of insights. I would We wanted a culture that empha- are dealing with people. We employ like to highlight a couple that I think sizes key values. The first is always do people and we serve people. Closely resonate in a special way. 92 Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 ROUNDTABLE heard that corporate governance is more fundamental than purpose. Ownership and control dene fi purpose. Empirically, companies that use purpose as a management tool are more successful but using purpose to denote a particular type of corporate governance creates confusion. It was clear that neither markets nor the state acting alone will solve our sustainability problem. – Marco Becht First, we cannot speak about session. Denise, José, Juvencio, thank ments. Purpose must be built into purpose without speaking about the you very much. corporate governance, measured, and culture of the organization, the soul companies should be held accountable. of the company, and the values of Conference Wrap-Up Patrick Bolton showed that financial the individuals. Ultimately, purpose Marco Becht: Let me take a few minutes markets are already pricing in climate is implemented through individual now to try and summarize what have we risk but it is unclear whether investors actions. Second, although you come learned during the past three days spent are leaders or followers. The change in from different companies and indus - discussing the question, can purpose the premia he showed occurred when tries, you all agree on the need to deliver better corporate governance? the Paris Agreement was signed, and integrate purpose into corporate strat- I think we reached a consensus on the Paris Agreement was not a private egy, into organizational design, the several points. Jordi just mentioned initiative. Are companies leaders, or are business model, the hiring system, the some of them. There was unanimous they following their investors? We also nominating system, the compensation agreement that people are not univer- heard that private equity seems to be system, and reporting. sally motivated by money. They look for oblivious. We didn’t hear about family Finally, we face a collective action a purpose in what they do. There was r fi ms at all. problem in trying to do all this. also unanimous agreement about the I thought what we heard about Companies need to work with govern- urgent challenges that lie ahead. Unless enlightened leaders in the last panel was ments, investors, and other companies we can bring about radical change, very encouraging. Rebecca Henderson to create a sustainable system for we may be threatened with extinc- argued that capitalism must be reimag- all, not just for the privileged few. tion. Participants agreed there was an ined. Bengt Hölmstrom urged caution This requires new metrics, new ways inherent contradiction in the capital- and argued that capitalism is very good of reporting, and an education of ist system. Although very successful in at reinventing itself. Luigi Zingales investors that goes far beyond report- spurring growth, innovation, and allevi- broadly agreed, and called for freedom ing short-term performance. This is ating poverty, capitalism has also created of enterprise. Finally, Paul Polman a big challenge but we are beginning accelerating damage to the environment invited us to rethink how we think to provide some answers to the over the last 40 years. about growth and what is sustainable. challenge. But there was far less agreement So, what is the answer to our And I want to close by commend- on the way forward. Claudia Garten- question about the role of purpose in ing Denise, José, and Juvencio for their berg’s research showed that purpose improving corporate governance? Well, outstanding work in organizations and statements matter as a management I heard that corporate governance is for their clarity, good judgment, and tool and their use differs across owner - more fundamental than purpose. personal integrity they bring to this ship types. Colin Mayer argued that Ownership and control define debate. It has been a most insightful purpose goes beyond purpose state- purpose. Empirically, companies that Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 93 ROUNDTABLE use purpose as a management tool are their support to this conference and more successful, but using purpose to the Strategic Management Society for denote a particular type of corporate their endorsement and for giving the governance creates confusion. It was conference a wider audience among its clear that neither markets nor the state members. This would not have been acting alone will solve our sustainabil- possible without the support of many ity problem. of my IESE colleagues including Félix But that said, I want to finish on Sanchez, Sabrina Voss, Míriam Freixa, an optimistic note. The 2009 Nobel and many others here at the school. Prize in Economics award to Elinor Like Marco, I too want to finish Ostrom included the following words: on an optimistic note. I feel inspired by people such as Paul Polman, Denise It was long unanimously held Kingsmill, José Viñals, Juvencio amongst economists that natural Maetzu, and Sophie L’Helias. These resources that were collectively used by people are in the real world of manage- their users would be overexploited and ment, governance, and investment, destroyed in the long term, also known and are committed to bring about as the Tragedy of the Commons. positive change. This is a real source Elinor Ostrom disproved that idea. of hope for all of us. She showed that when natural resources If there is a final message from are jointly owned by their users, rules are this conference, it is that some compa- established over time to use those resources nies are already making significant in a way that is both economically and progress in the right direction. This ecologically sustainable. According to should inspire us and help keep us research cited by Noah Harari, homo committed to finding ways to make the sapiens have come to dominate the planet world a better place, to leave behind a because we are a cooperative species better legacy, and to make companies manipulated by our genes to survive. That more human. provides further hope. So, thank you all very much. We look forward to more collaborative With that, Jordi, I will now allow efforts to improve corporate gover- you the very last final word. nance to build more resilient and more respected companies. Canals: Thank you very much, Marco, for that wrap-up of the conference. This has been a fantastic three-day journey, very intense in terms of the quality of the debates, the depth of the ideas, and the transformational impact of some of those ideas. I would like to thank ECGI, Marco Becht, Elaine McPartlan, and Vanessa Koenig for their wonderful work on behalf of this conference. I want to thank the Social Trends Insti- tute and Professor Carlos Cavallé for 94 Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 ADVISORY BOARD EDITORIAL Yakov Amihud Carl Ferenbach Donald Lessard Clifford Smith, Jr. Editor-in-Chief New York University High Meadows Foundation Massachusetts Institute of University of Rochester Donald H. Chew, Jr. Technology Mary Barth Kenneth French Charles Smithson Associate Editor Stanford University Dartmouth College John McConnell Rutter Associates John L. McCormack Purdue University Amar Bhidé Martin Fridson Laura Starks Design and Production Robert Merton Tufts University Lehmann, Livian, Fridson University of Texas at Austin Mary McBride Massachusetts Institute of Advisors LLC Erik Stern Michael Bradley Assistant Editor Technology Stern Value Management Duke University Stuart L. Gillan Michael E. Chew Gregory V. Milano University of Georgia G. Bennett Stewart Fortuna Advisors LLC Richard Brealey Institutional Shareholder London Business School Richard Greco Stewart Myers Services Filangieri Capital Partners Michael Brennan Massachusetts Institute of René Stulz University of California, Trevor Harris Technology The Ohio State University Los Angeles Columbia University Robert Parrino Sheridan Titman Robert Bruner Glenn Hubbard University of Texas at Austin University of Texas at Austin University of Virginia Columbia University Richard Ruback Alex Triantis Charles Calomiris Michael Jensen Harvard Business School University of Maryland Columbia University Harvard University G. William Schwert Laura D’Andrea Tyson Christopher Culp Steven Kaplan University of Rochester University of California, Johns Hopkins Institute for University of Chicago Alan Shapiro Berkeley Applied Economics University of Southern David Larcker Ross Watts California Howard Davies Stanford University Massachusetts Institute Institut d’Études Politiques Martin Leibowitz Betty Simkins of Technology de Paris Morgan Stanley Oklahoma State University Jerold Zimmerman Robert Eccles University of Rochester Harvard Business School Journal of Applied Corporate Finance (ISSN 1078-1196 [print], ISSN 1745-6622 Statement on Research4Life [online]) is published quarterly per year by Wiley Subscription Services, Inc., a Wiley Wiley is a founding member of the UN-backed HINARI, AGORA, and OARE initiatives. Company, 111 River St., Hoboken, NJ 07030-5774 USA. They are now collectively known as Research4Life, making online scientific content available free or at nominal cost to researchers in developing countries. Please visit Postmaster: Send all address changes to JOURNAL OF APPLIED CORPORATE FI- Wiley’s Content Access – Corporate Citizenship site: http://www.wiley.com/WileyCDA/ NANCE, Wiley Periodicals LLC, c/o The Sheridan Press, PO Box 465, Hanover, PA Section/id-390082.html 17331 USA. Journal of Applied Corporate Finance accepts articles for Open Access publication. Information for Subscribers Please visit https://authorservices.wiley.com/author-resources/Journal-Authors/open- Journal of Applied Corporate Finance is published quarterly per year. Institutional sub- access/onlineopen.html for further information about OnlineOpen. scription prices for 2021 are: Print & Online: US$844 (US), US$1007 (Rest of World), €656, (Europe), £516 Wiley’s Corporate Citizenship initiative seeks to address the environmental, social, (UK). Commercial subscription prices for 2021 are: Print & Online: US$1123 (US), economic, and ethical challenges faced in our business and which are important to US$1339 (Rest of World), €872 (Europe), £686 (UK). Individual subscription prices our diverse stakeholder groups. Since launching the initiative, we have focused on for 2021 are: Print & Online: US$137 (US), $137 (Rest of World), €115 (Europe), sharing our content with those in need, enhancing community philanthropy, reducing £79 (UK). Student subscription prices for 2021 are: Print & Online: US$49 (US), our carbon impact, creating global guidelines and best practices for paper use, estab- $49 (Rest of World), €41 (Europe), £28 (UK). Prices are exclusive of tax. Asia-Pacific lishing a vendor code of ethics, and engaging our colleagues and other stakeholders GST, Canadian GST/HST and European VAT will be applied at the appropriate rates. in our efforts. For more information on current tax rates, please go to https://onlinelibrary.wiley.com/ library-info/products/price-lists/payment. The price includes online access to the cur- Follow our progress at www.wiley.com/go/citizenship. rent and all online back files to January 1, 2017, where available. For other pricing options, including access information and terms and conditions, please visit https://on- Abstracting and Indexing Services linelibrary.wiley.com/library-info/products/price-lists. Terms of use can be found here: The Journal is indexed by Accounting and Tax Index, Emerald Management https://onlinelibrary.wiley.com/terms-and-conditions. Reviews (Online Edition), Environmental Science and Pollution Management, Risk Abstracts (Online Edition), and Banking Information Index. Delivery Terms and Legal Title Where the subscription price includes print issues and delivery is to the recipient’s Disclaimer address, delivery terms are Delivered at Place (DAP); the recipient is responsible for The Publisher, Cantillon and Mann, its affiliates, and Editors cannot be held respon - paying any import duty or taxes. Title to all issues transfers FOB our shipping point, sible for errors or any consequences arising from the use of information contained in freight prepaid. We will endeavour to fulfil claims for missing or damaged copies within this journal; the views and opinions expressed do not necessarily reflect those of the six months of publication, within our reasonable discretion and subject to availability. Publisher, Cantillon and Mann, its affiliates, and Editors, neither does the publication of advertisements constitute any endorsement by the Publisher, Cantillon and Mann, its Journal Customer Services: For ordering information, claims and any inquiry concern- affiliates, and Editors of the products advertised. ing your journal subscription please go to https://hub.wiley.com/community/support/ onlinelibrary or contact your nearest office. Copyright and Copying Americas: Email: cs-journals@wiley.com; Tel: +1 781 388 8598 or Copyright © 2021 The Authors. Journal of Applied Corporate Finance published by +1 800 835 6770 (toll free in the USA and Canada). Wiley Periodicals LLC on behalf of Cantillon & Mann. Europe, Middle East and Africa: Email: cs-journals@wiley.com; Tel: +44 (0) 1865 778315. This is an open access article under the terms of the Creative Commons Attribution Asia Pacific: Email: cs-journals@wiley.com; Tel: +65 6511 8000. License, which permits use, distribution and reproduction in any medium, provided Japan: For Japanese speaking support, Email: cs-japan@wiley.com the original work is properly cited. Visit our Online Customer Help at https://hub.wiley.com/community/support/onlineli- brary Production Editor: Namrata Lama (email: jacf@wiley.com). Back Issues: Single issues from current and recent volumes are available at the current single issue price from cs-journals@wiley.com. Earlier issues may be obtained from Periodicals Service Company, 351 Fairview Avenue – Ste 300, Hudson, NY 12534, USA. Tel: +1 518 537 4700, Fax: +1 518 537 5899, Email: psc@periodicals.com View this journal online at wileyonlinelibrary.com/journal/jacf. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Applied Corporate Finance Wiley

IESE ECGI CONFERENCE ON CORPORATE PURPOSE: Can Purpose Deliver Better Corporate Governance?

Loading next page...
 
/lp/wiley/iese-ecgi-conference-on-corporate-purpose-can-purpose-deliver-better-2NAHchNtqc
Publisher
Wiley
Copyright
Copyright © 2021 Cantillon and Mann
ISSN
1078-1196
eISSN
1745-6622
DOI
10.1111/jacf.12456
Publisher site
See Article on Publisher Site

Abstract

VOLUME 33 NUMBER 2 SPRING 2021 Journal of AP PLIED COR PORATE FINANC E IN THIS ISSUE: Enlightenment Environmentalism: A Humanistic Response to Sustainable Climate Change Steven Pinker, Harvard University Financial Corporate Resilience and Response to COVID-19 Alex Cheema-Fox, Bridget R. LaPerla, and Hui (Stacie) Wang, State Street Associates; and George Serafeim, Harvard Business School Management IESE ECGI CONFERENCE ON CORPORATE PURPOSE SESSION I: Are Corporate Statements More Than Verbiage? Speaker: Colin Mayer, University of Oxford and ECGI; Discussant: Luigi Zingales, University of Chicago SESSION II: Company Valuation and the Effects of ESG Factors Speaker: Patrick Bolton, Columbia Business School and ECGI; Discussant: Sophie L’Hélias, President LeaderXXchange and Co-Founder of ICGN SESSION III: Corporate Purpose and the Theory of the Firm Speakers: Bengt Holmström, MIT and ECGI; Paul Polman, former CEO of Unilever and co-founder of Imagine SESSION IV: Corporate Purpose, Ownership, and Performance Speaker: Claudine Gartenberg, University of Pennsylvania; Discussant: Caroline Flammer, Boston University SESSION V: Unpacking the Purpose of the Corporation Speaker: Rebecca Henderson, Harvard Business School; Discussant: Jordi Gual, Chairman of CaixaBank SESSION VI: How Should Boards of Directors Deal with Corporate Purpose? Speakers: Baroness Denise Kingsmill, Non-Executive Director of Inditex and IAG; Juvencio Maeztu, Deputy CEO and CFO of INGKA (IKEA): and José Viñals, Chairman of Standard Chartered A Deeper Look at the Return on Purpose: Before and During a Crisis Greg Milano and Riley Whately, Fortuna Advisors; and Brian Tomlinson and Alexa Yiğit, CEO Investor Forum at CECP ESG in Emerging Markets: The Value of Fundamental Research and Constructive Engagement in Looking beyond ESG Ratings Mark Mobius and Usman Ali, Mobius Capital Partners Capital Allocation and Corporate Strategy: An Examination of the Oil & Gas Majors Andrew Inkpen, Michael H. Moffett, and Kannan Ramaswamy, Arizona State University IESE ECGI CONFERENCE ON CORPORATE PURPOSE Can Purpose Deliver Better Corporate Governance? October 28-30, 2020 Paul Polman Co-Founder and Co-Chair of IMAGINE and the former Bengt Holmström CEO of Unilever MIT and ECGI Colin Mayer Luigi Zingales University of Oxford and ECGI Chicago Booth and ECGI Sophie L’Helias Patrick Bolton President LeaderXXchange and Columbia Business School and ECGI Co-Founder of ICGN Rebecca Henderson Jordi Gual Harvard Business School Chairman of CaixaBank Marco Becht Jordi Canals ECGI and Université libre de IESE Business School Bruxelles ROUNDTABLE Jordi Canals: Good afternoon, I’m Jordi Vanessa Koenig, for their outstanding as Jordi has already said, corporate Canals and, on behalf of the ECGI work. I also want to thank the Social governance now occupies center stage. and IESE Business School, I want to Trends Institute, its chairman Carlos We first had codes, then the OCD Cavallé, and its executive director, give you a very warm welcome to this principles, then the emerging markets conference on corporate purpose. Our Tracy O’Donnell, for their support of and global financial crisis, and today working title is: Can purpose deliver this conference. e Th Strategic Manage - we are talking about corporate gover- better corporate governance? ment Society, whose scholars are closely nance, which really means the future When we started planning this following developments around corpo- of capitalism and the role of business conference with our colleagues at rate purpose is another very important in society. ECGI in May 2019, we were already partner in this conference. I’ve always found it a pleasure convinced of the importance of corpo- And with that, I’ll stop and invite to work with IESE because of the rate purpose and how it could change Professor Marco Becht from ECGI to outstanding professionalism of its sta. ff the understanding of corporate gover- say a few words. Marco, the floor and Not only does Felix Sánchez do excel- nance. In the 18 months since then, screen are yours. lent work but, nomen est omen, it takes our beliefs have been strengthened a bit of luck as well as hard work to run by the Business Roundtable State- Marco Becht: Thanks, Jordi. I am a conference with 1,700 participants. ment on the purpose for corporations Marco Becht, a professor of Finance And let me close by thanking Jordi and and multi-stakeholder management at the University Libre de Bruxelles everybody at IESE for their efforts. in August 2019, and by the World and the executive director of the Euro- Economic Forum manifesto in support pean Corporate Governance Institute, Canals: Thank you very much, Marco, of multi-stakeholder management a or ECGI. We have had a long-stand- for your kind words. It is a pleasure to few months later. ing connection with IESE. Jordi was a work with you and your colleagues at Unfortunately, we have also seen member of the ECGI board for many ECGI. And on behalf of Marco and the the onset of COVID-19, which has only years, and in 2008 he hosted the 2008 conference academic committee, let me made clearer the importance of environ- ECGI Annual Meeting at IESE’s brand provide a brief overview of the topics mental impacts and the social impact of new state-of-the-art Executive Teaching and sessions of the next three days. companies. In just the past few weeks, facility in Barcelona. Our first session, which will begin we’ve had several debates about share- ECGI is a global network compris- in a few minutes, will be led by Profes- holders and stakeholders, inspired in ing about 300 of the world’s leading sors Colin Mayer and Luigi Zingales. part by the 50th anniversary of Milton researchers in economics, finance, Colin will present a paper on how Friedman’s article in The New York and law, with a strong interest in serious corporate purpose statements Times on the primacy of shareholders. corporate governance. More gener- promote better corporate governance. We look forward to contributing to ally, ECGI serves as a bridge between In our second session, later this the debate on corporate purpose during academic research, corporate practice, afternoon, Professor Patrick Bolton this conference. The subject of corpo - and policymaking. We have more than of Columbia University will present rate purpose and governance has been 600 members. ECGI is financed by valuation models that take externalities studied by scholars from many different membership dues, contributions, and such as carbon emissions into account. academic disciplines, including organi- donations. And our two largest donors Patrick’s paper will be discussed by zational economics, corporate finance, currently are BlackRock and Investor Sophie L’Helias, a well-known investor strategic management, and corporate AB, the holding company controlled by and President and Founder of Leaders law. More than 1,700 people have the Wallenberg Foundations. for Change. registered for this conference, includ- The roots of ECGI go back to In our third session, B e n g t 1996, when corporate governance Holmström ing a number of corporate CEOs. And , MIT Professor and 2016 was practiced by a few investors and Nobel Laureate of Economics, will I would like to start by thanking my present his thinking on how purpose ECGI colleagues, particularly Professor studied by some academics or, colloqui- can be incorporated in contemporary Marco Becht, Elaine McPartlan, and ally speaking, a bunch of geeks. But, 42 Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 ROUNDTABLE complex subject, and of the promise models of the firm. And Bengt will be Henderson, a leading scholar in organi- of strengthening corporate purpose for accompanied by Paul Polman, former zational economics from the Harvard improving the quality of governance. CEO of Unilever, who has been widely Business School, will also discuss the impact of purpose on employee recognized for his role in bringing Companies will command greater respect sustainability on the agenda of large motivation and engagement, and also in the political and social spheres and, in companies and for introducing purpose the effect of corporate decisions on so doing, enlarge their ability to create and multi-stakeholder management. climate change and social inequality. not just economic value and wealth, but Our fourth session, late tomorrow, Jordi Gual, currently the chairman all the other kinds of social value that will delve into a number of impor- of CaixaBank, will discuss Rebecca’s come with the concept of purpose and tant aspects of purpose, namely, how paper. corporate ec ffi iency and value. employee morale and engagement We will finish on Friday afternoon And with that thought, let me depends on corporate commitments with a panel featuring board directors, begin our first session by turning the to purpose, but also on the nature of CEOs, and company chairmen on floor over to Colin Mayer of Oxford ownership. Wharton’s Claudine Garten- how to bring purpose into boardroom University, a well-known authority berg will present an interesting paper on discussions and how this may help on the subject of corporate purpose. this topic, which will be discussed by boards frame strategic discussions and Colin, it’s all yours. Caroline Flammer of Boston University. improve strategic decision-making. At our fifth session, which takes Our aim in these sessions is to place on Friday, Professor Rebecca advance our understanding of this Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 43 IESE ECGI CONFERENCE ON CORPORATE PURPOSE SESSION I: Are Corporate Statements More Than Verbiage? Colin Mayer: Thanks, Jordi. The subject look after the suppliers in their supply holder value, companies should take of our conference today is “Can purpose chains, promote the environment, account of the interests of all other deliver better corporate governance?” important stakeholders—and that, in so produce safe and healthy products, and And the subject of this particular session doing, companies are likely to increase pay taxes—but only up to the point that is “Are corporate statements verbiage?” I their own value, at least under certain such measures work to increase share- will start by telling you that I think the circumstances that economists describe holder value. answer to both questions is yes, even if as involving no “negative externalities,” One problem with all this, however, those two statements seem to be at odds. no negative social effects, such as those is that such directives as the one I just The definition of “verbiage” arising from pollution, that are not cited from the U.K. Companies Act provided by the Oxford English Diction- captured on their P&Ls and balanced could be, and often are, interpreted ary is “superabundant or superfluous sheets. This doctrine became very as saying that companies should pay wording; profusion of words without popular during the 1980s, and a version as little in wages to their employees, good cause, or without helping to make of it was effectively adopted in 28 Ameri- employ people in their supply chains the intended meaning clearer or more can states in the form of “constituency” at the cheapest conditions possible, precise; excessive wordiness or elaborate- statutes. The concept of enlightened produce addictive products, undermine ness of language.” And I would describe shareholder value has also been embod- the environment and avoid paying taxes purpose statements as even less meaning- ied in the U.K. Companies Act, which whenever possible, provided they don’t ful than “verbiage,” as mostly just states that “a director of a company must break the law. But in doing all this, of “twaddle”—which the OED defines as act in a way he considers, in good faith, course, such companies risk significant “senseless, silly or trifling talk or writing; would be most likely to promote the harm to their reputations that is likely empty verbosity; dull and trashy state- success of the company for the benefit to undermine the value of their compa- ment or discourse; empty commonplace; of its members as a whole.” Although nies. And needless to say, such behavior prosy nonsense.” basically a shareholder primacy state- does not meet most people’s concept Most corporate statements of ment, it goes on to say that “and in doing of “enlightened.” But the concept of purpose, I will argue, lie somewhere so… regard… the likely consequences enlightened shareholder value relies between twaddle and verbiage. And in of any decision in the long term for its in part on market investors rewarding making my point, I will show that most other stakeholders—namely, its employ- virtuous companies with higher stock statements suffer from confusion about ees, suppliers, customers, communities, prices—and to the extent such virtue where they stand in terms of what I view the environment, the company’s reputa- is not in fact rewarded, the approach as the four main alternatives to today’s tion, and its members.” could fail to provide “protection” for prevailing paradigm—namely, the value In sum, enlightened shareholder socially responsible companies against maximization or Friedman doctrine, value says that companies should protect the attacks of activist investors that call which holds that the social purpose of and promote the interests of all their for cuts in employee wages or taxes paid business is to increase its own profits stakeholders in so far as this enhances the in the name of increasing shareholder while complying with laws and regula- value of the company over the long run. value. tions, or “the rules of the game.” The four This is what might be described as an But now let’s turn to stakeholder alternatives to value maximization that I “instrumental” view of the promotion of theory, whose fundamental premise is will refer to are as follows: (1) enlight- stakeholder interest. It is also an extrinsic that companies should take an intrinsic ened shareholder value; (2) stakeholder concept in the sense that it takes account interest in their other stakeholders—and theory; (3) shareholder welfare and (4) of the values, interests, and well-being that such interests should thus be viewed corporate purpose. And I will take a brief of other stakeholders only insofar as they as equivalent to, or on a par with, their look at each of them. contribute to greater shareholder value. shareholders’. As one example, consider Enlightened shareholder value is It implies that companies should, for Minnesota’s 1991 Constituency Statute, the notion that, in pursuing share- example, pay their employees fair wages, which allows the directors of a public 44 Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 ROUNDTABLE company faced with a takeover bid to So, neither enlightened share- behavior through state regulation. For consider holder value nor stakeholder theory are example, it is one thing to recognize and condemn affronts to employee themselves very compelling arguments. the interests of the corporation’s employ- This brings us to the third alterna- dignity, but quite another to come up ees, customers, suppliers and creditors, the tive, which is the shareholder welfare with clearly written rules and regula- economy of the state and nation, commu- concept proposed by Luigi Zingales tions that will anticipate and deter nity and societal considerations, and the and his co-author Oliver Hart. Luigi’s such possibilities, especially in a way long-term as well as the short-term inter- concept is appealing because by focus- that does not significantly limit their ests of the corporation and its shareholders, ing on shareholders as human owners of commercial viability and incentives to including the possibility that these interests a business enterprise, and not disparate invest. This is especially true of global might be best served by the continued inde- stakeholder interests, it recognizes our enterprises, whose local operations pendence of the corporation. collective interest in a clean environ- are effectively overseen by a variety of ment, healthy societies, high quality national governments. The message here is that public consumer products, and in the welfare Recognizing these limits to the companies have what amounts to an of our children and grandchildren. reach and effectiveness of regulation, intrinsic obligation to all stakeholders So, the concerns of shareholder the concept of shareholder welfare calls that takes precedence over shareholder welfare about corporations go well on corporate managements to consider returns and accordingly should seek to beyond their market value. Shareholders a broad range of factors that affect the protect and serve those interests together of a company are ordinary people who welfare of their investors. What’s more, with the long- and short-term share- are concerned about money, but who Luigi and Oliver suggest that mutual holder interests. also have ethical and social concerns. funds have a major role to play in focus- The problem with such an approach, They want managers to remain focused ing management’s attention. Mutual however, is that it leaves management on shareholder interests, but recognize funds must manage a variety of finan - with an impossible task, and no guidance that those interests extend to society and cial risks, covering long-term as well for decision-making. Managers have no the environment. Similarly, the fiduciary as shorter time horizons, and general clear way to advance all interests for duties of institutions to their beneficia - welfare considerations must be part of the simple reason that most managerial ries should be to their general welfare, this risk assessment, if only because of decisions involve trade-offs that make not just to their financial wealth. the threat of new government regulation some stakeholders better off but others i Th s view recognizes that the Fried - and intervention. worse off. As a consequence, the stake - man doctrine rests on two erroneous But this raises the question of holder theory is likely to lead to very assumptions. The first is that one can whether mutual funds would, in weak or confused corporate governance, easily separate philanthropy from the practice, actually be able to implement with accountability to everyone ending productivity and wealth-increasing activ- this notion of shareholder welfare. In up as accountability to no one. It’s hard ities of companies. The second mistaken a more recent paper, Luigi and Oliver to rank performance against all those assumption is that government regula- discuss the likely effectiveness of the stakeholder interests, and this means tion will suffice to constrain potentially two main investor responses to offend- confused incentives. Notice also that the harmful activities of companies. Luigi ing companies: “exit” and “voice.” Since Minnesota statement said that directors and Oliver pointed to robber barons, exit amounts to investors simply selling “may,” not “must,” consider other stake- such as Carnegie, and the Rockefellers their shares in the oe ff nding companies, holders, so the statute permits but does and Vanderbilts, whose establishment of such selling does little more than create not prescribe. Stakeholder theory aims charitable foundations came after, and profit opportunities for two kinds of to prescribe here, to substitute “must” have been viewed as a kind of expiation investors: less socially responsible ones, for “may”; and to the extent it succeeds for their exploitative treatment of their or shareholder activists intent on actually in getting its way, it is likely to fail in workers. engaging with the company to address its goal of creating value for, and thus It is very difficult, indeed impos - their problems. serving the interests of, all stakeholders. sible, to constrain all harmful corporate Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 45 ROUNDTABLE But where Luigi and Oliver express ment—ownership is no guarantee of the rights of shareholders, and gover- considerable optimism about the effec - socially responsible behavior. nance focuses on resolving the “agency tiveness of such engagement, I don’t fully This brings us to the corporate problem’ of aligning managers” interests purpose alternative. Since this notion share their confidence. They assume, for with those of their shareholders. example, that all shareholders would be means different things to different The law should define the duties to “pivotal,” in the sense of being likely to people, it’s not surprising that corpo- deliver on that corporate purpose along support the activist campaign. But I find rate purpose statements strike many as the lines of what I just described in the this assumption inconsistent with Luigi’s merely verbiage. A simple answer to U.K. Companies Act. It is also a feature own finding, in a paper published in the the question, “What is the reason for of the Pact Loire that’s been put forward 1990s, that such pivotal shareholders being of this company?” is likely to be in France, and of the Public Benefit represented less than 50% of all share - something like “to make the world a Corporation in the United States. holders. And given the trend toward better place.” Regulation is not just about complying global indexing, this percentage has My idea of purpose is seeking profit - with the rules of the game, but aligning probably declined sharply from those able solutions to the problems that you purpose in ways designed to ensure the levels in the last two decades since then. and I face as individuals and as societies, continuation of companies’ social license There is also a problem on the without adding to problems for either to operate. Ownership is not just about investment side with multiple layers people or the planet. That brings clarity protecting and exercising the rights of of control and ownership diluting the to the notion of corporate purpose, and the shareholders, but also upholding ability of even the most welfare-promot- that clarity brings credibility. their responsibilities, particularly in ing investors to influence what goes on But, as important as the clarity of promoting the purpose of companies. at the level of the firm. And there are corporate purpose statements is working This notion of corporate purpose is also questions about how shareholder to ensure that such purpose gets enacted not a rigid code of social conduct that is activism and takeovers might pressure by and within companies. Interest- intended to be monitored and imposed companies away from, instead of toward, ingly, the second paragraph in the U.K. by a purpose police. It is meant to the pursuit of purpose. Companies Act says that companies can encourage a plurality of purposes—one Even more signic fi antly, it’s impor - substitute the notion of purpose for the achieved through innovation or experi- tant to recognize that the concept of idea of promoting success for the benet fi mentation that helps companies find shareholder welfare is still based on an of their members, and therefore boards new ways to profit while or even by limit- extrinsic view of interest, in the sense and top managers can promote the ing negative externalities. To this end, that corporate managers take account purpose of the company, and take full corporate performance should be evalu- of stakeholder interests only insofar as account of the interests of all the other ated both in light of existing standards they affect the interests of sharehold - parties as well. and metrics, and by adapting such ers. And these interests could diverge So, that’s one element in terms of metrics to incorporate relevant indica- greatly. Consider, for example, Purdue implementing corporate purpose. But if tors of a company’s success in making Pharma, the Sackler family, and the law is clearly important in defining the good on its purpose. The aim here is opioid epidemic to which Oxycontin duties of directors, there are other key to promote sustainability by directing has given rise, or the Porsche-Piech elements that include rules and enforce- companies toward activities that benefit, family and the V W “Dieselgate” ment of regulation, ownership rights and rather than harm, other parties. scandal. In neither of these cases were responsibilities, governance, the align- What’s more, this corporate purpose problems avoided by the presence of ment and accountability of the boards, notion might be viewed as combining “pivotal” as opposed to dispersed share- performance measurement, incentives, the concepts of enlightened shareholder holders—including, in V W’s case, the and resource allocation. Law addresses value and of shareholder welfare. state government of Saxony—whose the duties of directors to shareholders Achieving corporate purpose comes by while regulation provides the “rules of inu fl ence and intervention might have managing the company for the welfare prevented the social problems that the game,” and the extent to which they of its shareholders while regarding the arose. In sum, family—and govern- get enforced. Ownership determines likely long-term consequences for the 46 Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 ROUNDTABLE welfare of its stakeholders. And another longer. For companies governed by millennials and Gen Z members joining industrial foundations, we find that one of the benefits of this combina- the workforce. tion is a lower cost of capital because about 30% of them survive for at least But these points of agreement the company faces lower risks and, as 40 years, as compared to only about notwithstanding, I find myself troubled a consequence, can reasonably expect 10% of their widely owned counter- by several questions about Colin’s a longer life as a viable, independent parts. concept of corporate purpose. Is it going concern. With that, let me now turn things mainly a moral precept intended to What I think emerges from this over to Luigi. guide individual conduct, or is it also comparison is that enlightened share- meant to guide managers and improve holder value provides a minimum Shareholder Welfare vs. how their companies are run internally? standard of what might be deemed Shareholder Value Or is it a set of policy prescriptions for acceptable, whereas the notion of stake- Luigi Zingales: Let me start by thanking corporations that should be mandated holder theory remains unworkable Jordi, Marco, and the other organizers to help them carry out their larger role and impractical as a guide for corpo- for the opportunity to respond to Colin. in society? rate governance. The reason so many I think that Colin is trying to rein- My impression from listening to purpose statements are merely verbiage vent capitalism, which although a near Colin’s comments is that he intends a is that the thinking about purpose has impossible task for an ordinary person, little bit of all three. As much as I admire been vague, and the verbiage provides a is a dic ffi ult undertaking even for some - Colin, I continue to find Kant’s categori - means of covering over the void. On the body as talented and accomplished as cal imperative—that you should behave other hand, by bringing precision to a Colin Mayer. as you would want others to do—a purpose that involves addressing specific Let me start by saying that I agree better guide to individual conduct. problems faced by particular groups in with Colin completely on three points. Indeed, I would call it the best guide; in society, one can embed that purpose e fi Th rst is that corporate governance is economists’ terms, it should be viewed in corporate practice. That would also crucial in shaping the capitalist system, as the general equilibrium idea of moral encourage more relevant public policies and that we do not spend enough time precepts. But whether most people and corporate laws that would encour- thinking about this. Capitalism, since follow that precept is a different story age companies to fulfil their corporate the beginning of the 20th century, has altogether—and I think most people purpose. been corporate capitalism; that is to say, it know where I stand on that question. One good example comes from has been very much shaped by the largest Why is Kant’s imperative better? It Denmark, where the industrial founda- corporations. doesn’t require that we define concepts tion laws have encouraged some of the The second point on which Colin like profitability or purpose, or most successful companies in Europe. and I agree completely is that the Fried- “problems of people and planet.” Kant’s Along with Bosch in Denmark, man doctrine of shareholder value imperative is basically just a general Northern European companies like maximization is outdated. The social equilibrium consistency argument that Bertelsmann, Ikea, and Velux are all mission of the public corporation today we economists can readily understand. owned by industrial foundations. Those goes beyond maximizing its own profits, So, if corporate purpose isn’t really foundations provide the “lock-in” of even when that is properly interpreted the best guide to individual conduct, corporate purpose I have described. as maximizing its long-run value to its is it the best guide for corporate They provide board oversight of and shareholders. managers when running companies? accountability for the achievement of As economists, we tend to look at The third, and probably our most corporate purpose. Among the many important point of agreement is our trade-offs along the production possi - accomplishments of such compa- common belief that people are motivated bility frontier. Indeed, we are obsessed nies is that, although their financial by more than money. Purpose is a power- with trade-offs, and with finding the performance is comparable to that of optimal, or value-maximizing, trade- ful motivating factor, and Colin’s use of similar-sized companies in the same offs. Colin appears to be suggesting the intrinsic motivation language has industries, they tend to survive much proven to be especially appealing to the that his approach is somehow capable Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 47 ROUNDTABLE of pushing out that frontier, creating enjoy an exorbitant privilege—namely, circulation declines, the number of more with less. For example, if you limited liability vis-à-vis tort claim- journalists declines, local political cover- ants. But this advantage accrues only find a way to motivate workers more age declines, fewer people vote because effectively, you end up with higher to those enterprises that incorporate. they are not informed, and politicians productivity with possibly even lower So, if Colin’s focus was on the type of become more extreme. None of these costs, say from reductions in turnover. externality that affects our claimants, his changes is a good thing. Now, all this might well be conclusion would make perfect sense. So, the question arises, is Craigslist doable—a way to maximize companies’ If you believe companies dump too producing profitable solutions or is it value while also perhaps even working much toxic waste in the river because profiting from producing problems? I say to limit negative externalities. But if they have limited liability for the harm it is prot fi ing from producing problems that’s the case, I find it hard to under - they cause, then his proposed regulation despite its declared goals. stand why entrepreneurs and VCs makes sense. In sum, there is an important differ - have yet to adopt corporate purpose? But as I understand them, Colin’s ence between stated intentions and Maybe they haven’t yet read Colin’s concerns are about things like global actual results. And how would we tell paper, and once they do, they will go warming, inequality, racism, and other the difference before the fact? That is in that direction. But, as Colin himself issues that do not generate financial why I’m concerned about mandating a has mentioned before, U.S. businesses liability, or at least not yet. if you want corporate purpose. can now choose to organize as Public to mandate social purpose to fix these Colin defines capitalism, at least Benefit Corporations, and similar problems, why would you require it traditional capitalism, as an economic legal entities exist in most developed only for the corporate form? Should I system of private ownership of the countries. But very few entrepreneurs be exempted from caring about global means of production and its operation choose such different organizational warming if I choose to operate as a for profit. I think about it somewhat forms—and the question is why? limited partnership? differently. In my version, actual When I put that question to one Second, is Colin’s idea feasible? ownership is not essential. You can entrepreneur who claimed to be pursu- Craigslist is a company that is famous also lease the means of production. It ing an explicit social goal, he said that for its social purpose. Craig, the founder does not really make a difference. Colin the traditional corporate form preserves of Craigslist, is dedicated to the public and I work for universities, which are his access to the broadest range and good and, in fact, he formed a founda- nonprofit organizations—but they are largest number of investors—and that tion to own the business, as did the nonetheless private organizations; they such access gives him a lower cost of northern European companies Colin are not owned by the state. capital. And I will come back to that mentioned earlier. The foundation’s To me, the essence of capitalism point later. But to repeat my point, goals include promoting trustworthy is freedom of enterprise. Freedom though corporate purpose may qualify journalism, protecting voting rights, of enterprise also means freedom of as a managerial guide in some aspects, and everything that Colin likes—and I incorporation. But if social purpose is its validity remains to be seen. too like, by the way. mandated, there must be somebody That brings us to the third possi - Interestingly, though, a recent paper screening that purpose. Who is that? bility: corporate purpose as a general has shown that Craigslist has accom- Who decides what is a legitimate social policy prescription, perhaps even with a plished exactly the opposite of what purpose and what is not? mandate? But if that’s the case, then we its stated goals indicated they should During the fascist era in Italy, the do. Although most people think that savings and loans were organized as need to ask three questions: Why is this journalism was killed by Google and proposal limited just to corporations? Public Benefit Corporations and their Facebook, it was actually Craigslist How feasible is it? And are there signi- fi social purpose included donating to the that killed local journalism by taking cant risks or downside associated with young fascist organization. Today, we do adopting and mandating such a policy? away its classified advertising revenues. not view that as a good social purpose. Let’s start with the corporation. This paper documents that, when But the more powerful the state, the Colin is well aware that corporations Craigslist enters a market, newspaper more it restricts alternative forms of 48 Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 ROUNDTABLE competition. I think that if we kill be listened with great precaution and ought tions, such as limited partnerships and freedom of enterprise, we end capital- never to be adopted till after having been applies as much to private as to public ism as we know it. long and carefully examined. corporations. Take the case of Novo Nordisk, And the idea that it is contrary to a company that Colin has repeatedly My parting message is a warning: freedom of enterprise is also completely used to demonstrate his concept of Beware corporations bearing gifts. misinformed. Indeed, corporate purpose corporate purpose. Novo Nordisk is a can be expected to encourage greater Danish pharmaceutical company and Clarifying Purpose plurality and variety of form. Nor does one of a triopoly that controls 96% Mayer: Thanks, Luigi, for the it require a corporate policeman to of the insulin market. Novo has used comments. Let me respond by saying determine what is acceptable. If a firm this market power to increase insulin that I think your arguments can be is profitable and its profits are defined prices dramatically. Between 2001 and summed up as the belief that the enact- in terms of not producing problems for 2017, insulin prices for U.S. customers ment and implementation of corporate others, then economists would view it as increased somewhere between 671% purpose are infeasible, the concept is not “Pareto-improving.” So, you don’t need to 724%, depending upon the type of in fact being practiced as promoted, it a regulator to decide what a purposeful insulin. There is an enormous margin gives rise to serious distortions, and it company is. between the prices of the active ingre- undermines freedom of enterprise. But Finally, my argument about dient and the insulin product sold to let me start by saying that this last objec- Novo Nordisk is precisely that the diabetics. Though the active ingredi - tion—that the concept is meant for use cross subsidy that Luigi has pointed ents for both types of insulin go for only by public corporations—is not at to is not the right way of trying to $6.50/kilo in the U.S., they are sold for all what I’ve been proposing, and what I address the problems. Indeed, that is $48.20/kilo for one type and $34.20 think most people today understand by why Novo Nordisk is looking to find for the other. corporate purpose. ways of solving diabetes that do not Is Novo Nordisk subsidizing But let’s start with the first of Luigi’s involve insulin at all. What I find customers in developing countries by questions: is corporate purpose a state- impressive here is that the company charging higher prices in developed ment of individual morality? There is is effectively volunteering to canni - countries, as Colin seems to suggest, or clearly a moral dimension to corporate balize its own past profit stream by is it simply using its market power to purpose, particularly its urging compa- seeking alternative treatments, such maximize its profits and using corpo - nies to avoid profiting from producing as changing people’s lifestyles. The rate responsibility as a veneer for price problems. And I would view that as insulin pricing problems in the U.S. gouging? essentially the equivalent of a Kantian demonstrate exactly why one should This may be what is called law, a categorical imperative. not want to subsidize some at the “greenwashing.” And even if the As for Luigi’s observation that few expense of others. Luigi has interpreted pharmaceutical company is subsidiz- companies are incorporating as public purpose in a quite contrary manner. ing people in poor countries, as Colin benet fi corporations, I should note that The idea that purpose is something claims, whose objective function is it the number of smaller companies that that should be resisted simply because maximizing? Who is Novo Nordisk to have adopted the public benefit form has some companies will abuse it—use it as decide that poor midwestern farmers in recently increased. It’s dic ffi ult for exist - a stalking horse to distract the media the U.S. should subsidize a rich African ing corporations to shift to the public and regulators—should not allow us to in Nigeria? benefit form because doing so requires a overlook socially purposeful behavior So, let me close by reminding us supermajority shareholder vote. But to by companies with genuine commit- all of what Adam Smith wrote in The say that corporate purpose is essentially ment to important goals. Companies Wealth of Nations, a policy prescription that is being applied like Novo Nordisk, whatever their past only to limited liability firms is wrong. offenses, are arguably not greenwash - The proposal of any new law which On the contrary, the notion of purpose ing; but trying to find ways of helping comes from businessmen ought always to people around the world. should indeed apply to other organiza- Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 49 IESE ECGI CONFERENCE ON CORPORATE PURPOSE SESSION II: Company Valuation and the Effects of ESG Factors Xavier Vives: I’m Xavier Vives of the ing and research on these questions. decisions involving ethical dilemmas. IESE Business School, and I want to Patrick has had a distinguished career Having become an avid reader of these welcome you to the second session of in Europe as well as the U.S., and has columns, I’ve come to realize that it’s this conference on corporate purpose. been president of the American Finance rarely obvious what the ethical course This session is on company valuation and Association, among other organizations. of action is in concrete settings. And so the ee ff cts of ESG factors. These factors He is a leading expert in corporate gover- by bringing ethics into the corporate are increasingly important to investors nance and a pioneer in the development governance picture, we have to recog- and company managers. Although some of contract theory, which has made him nize that we are introducing complexity. investors have started to pay attention to an authority on the optimal allocation But I will argue that we should not be these factors, it is still not known how of control rights between contracting put off by the complexity of ESG issues big their impact has been. The Church parties and the firm. More recently, and the question of corporate purpose. of England pension fund, among others, Patrick has turned his attention to the Instead we should help companies states clearly its commitment to the Paris impact of climate change on companies identify and respond ee ff ctively to their agreement on climate change, but is not and their markets and investors. most pressing ESG issues—and in ways true for most institutional investors. The discussant for this session will that both address social and environ- Rising temperatures and climate be Sophie L’Helias a widely recognized mental problems and enable companies change frame the debate. Recent international governance and ESG to continue serving the interests of their examples of acute weather variability, expert with considerable experience investors. such as the fires in Australia and Califor - with shareholder activism in Europe, the Climate change is perhaps the funda- nia, have raised public consciousness U.S., and Canada. Sophie is President of mental reason why we have to bring ethics about this issue. LeaderX Xchange, a co-founder of the back into the picture. It is the biggest Some climate-related risks seem International Corporate Governance challenge facing us in the 21st century. obvious to us now. For example, today a Network (ICGN), and an independent If we simply continue pursuing tradi- company producing diesel cars is asking non-executive director on several corpo- tional approaches to shareholder value, in for trouble, but this has not always been rate boards. which all externalities are assumed to be the case. And we need to better appreci- Patrick, the virtual floor is yours. the responsibility of governments, we will ate the complexity of risks. ESG risks be on a road to disaster. It is in the interest have technological, regulatory, and Is the Market Pricing ESG Risk? of all shareholders today to let corpora- political dimensions that companies Patrick Bolton: Thank you, Xavier, for tions enlarge their objective function or need to understand more fully and those kind words. mission, look more broadly at the impact manage more effectively. Before I start with my presentation, of their operations, and work to limit the In this session, we will examine the I want to provide some context by risk to the planet posed by climate change. question of whether carbon emissions commenting on the first session with A major obstacle, however, is the represent a material risk that is reflected Colin Mayer and Luigi Zingales that absence of a sufficiently broad consensus in asset prices and stock returns. Do we just heard. about the risks associated with climate financial markets fail to recognize and When discussing the purpose of a change. The Paris Climate Agreement therefore underprice carbon risk? Can corporation, we must recognize that it of December 2015, which assembled socially responsible investors do well by is a call for ethical behavior. But ethical nearly all the main actors that can make doing good? And can investors generate behavior is not easy to define; it’s not a difference in curbing emissions, and alpha by incorporating ESG metrics along nearly as straightforward as, say, the that resulted in new national, regional, with traditional financial fundamentals? objective of maximizing shareholder and corporate commitments to reduce Patrick Bolton, who is Professor of value. carbon emissions, has been a major Finance at Columbia Business School, Every Sunday newspaper has boost in raising awareness and building will now summarize his latest think- columns discussing specific cases and a consensus. Importantly, this agree- 50 Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 ROUNDTABLE Table 1 Carbon Emissions: Correlations S1CHG S2CHG S3CHG LOGS1TOT LOGS2TOT LOGS3TOT S1CHG 1 S2CHG 0.485 1 S3CHG 0.555 0.503 1 LOGS1TOT 0.040 -0.004 -0.045 1 LOGS2TOT -0.020 0.045 -0.061 0.736 1 LOGS3TOT -0.047 -0.046 -0.059 0.808 0.824 1 ment brought the business and financial carbon-emitting companies and buying dramatic improvements in renewable investment worlds into the picture for low-carbon emitters? The conclusion energy efficiency and that’s going to the first time. For example, BlackRock, from our analysis is that the answer to continue. Carbon capture technology the biggest asset manager in the world, this question is “no,” even if bets against may also improve, but there is still a lot has taken a clear position on the impor- oil and gas companies pay off as they of uncertainty about its economic feasi- tance of addressing climate change. Yet, have in recent years. bility and scalability. we continue to see considerable skepti- What is new about our work is cism, especially in the U.S. Indeed, in that we use company-level informa- A Closer Look at Our Study a recent article in the Harvard Business tion on carbon emissions and examine So, what do we mean by carbon emis- Review, Eccles and Klimenko wrote, the economic mechanism behind stock sions? A first basic classification is returns. In simple terms, our main between direct and indirect emis- The impression among U.S. business finding is that carbon emissions repre - sions. Direct emissions are divided into leaders is that ESG just hasn’t gone sent a “transition risk” for corporations. Scope 1 and Scope 2 emissions. Indi- mainstream in the investment community. To achieve the goals set by the Paris rect emissions are labeled Scope 3; they And, more recently, the CEO of Exxon said Agreement, we need to find ways to are emissions resulting not only from individual companies setting targets and get all companies that emit carbon to the production of inputs for the compa- then selling assets to another company so reduce their emissions substantially. But ny’s finished products, but also from the that their portfolio has a different carbon this involves major changes to business downstream use of such products. For intensity has not solved the problem for the models, the introduction of new technol- example, in the auto industry, selling a world. ogies, and exposure to regulatory risk. car results in a lot of indirect emissions e Th silver lining of the COVID-19 through the use of the car. The question for our panel today pandemic, if there is one, is that it has So that’s what our study looks at— is this: Is there value in pursuing ESG contributed to the reduction in carbon Scope 1, Scope 2, Scope 3 emissions goals? The short answer to this question, emissions around the world. at the level of an individual publicly based on my research with Marcin e b Th ad news, however, is that we traded company. We have data on Kacperczyk at Imperial College, is a will have to maintain the same rate of carbon emissions for 14,468 such “resounding yes.” Our work provides decline in carbon emissions we achieved companies in 77 countries, representing clear evidence that carbon emissions this year until 2050, and maintaining roughly 99% of total market cap. Along pose a material risk to investors—risk that rate of reduction will be a great with yearly levels of emissions for each that is already being ree fl cted in stock challenge. company—expressed as tons of CO — returns. Carbon transition risk is tied to we also look at the year-to-year growth Another related question is whether both the risk that future emissions may in emissions and emission “intensity,” the stock market prices carbon risk be substantially curbed, and to chang- which is tons of CO emitted divided efficiently ? ing investor awareness of this problem. by sales revenues. Or is there an arbitrage opportunity An important aspect of transition risk Now, as can be seen in Table 1 to profit by shorting shares of high- is technological change. We have had taken from our “Global pricing of Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 51 ROUNDTABLE carbon-transition risk” paper, one of between carbon emissions and stock emissions, we found that there is a lot of variation across industries. But our first findings worth noting is that returns by identifying some third factor these three measures are not highly affecting both. what is also striking, as can be seen in correlated with one other. In particu- Moreover, the carbon premium Figure 1 taken from our forthcoming lar, Scope 1 intensity has a correlation could not be explained by prot fi ability Journal of Financial Economics article, is of only 0.49 with the Scope 1 level of or earnings surprises. In other words, the substantial variation within indus- emissions. we ruled out the possibility that the try. In fact, there is almost as much How do we explain that? In the returns for high-emitting companies are variation within as across industries. process of normalizing, you are effec - high because the companies themselves Since carbon emissions are reported tively mixing all different kinds of become more prot fi able. on a yearly basis and the stock returns companies. Some companies have large What’s more, and somewhat are monthly, we used a pooled regres- sales and high emissions, some compa- surprisingly perhaps, we found that the sion specification to explore how a nies have low sales and low emissions. As premium is not explained, and appears company’s stock returns were affected a consequence, the use of emission inten- to have largely been unaffected, by by its carbon emissions, controlling for sity turns out to be a very noisy measure. announcements of divestments by large as many relevant variables as possible But what are our key findings? Our prominent institutional investors, such (including year, month, and industry main finding is that carbon emissions as university endowments. What we fixed effects). do appear to ae ff ct actual and expected did find, however, is that much of the What you can see in the first three stock returns; during the relatively recent carbon premium can be explained by an columns of Table 3 taken from our period 2005-2017, the stock returns increase in what we call “investor atten- “Global pricing of carbon-transition of high-carbon emitters significantly tion,” and the accompanying change risk” paper is how average monthly exceeded those of low-carbon emitters. in investors’ perception of risk. The returns are affected by the level What this means is that market inves- simplest way of explaining this finding of the three different categories of tors effectively require higher returns is that the P/E ratios of companies with carbon emissions: the level of Scope for holding high emitters to compen- higher emissions tend to fall over time 1 emissions, Scope 2 emissions, and sate them either for bearing the greater to reflect their higher perceived risks, Scope 3 emissions, all measured in carbon risk or avoiding companies which in turn provides higher stock logs. Each of the three coefficients with high emissions. In other words, returns for those investors who choose is positive and statistically signifi- high emitters can be viewed as having a to hold the riskier stocks. And for those cant, and the coefficient is even more higher required rate of return. A higher of us concerned about climate change, significant and larger when we include required return in turn means a higher this is good news, in the sense that industry fixed effects. “cost of capital,” and thus a lower value climate change is now perceived as a Our findings thus suggest that other things equal. material risk for investors. what matters most is the carbon This finding holds for all three emission variation within industries as categories of emissions across all A Closer Look at the Data opposed to across industries. We also countries. We take this as evidence of In testing these relationships, we had found, somewhat surprisingly, that an emerging “carbon premium”—a access to two fantastic data sets. The the carbon premium as a function of relationship between carbon emissions first is FactSet, which is widely used by emission intensity was neither statisti- and cost of capital that is economically finance professionals and contains equity cally significant nor very large. That’s as well as statistically signic fi ant. returns as well as an array of corporate an important finding in light of the We further investigated whether characteristics. The second is Trucost, fact that the asset management indus- which provides high-quality carbon carbon emissions could be a proxy for try and institutional investors have other, commonly identified predictors emission data at the corporate level. been paying a lot of attention to this of firm-level returns, such as the size of As reported earlier in Table 1, variable. Carbon intensity is simply not which shows carbon emissions across the firm, book to market ratio, and so a good measure of exposure to transi- industries for all three measures of tion risk. on. But we could not explain the link 52 Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 ROUNDTABLE Figure 1 Carbon Emissions: Correlations Panel A: Unconditional data 0.6 0.5 0.4 0.3 0.2 0.1 200601 200609 200705 200801 200809 200905 201001 201009 201105 201201 201209 201305 201401 201409 201505 201601 201609 201705 wscope1chg wscope2chg wscope3chg Panel B: Within industry-variation 0.45 0.4 0.35 0.3 0.25 0.2 0.15 0.1 0.05 200601 200609 200705 200801 200809 200905 201001 201009 201105 201201 201209 201305 201401 201409 201505 201601 201609 201705 wscope1chg wscope2chg wscope3chg Take the example of ExxonMo- carbon emissions and are increasingly “Global pricing of carbon-transition bil and Chevron, two companies that exposed to “stranded asset” risk, which risk” paper, we found that the carbon have sought to boost their green creden- is proportional to the level of their premium has increased somewhat after tials by touting their carbon-intensity emissions, not their emission intensity. the Paris agreement of 2015 though it reductions. Any such performance Let me close with a word on inves- has not been a big change. The biggest does not take away the fact that they tor awareness about climate change. As change is in Asia. Investors are increas- are responsible for a huge share of can be seen in Table 4 taken from our ingly concerned about climate change. Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 53 ROUNDTABLE Table 3 Carbon Emissions and Stock Returns: Full Sample The sample period is 2005-2018. The dependent variable is RET. The main independent variables are carbon emission levels (Panel A) and the percentage changes in emissions (Panel B). We report the results of the pooled regression with standard errors clustered at the firm and year level. All regressions include year -month fixed effects and countr y fixed effects. In columns (4) through (6), we additionally include industry-fixed effects. In columns (7) to (9), we instead include firm fixed effects. ***1% significance; **5% significance; *10% significance. LOGS1TOT (LOGS2TOT ; LOGS3TOT) is the logarithm of firm-level scope 1(scope 2; scope 3) carbon emissions measured in tons of CO2e. S1CHG (S2CHG; S3CHG) measures the percentage growth rate in carbon emissions of scope 1 (scope 2; scope 3) (winsorized at 2.5%). Panel A: Levels DEP. VARIABLE: RET (1) (2) (3) (4) (5) (6) (7) (8) (9) LOGS1TOT 0.029 0.066*** 0.140*** (0.022) (0.016) (0.044) LOGS2TOT 0.096*** 0.118*** 0.154** (0.030) (0.027) (0.056) LOGS3TOT 0.118*** 0.174*** 0.620*** (0.032) (0.037) (0.180) Controls Yes Yes Yes Yes Yes Yes Yes Yes Yes Yr/mo fixed effects Yes Yes Yes Yes Yes Yes Yes Yes Yes Country fixed effects Yes Yes Yes Yes Yes Yes No No No Industry fixed effects No No No Yes Yes Yes No No No Firm fixed effects No No No No No No Yes Yes Yes Observations 746,642 746,797 747,290 736,851 737,006 737,499 746,615 746,770 747,263 R-squared 0.150 0.150 0.150 0.151 0.151 0.151 0.176 0.176 0.177 Panel B: Percentage Changes DEP. VARIABLE: RET (1) (2) (3) (4) (5) (6) (7) (8) (9) S1CHG 0.500*** 0.515*** 0.586*** (0.089) (0.091) (0.086) S2CHG 0.301*** 0.307*** 0.354*** (0.062) (0.065) (0.071) S3CHG 1.342*** 1.364*** 1.628*** (0.257) (0.266) (0.230) Controls Yes Yes Yes Yes Yes Yes Yes Yes Yes Yr/mo fixed effects Yes Yes Yes Yes Yes Yes Yes Yes Yes Country fixed effects Yes Yes Yes Yes Yes Yes No No No Industry fixed effects No No No Yes Yes Yes No No No Firm fixed effects No No No No No No Yes Yes Yes Observations 746,738 746,749 747,290 736,947 736,958 737,499 746,711 746,722 747,263 R-squared 0.150 0.150 0.151 0.152 0.151 0.152 0.177 0.177 0.177 54 Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 ROUNDTABLE We found that all over the world they ESG factors that are aligned with and to bring about change, improve gover- are worried about carbon transition contribute to the company’s purpose, nance, and increase shareholder value. risk, and their concerns are increas- When companies improve their ESG Studies show that bad governance tends ingly ref lected in stock returns. So factors, that often indicates greater to create a share price discount, while that companies that have high carbon resilience and stronger financial perfor - good governance tends to deliver a emissions are facing a higher cost of mance. But when ESG factors show premium. capital. poor performance, or a lack of align- Good governance provides the Xavier, let me end with that. ment with the company’s purpose, it framework and processes that protect suggests non-financial risks that can companies against a wide range of Vives: Thank you, Patrick for this have a financial impact and point to shocks and risks, thereby making them interesting presentation. Now, we a less resilient company that is likely more resilient. Consistent with Patrick’s will hear from Sophie L’Helias, who to underperform during economic or study, market research suggests that as I mentioned is President of Lead- industry downturns. while investors generally don’t reduce erX Xchange and co-founder of the The E in ESG stands for environ - their required returns for well-governed International Corporate Governance mental topics. It encompasses the companies, they do require higher Network. energy and other resources the company returns from poorly governed compa- Sophie, the virtual floor is yours. uses, the waste it produces, and the nies to compensate for the additional resulting consequences for the planet risk. This is why I find Patrick’s study so An Activist Investor’s Take on ESG and living beings. The E includes compelling: his findings expand inves - Sophie L’Helias: Thank you very much, carbon emissions and climate change, tor expectations from governance, or Xavier. I want to congratulate Patrick though it is not limited to those topics. the “G” is ESG, to climate, or the “E.” for this excellent paper and its success e Th S encompasses all of a compa - Only a few years ago, ESG investing in validating the assumption that ny’s stakeholders in the communities was limited to a few investors focused many of us have long operated under— where it operates, directly and indirectly. on socially responsible impact invest- namely, that markets recognize and S includes labor relations, diversity and ing. They were the pioneers of ESG incorporate information about non- inclusion, suppliers, customers, local investing. The assets they managed financial risks such as climate change communities, etc. Every company were a few billion dollars, not enough into their pricing. This study is very operates within a broader society, and to have a meaningful impact across all positive in that sense. has many different stakeholders that industries and in all markets worldwide. Though I am not an academic, drive its purpose. Today, ESG investing represents more I have worked with investors, includ- e Th G is governance, the internal than $30 trillion. And it is the fastest ing a number of activist investors, on system of practices, controls, and proce- growing investment category in the governance and ESG issues. I have also dures a company uses to govern itself, to United States as well as Europe. developed investment methodologies make effective decisions that meet the There are several reasons for this using non-financial ESG metrics such expectations of its stakeholders, includ- transformation. as gender diversity and human capital. ing its shareholders. The first is a broad societal shift ESG is critical because it goes to the Every company has a governance toward purpose and having a meaning- core of long-term sustainable growth system, and many academic studies ful impact. People are looking for and corporate resilience, It increas- have shown that good governance purpose in what they do and how they ingly reflects where we are, and what generates alpha. All this seems indis- invest; and investors are responding to putable. Activist investors identify we want, as a society. their clients’ demand. The second shift is new and acces - And ESG factors could be viewed governance vulnerabilities in companies as the building blocks of corporate that underperform. Some hedge fund sible data. Patrick mentioned earlier that he had to impute some of his purpose. Once you define your purpose, activist investors take short positions in then you must focus on the specifics such companies. Others, however, take pre-2005 data because it was not avail - and identify meaningful and material long positions and launch campaigns able. Now that markets are collecting Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 55 ROUNDTABLE Table 4 Carbon Emissions and Stock Returns: The Role of Investor Awareness The dependent variable is RET. The main independent variables are carbon emission levels (columns 1-4) and the percentage changes in emissions (columns 5-8). We report the results of the pooled regression with standard errors clustered at the firm and year level. Panel A reports the results for a sample covering the period January 2014-November 2015 (two years before Paris COP 21 conference). Panel B reports the results for a sample covering the period January 2016-December 2017 (two years after Paris COP 21 conference). All regression models include the controls of Table 7 (unreported for brevity), year-month fixed effects, and country fixed effects. In selected columns, we additionally include industry-fixed effects. ***1% significance; **5% signifi- cance; *10% significance. Panel A: Pre Paris DEP. VARIABLE: RET (1) (2) (3) (4) (5) (6) (7) (8) LOGS1TOT -0.032 0.019 (0.023) (0.018) LOGS3TOT 0.007 0.096* (0.038) (0.050) S1CHG 0.731*** 0.722*** (0.119) (0.119) S3CHG 1.924*** 1.891*** (0.338) (0.345) Controls Yes Yes Yes Yes Yes Yes Yes Yes Yr/mo fixed effects Yes Yes Yes Yes Yes Yes Yes Yes Country fixed effects Yes Yes Yes Yes Yes Yes Yes Yes Industry fixed effects No No Yes Yes No No Yes Yes Observations 109,394 109,578 108,143 108,327 109,394 109,578 108,143 108,327 R-squared 0.090 0.090 0.098 0.098 0.091 0.092 0.099 0.100 Panel B: Post Paris DEP. VAR.: RET (1) (2) (3) (4) (5) (6) (7) (8) LOGS1TOT 0.095*** 0.096*** (0.031) (0.025) LOGS3TOT 0.209*** 0.265*** (0.043) (0.043) S1CHG 0.527*** 0.509*** (0.100) (0.105) S3CHG 1.611*** 1.584*** (0.237) (0.247) Controls Yes Yes Yes Yes Yes Yes Yes Yes Yr/mo fixed effects Yes Yes Yes Yes Yes Yes Yes Yes Country fixed effects Yes Yes Yes Yes Yes Yes Yes Yes Industry fixed effects No No Yes Yes No No Yes Yes Observations 192,678 192,810 190,047 190,179 192,678 192,810 190,047 190,179 R-squared 0.048 0.049 0.053 0.053 0.048 0.049 0.053 0.054 56 Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 ROUNDTABLE the data, new ESG factors are being investors shrinks, the remaining inves- lar offers a very powerful framework for the transition to a lower-carbon uncovered. For example, in assessing tors have more leverage to set better economy. It has given investors and human capital or corporate culture, terms. That is what we see in the market companies common language and investors may use employee turnover today, and what the findings of Patrick’s rates that indicate an ability to retain study suggest. outlined an effective governance frame - and attract talent. As such data are Patrick also stressed the importance work to build a climate transition plan. collected, studies will show the extent of investor awareness and mentioned Finally, I would like to comment on to which there is a correlation between Climate Action 100+, an investor Scope 3 emissions, which were excluded employee turnover and stock returns. consortium I engaged with at the time in Patrick’s study. Scope 3 is an impor- In addition to the growing volume of their launch. Prior to the establish- tant measure because some industries’ of available of data, new technology ment of Climate Action 100+, around indirect carbon emissions are greater has made its way in financial services the time of the COP21 Paris accord, a than their direct emissions. Moreover, and the investment arena, lowering small group of the world’s leading inves- companies that simply transfer carbon- the entry barrier for new entrants to tors and co-founders of climate Action emitting activities through asset sales to offer expanded services to retail inves - 100+, met in New York to develop a another company are not helping the tors along with the ability to choose common language and framework for environment. their investments according to their engaging companies on climate change. Another recent development personal preferences and ESG values. I managed the discussion among these supporting Patrick’s argument is that A 2015 study by Deutsche Bank investors and saw their sense of urgency carbon and other ESG regulations summarizing the findings of over to get companies address this financially are increasingly creating new disclo- 2,000 academic studies of ESG and material issue that poses an existential sure requirements for investors. EU stock market performance reported threat. What we have observed in the regulations in particular are targeting that 63% of the studies uncovered a few years since then is not just greater investors’ environmental and carbon positive correlation, 8% of the studies investor awareness, but more impor- footprint and regulating marketing reported a negative correlation, and tantly, a common objective to get of ESG investment products to limit the remaining studies found none. companies to address climate change “greenwashing.” Investors are increas- Academic studies have also clearly with actionable plans and disclosure ingly asked to measure and disclose demonstrated the importance of frameworks proposed by Climate the carbon footprint of their invest- distinguishing between material Action 100+ and other members of the ment portfolios. The impact of these and immaterial ESG factors: Some financial community. regulations is driving investors to sell topics clearly have a greater impact on That brings me to a point I shares of companies that increase their corporate performance and value than would like to raise that, although not portfolios’ carbon footprint or engage others, depending on the geographic mentioned in Patrick’s paper, clearly their portfolio companies to take region and the sectors in which a supports his position. New ESG and action and reduce it. To attract inves- company operate as well other topics climate disclosure frameworks have tors, companies with a high carbon specific to each company. emerged that include the EU regulatory footprint will need to deliver a higher Take Patrick’s study, which screened framework, the GRI, the TCFD (Task rate of return to compensate inves- out a large number of companies that Force on Climate-related Financial tors for the greater risk and associated are high-carbon emitters. If a company Disclosures), and the SASB (Sustain- social and reputational costs of owning ability Accounting Standards Board) is avoided by investors who don’t want their shares. to own its shares, the company will have in the United States. For this reason alone, I would not a smaller investor pool from which it es Th e organizations have provided be surprised to see the carbon premium can raise capital. It is logical therefore valuable guidelines for companies and Patrick identie fi d signic fi antly increase over time as more investors understand that the company will have to offer a investors to identify, measure, and disclose material ESG topics such as premium to those investors willing to the risks and the cost associated with climate change and ESG more gener- buy its shares. When a pool of potential climate change. The TCFD in particu - Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 57 ROUNDTABLE ally, access quality carbon and ESG enced by how companies communicate between the U.S. and European inves- with the raters, what companies say— data, and hold companies and their tors because there are other important board accountable for ESG outcomes. and are encouraged to say—as opposed differences between those two groups So, thank you very much. And, to what they actually do about climate of investors. again, I encourage those who have not change. Our study attempts to circum- What we can say, though, based on done so to read Patrick’s compelling vent this issue by looking directly at our subsequent study, is that as a result paper. objective measures of emissions while of the more extensive energy transi- ignoring the ESG ratings. tion underway in many European The Temptation of Greenwashing countries, you find lower risk premia Vives: I want to thank Sophie for L’Helias: I agree entirely with Patrick. associated with carbon in Europe than her comments and for the broader There are a number of organizations in the U.S. context she has provided. I thought her that provide ESG ratings, and stud- comments about Climate Action 100 ies of the ESG ratings themselves show Vives: Sophie, is that consistent with were particularly important. But having surprisingly low correlation among what you are seeing? said that, I would like to learn more them. Even when the rating agencies about the link between purpose—that are looking at the same ESG factors— L’Helias: Yes, though the tide is turn- is, companies’ taking an ethical stance— which they often don’t—the ratings ing. Patrick noted that the United States and the financial reality of pricing of risk. or scores can vary wildly for the same withdrew from the Paris Agreement in I think it would be a mistake to assume company. I believe that raw ESG data 2016. that markets will catch up quickly once communicated by companies without However, that did not stop compa- carbon emissions data is available. It is an opaque filter developed by third nies and investors in Europe, the tempting to believe that investors can parties is extremely valuable for both U.S., and other markets from taking carry on as they did before, just with investors and companies. By disclosing action. LeaderX Xchange and the better data and the ability to determine a information, companies take owner- Millstein Center at Columbia Law premium for carbon risk. It usually takes ship of their data and their results. School surveyed 130 investors and time for investors and the broader world Disclosure limits the risk of possible board directors in North America and to understand the real environmental and distortion or error by third parties that Europe, with two-thirds of respon- social impact of company operations. find other means to collect ESG data dents confirming that climate change Having now arrived at the question that may not be as reliable.. I expect had a material impact on business and answer part of our session, I want to see more transparent data platforms operations. to raise a question that I think is on the that invite companies to disclose, minds of many people: To what extent investors to collect, and researchers to Do Investors Value Carbon are corporate responses to these ESG analyze, thereby bypassing the ESG Offsets? factors just window dressing—that’s data aggregators whose methodolo- Vives: We have another question for to say, greenwashing. Shouldn’t we set gies may have biases that skew results. Patrick: Do your results imply that more quantifiable objectives to check companies that purchase carbon offsets, the materiality of the actions of both U.S. vs. European Pricing of ESG rather than reducing emissions opera- companies and investors? Vives: Peter Strömberg has asked if tionally, also enjoy a reduction in their there is hard data to support the belief cost of capital from a lower-carbon Bolton: That’s an excellent question that European investors have been more premium? and it really ties these first two panels concerned about climate risk than U.S. together. Greenwashing is a concern, a investors in recent years? Bolton: That is a great question and real issue. it relates to a point that Sophie made earlier. It is one thing to take active Greenwashing is such a temptation Bolton: I wish I could give you a clear steps to reduce your emissions and for companies in signic fi ant part because answer to that but it is dic ffi ult to isolate ESG ratings seem to be excessively inu fl - differences in the carbon premium quite another to sell your highest-emit- 58 Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 ROUNDTABLE ting assets or to buy carbon offsets, and If people are key to a company’s dented. We conveniently forgot about investors understand that, too. success, then employee turnover and the Spanish f lu. I think COVID is gender equality are critical. A growing teaching us that nature matters, and we Vives: Okay, and a follow-up question: number of investors eventually recog- have to take nature seriously. how would a sudden increase of pricing nize that and take those factors into of the carbon offset affect stock returns? account when they decide to invest in L’Helias: I agree completely. I would add And is there a conjoined effect involving a company’s stock. The more investors only that the pandemic has shown us waste treatment, water use, disembod- want to invest in a company’s stock, the the need for resilience. ied turnovers, and gender equality along higher the share price, and vice versa. with carbon emissions? Vives: ESG and climate change are Climate Change and Vulnerability about being mindful, being purposeful, Bolton: Absolutely. This is a very impor - to Pandemics it’s about being prudent and sustain- tant issue. The short answer is, we don’t Vives: Last question, this one my own: able, and it is about integrating all of have that data. Maybe Sophie has Do you see any interaction between these human factors and environmen- looked at the other ESG impact vari- reducing climate change and protect- tal factors. Practically speaking, the ables. ing against pandemics? pandemic has shown companies what a crisis on a global systemic scale will L’Helias: Bolton: Climate change makes the risk look like. Climate change is a long-lived LeaderX Xchange found evidence of pandemics greater because climate global systemic risk, but a pandemic is analyzing raw data of a positive relation- change, for example, through defores- only a temporary global systemic risk. ship between better gender outcomes tation accelerates the transmission of Or let us hope so. and firm performance, but we did not viruses from animals to humans. So, test that data against carbon emissions there is a direct link. As Patrick mentioned at the outset, We must bear in mind that the materiality matters. COVID pandemic is not unprece- Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 59 IESE ECGI CONFERENCE ON CORPORATE PURPOSE SESSION III: Corporate Purpose and the Theory of the Firm Jordi Canals: Welcome to the second The third reflection gets inspiration Joan Enric Ricart: Welcome to this day of our conference. I want to start from Chester Barnard and Ken Andrews, session on “Corporate Purpose and the today’s proceedings by providing a bridge two of the founding fathers of contempo- e Th ory of the Firm.” The format of this between yesterday’s sessions, particularly rary corporate strategy.3 As Ken said “the session will die ff r slightly from others in Patrick Bolton’s empirical findings of a judgment of what a company might do, this conference. Professor Bengt Hölm- link between carbon emissions risk and what a company can do, what a company strom and Paul Polman will each have 25 equity pricing, and today’s sessions. To wants to do, and what the company minutes to present their ideas, followed set the stage I will begin with three state- should do den fi es the firm’s purpose and by a short debate that I will moderate. I ments by distinguished scholars who have shapes its strategy.” Ken Andrews helps think this debate should provide a nice thought about purpose from the perspec- us think about purpose in terms of a continuation of the debate between tive of strategy and leadership. company’s “boundaries,” the resources Colin Mayer and Luigi Zingales we The first comes from Chris Bartlett and capabilities that it has at its disposal, heard yesterday. Bengt, the virtual floor and the late Sumantra Ghoshal. In their and the aspirations of its top management is yours. influential book on strategic manage- and employees for the company. ment published in 1997, 1 they wrote e Th first of our two sessions today is Coase-Friedman Doctrine and that “Purpose is the statement of a on corporate purpose and the theory of Corporate Purpose company’s moral response to its broad the firm, and it will be led by Nobel laure - Bengt Holmström: Thank you, Joan, responsibilities, not an amoral plan for ate and MIT Professor Bengt Holmström. thank you Jordi, and thanks to the exploiting commercial opportunities.” We have asked Bengt to try to integrate organizers for inviting me. It is a great I find this statement really useful because current notions of purpose with the honor to be here. Since I will be speak- it addresses what purpose should include contemporary theory of the firm that he ing from the perspective of the theory and what it should exclude. It raises the has contributed so much to over the past of the firm, you should not expect question: How do we apply this concept three decades. much practical advice. My aim is more of purpose to organizations and to assess- After Bengt’s presentation, we modest: to present some concepts that ments of performance in organizations will hear from Paul Polman, a former may be helpful in thinking about that embrace this concept? corporate chief executive officer who whether corporate governance prac- The second comes from Juan has actually brought purpose to a large tices should be changed to deal with Antonio Pérez López, a professor at IESE organization. As CEO of Unilever from current challenges our society is facing and dean between 1978 and 1984, who 2009 to 2019, Paul started out with a and, if so, how. den fi ed purpose as meeting “specic fi real very ambitious notion of purpose and I want to make two main points needs that an organization wants to serve went on to adopt the use of some key in this comment. First, that corpo- through its products and services.”2 He ESG factors included in the Unilever rate governance has been evolving added that achieving purpose should Sustainable Living Plan that have become over time, adapting itself to corporate include designing and putting in place a standard in the field. This session will and social needs and public opinion. indicators of ee ff ctiveness and ec ffi iency, be chaired by Professor Joan Enric Ricart Current trends are no exception to and promoting cooperation, fostering of IESE. Henry Tricks, The Economist this general pattern. Second, and more learning, and building trust among the Schumpeter Writer, will manage the provocatively perhaps, I will suggest different parties to the organization, dialogue between Bengt and Paul after that Friedman’s 1970 argument for especially employees. their presentations. ma ximizing profits—for which read And with that, I will turn the floor “shareholder value”—finds partial over to Professor Ricart. support in the way companies have 1 See S. Ghoshal and C. Bartlett, The Individual- ized Corporation: A Fundamentally New Approach to responded to current social concerns. Management, Harper Business, 1997. My tentative conclusion is that calls 2 J.A. Pérez López (1993), Fundamentos de 3 K. R. Andrews (1971), The concept of corporate for wholesale changes in corporate Dirección de Empresas, Ed. Rialp, Madrid. strategy, Irwin. 60 Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 ROUNDTABLE the workers are treated, how well governance are premature. There are huge social challenges that face us. the products are received by the serious problems confronting us, some They will necessarily have to do much of the heavy lifting. consumers, and how companies uphold of unprecedented scale and complexity social values. In idealized conditions, such as climate change. But we should Even within this relatively short try to deal with these problems within history, we can see how corporate if parties can bargain and contract our general governance and economic governance adapts to the concerns of costlessly, the outcome will be efficient framework using the legal and regula- the day, both economic and social. It in the sense that the preferences and tory tools we have available and adding is not that we are steadily ascending exit options of all stakeholders have new ones as needed. To do this effec - towards some ideal form of corporate been considered. This central insight tively, we need to understand how the governance. Instead, the movement is Coase’s, and it underpins Friedman’s system has been working in the past: is more like a pendulum, where logic. its logic, its successes, and its failures. focus shifts back and forth between In practice, transactions costs To illustrate how corporate gover- broader stakeholder concerns and make bargaining costly. Information nance has evolved, consider the past narrower shareholder objectives. It asymmetries and enforcement costs, 50 years. The prevailing doctrine in is important to appreciate that both for instance, create frictions that the 1970s was “stakeholder value.” regimes have served society in some interfere with bargaining. In the Corporate annual reports in those form. The 1980s switch to shareholder theory of the firm, transactions costs days emphasized what the company value restructured and invigorated the have been extensively used to interpret has done for workers, communities, economy, providing broad benefits observed patterns of contracting and and other stakeholders. Shareholder along with some undesirable outcomes. organization. My interpretation of value was rarely if ever mentioned. This Today’s ESG movement has provided evolving corporate governance practices began to change in the 1980s. Share - a critical call to arms against major uses the same approach. I imagine holder value maximization became the social threats and corporations have that they maximize the net value to new motto in the wake of successful responded by embracing ESG goals. all stakeholders—the total available hostile takeovers and restructurings. How well corporations can translate “pie.” As circumstances, objectives, and Executives joined the movement, social pressure into effective actions frictions change, the value-maximizing attracted in large part by lucrative this time remains to be seen. practices change. option contracts. These worked well What’s the basis for the hypothesis I want to stress that for this initially, because there was much to that these movements serve a social mechanism to work, it is crucial that restructure. But these option contracts purpose? The best I can do is refer managers work to maximize firm were poorly designed and eventu- to Friedman’s argument in support value. If corporate managers become ally led to scandals that eroded social of shareholder value maximization, indifferent to or are prevented from trust. Today we are seeing a return to which many of you are familiar with. trying to maximize investors’ wealth, stakeholder value again, but something He argued that since shareholders are the system breaks down, including that’s different from the 1970s. One residual claimants—which means that the benefits and assurances it offers might call the new regime “stakeholder the other stakeholders receive f ixed non-investor stakeholders. By caring value plus.” payments—the corporate managers about the welfare of shareholders, you e p Th lus refers to the rise of ESG as who represent them will make choices are maximizing total surplus. an increasingly important component that consider the total benefits and The Case for Stakeholder Voice? of corporate governance. In the past, costs to all stakeholders. If the decision corporate governance was primarily is bad for a worker, the firm has to But this view also raises ques - tions. Henry Hansmann, my former about the relation between sharehold- compensate her for the loss or else she ers, boards, and management, and will leave. colleague at Yale, has made the point what would be most efficient economi - It is the right to exit, using that if it is in the interests of sharehold- Hirschman’s language, which forces cally. Today, corporations are expected ers to take care of other stakeholders to shareholders to consider how well to get actively involved in solving the maximize their wealth, the same argu- Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 61 ROUNDTABLE ment could be made on behalf of any to equity capital. Raising equity for theorem” in finance. But we also see worker-operated firms is limited, stakeholder. For example, why not let family firms self-destruct from internal because the investors as risk-bearers workers be in charge and allow them to tensions. These are examples where the need voice. Cooperatives can and do maximize their wealth subject to inves- Coase theorem fails! tor utility constraints? We usually just raise debt capital, of course, but high Hansmann’s argument about the assume that investors are in charge debt levels also create risk that operates costs of voice is an important way of because we call them “owners.” But as a significant constraint. operationalizing Coase’s view that there are companies in which employ- Hansmann’s argument for the institutions are designed to reduce ees rather than investors are the prevalence of joint stock companies, transactions costs, particularly in the owners, such as cooperatives. The fact then, is that shareholders have a relative form of costly “haggling.” It is hard for that investor-owned companies occupy unity of interest. Of all the different many observers to accept that workers such a prominent place in our econ- stakeholders that make up the corpo- have relatively little say. What I have omy suggests that it brings substantial ration, shareholders are by far the most just explained, using the insights of advantages. What are they? homogeneous group. If investors can Hansmann, is that if workers have Hansmann’s analysis focuses on buy and sell their shares easily, their reasonable outside options—notably the costs associated with giving greater interests as a group are pretty well viable exits—the shareholders and decision rights, or “voice,” to different aligned. Wealth maximization is a clear their representatives as residual claim- parties to the corporate contract—for common objective. As a general rule, ants will look after the well-being of example, by putting labor representa- shareholders are united by their prefer- the workers, too, while avoiding costly tives on public company boards—and ence for higher rather than lower share internal tensions. Both groups will be how that cost is likely to vary in prices, provided the firm is complying better off as a result. other forms of organizations, such with laws and regulations. as nonprofits. When explaining the By comparison, the costs of collec- The Case for More success and dominance of the public tive decision-making in worker-owned Shareholder Voice company, he shows how the costs enterprises tend to be large. Workers What about demands for shareholder associated with voice are minimized have different backgrounds; they work voice of the kinds now being made by by concentrating voice in sharehold- for different reasons; they differ in age Oliver Hart and Luigi Zingales? Up ers and the boards who represent them. and education. These differences matter to this point I’ve talked as if manag- At the same time, he points out that less if they are paid a fixed wage. But ers represent shareholders perfectly. not-for-prot fi s, cooperatives, and other when they have a stake in the firm and Well-designed executive compen- firms that are not joint stock compa - a voice in how the firm is run, decisions sation contracts can align interests, nies typically have a much narrower become compromises that are likely to though not perfectly of course. Hart focus, including members who are conflict with the long-run efficiency and Zingales have recently intro - committed to a shared interest that and value of the organization. Tensions duced another layer of complexity by goes beyond value maximization. arise even in small partnerships, which noting that stock prices do not neces- This is important because shared frequently dissolve. sarily capture the social concerns that interests make reaching consensus Similar issues arise in family- shareholders may also want managers and decision-making easier in these owned companies, where the possibility to take account of in their decision- “non-public” enterprises. But this also to trade shares is either severely limited making. limits the types of activities for which or non-existent, and so family members So, why not give shareholders more of a voice—not just through such member- and employee-owned lack liquidity. Disputes commonly arise as the family grows. Listing on board representation, but also direct companies are well suited. Of course, there are other reasons shareholder voting? We could have the stock exchange or selling the firm for the dominance of the public either to a subgroup of the family or to them vote, for example, on how much company. Perhaps the most obvious an outsider can resolve conflicts in the weight to give ESG criteria in company is that public companies have access spirit of the famous Fisher “separation policies and decision-making. 62 Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 ROUNDTABLE think changing capitalism dramatically—and I think Luigi agrees—seems utterly unwarranted at this stage. Nevertheless, there are improvements that can be made to corporate governance on the margin that do not involve massive structural change. I think there is a need for better information so you know what changes are socially good or bad and can measure consequences. – Bengt Holmström Let me suggest two arguments cial standing—and possibly the social can lose large amounts of value. Being against this idea. The first is that giving preferences, too—of the other people ESG-conscious is a win-win. What is extensive voting rights to shareholders in the building; and they will insist on good for society is, in the long run, will make the group more heteroge- knowing even more about you. good for companies, too. neous. Hansmann’s insight about the Win-win cases seem straightfor- costs associated with heterogeneity Turning Social Concerns into ward. The big question is whether makes me skeptical about extending Corporate Action companies are willing to—or should— shareholder “voice” beyond major In thinking about major changes to sacric fi e long-term value for the benet fi issues such as control changes. corporate governance, it is important of broader social goals. When asked I would be even more wary of to understand how social concerns get about this, institutional investors do proposals to give shareholders voting integrated into the existing corporate not seem willing to make such sacri- rights over divisive social issues. Should governance system. I began by noting fices. One reason is that it can be very Walmart’s shareholders be asked that corporate governance has histori- hard to know whether an action that whether to sell weapons in Walmart cally shifted in response to stakeholder lowers the value of a company does stores? Though voting might sound concerns and that corporations have enough social good to warrant the like a good way of resolving a compli- indeed found it value-maximizing to losses in value. cated issue, once you start asking your do so. Based on this logic, one could This points to a problem with shareholders for decisions on a range of have predicted that corporations will relying on social pressure as a guide such issues, you lose one of the valuable respond to the ESG concerns—and so for corporate decision-making. Social features of investing in public compa- they have. interest groups have been instrumental nies—shareholder anonymity. Today, corporations compete for in getting corporations and politicians With expanded voice, the joint customers, workers, and other patrons to pay attention to climate change stock company would risk becoming by expressing their commitment to the and other social issues. But the signals politicized. As a shareholder, one does environment, to gender equality, and from social media are qualitative, not not typically want to worry about how other high-profile social issues. Institu - quantitative. It is far from obvious to the other shareholders might vote in tional investors are especially concerned me that some social interest group that future eventualities. Frequent voting about ESG. They see signic fi ant reputa - becomes popular on social media will would induce uncertainty not just for tional risks in failing to respond to the be able to determine what is good or the shareholders but also management. prevailing expectations for socially bad. I believe in the wisdom of crowds, e Th se conflicts are familiar to residents responsible behaviour. Because of to some extent, but also in its opposite, of housing cooperatives. Before buying social media, missteps can quickly let’s call it the fallibility of the crowd— a New York coop, one needs to know upend even billion-dollar corporations. those cases in which crowds are not a good deal about at least the finan - Within days or even hours, companies providing us with a balanced view of Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 63 ROUNDTABLE social preferences. As Milton Friedman activities using artificial intelligence, A Former CEO’s Perspective on pointed out, spontaneously organized machine learning, and other digital Purpose pressure groups do not directly pay for technologies. Today we can collect Paul Polman: I was frantically taking what they want, unlike consumers or and store massive amounts of data, notes as Bengt talked. I really appreci- workers who have shown themselves monitor compliance using satellites ate his perspective which comes from willing to make economic sacrifices and sensors, and process and present deep thought and understanding of our to express their social concerns. He this information in useful ways to economic system. And I can relate to should have added that his caretak- investors and decision-makers. quite a lot of it. ing logic will not work unless all the As an example, Upright, a Finnish In a perfect market, to the extent affected parties are fairly represented at start-up, uses AI to assess the net we have had one, the system would the “bargaining table.” environmental and social impact give us what we deserve. But we need While corporations will play a of common activities, like eating to compare the ideal market to the central role in solving today’s ESG a hamburger or drinking from a realities of our current market and then problems, public pressure is a very plastic bottle. Upright has 44,000 discuss what needs to evolve, and what indirect and imperfect way of engaging companies in their database that AI does not. I agree we should not throw and guiding corporations in this task. has scanned from a mass of documents out the existing system entirely and try Some socially valuable actions manag- and scientific articles. The system will to build something entirely new. But ers can figure out and implement, give the net impact of McDonald’s because what we currently have isn’t but there are also many challenges in on various social factors such as the quite working, we need to start with a putting appropriate weights on various environment, public health, education, reality check. ESG categories. and so on. The system uses only Let me begin with a little story. I What we really need is more and public information about companies. trained as an economist at university better information for all stakehold- Institutional investors can put their in the Netherlands and, thanks to the ers, including institutional investors. own weights on these factors to get a Dutch government, I could get my Taking climate change again as an net score of a company’s overall social education, and I am still grateful for that. example, the first critical step is to impact and how it compares with other My father was a factory worker and had measure who pollutes and how much. companies in the database. Upright six kids, so he did not have much money. This explains the involvement of recently began distributing their But when I graduated from university, central banks in the fight against impact measures in partnership with he gave me a little porcelain plaque that climate change. Financial institutions NASDAQ. I still have. At the time I wondered why can force companies to provide more With such measures we can run he gave it to me, and I didn’t appreciate accurate information about sources markets that find prices to guide this right away. But I kept it in my drawer and levels of pollution and make this corporate decisions and stimulate and now look at it quite often when I am information part of corporate account- innovations. We do not need radical at my desk. It simply said in Dutch: “An ing systems. new forms of corporate governance to economist is someone who doesn’t know Private efforts to measure ESG deal with today’s social problems. The what he doesn’t know.” compliance are also proliferating, way forward is to make better use of What he was trying to tell me was with rating agencies providing scores the tools and institutional structures we to approach issues with a little bit of that are supposed to help investors and have available and improve them with humanity, and with humility or modesty. consumers to assess corporate progress. the help of digital technologies. And My perspective is from the practitioner It’s unclear how well this works, but it’s we also need more efficient government side of business, and what I see right now, a start. I am encouraged by the strong regulations that harness corporations unfortunately, is that things are not quite interest that doctoral students around for the social good. working the way we had anticipated. I the world have shown in finding a Th nk you very much. will not argue whether Milton Friedman ways to measure the total social was right or wrong. What I will say is impact from corporate and human that he developed his perspective in a 64 Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 ROUNDTABLE o company long-lived company was founded to maximize share- holder value. They were started for specic fi purposes. Lord Lever did not found his company to maximize his own wealth. No, he was driven by the issues of hygiene in Victorian Britain when one out of two babies born did not live past the rfi st year. He wanted to invent products that solved hygiene problems. – Paul Polman different time and in the U.S., which people on an unhealthy planet. We are When Milton Friedman was born, had a different vision of how the world not getting what we want and expect we relied on governance codes that should function than perhaps some of from governments, financial markets, made companies behave responsibly. us who grew up in different places in and business, despite the best will and Right now, we have governments that Europe had. He was writing in 1970, mechanisms that were supposed to work. cannot even come together and reach when governments were functioning and If too many people in the world feel agreement on the basic issues of how we when the planetary boundaries were not they are not included or cannot partici- treat people with COVID, or what we so transparent. We must acknowledge pate, they will ultimately rebel. A world should be doing as we travel around, or that the system we inherited from that without inclusive and sustainable growth how we should help countries that are era undoubtedly did a tremendous job. cannot last. still left behind or suffering from things Over the last few decades, it lifted many In the last 40 years, we have done that we have inflicted upon them. Global more people out of poverty than at any more damage to our planet than in the governance is broken. Many of our insti- time in history. It has actually been a whole history of the planet combined. tutions were developed at the time of good time to have been born: people live Over two thirds of species have disap- Bretton Woods in 1944 and have never longer, have healthier lives, have more peared. About a million more are about been adjusted. No company would have possibilities. You would love to be physi- to disappear. Climate change will create survived that long without making major cally young and in spirit in today’s world. a billion refugees. Our poverty levels go adjustments to changing conditions. But the reality is, the way our up again and the numbers go on. Shareholder primacy works in theory, economic system has provided growth So, again, I start from the practi- but no longer in practice. We have too is simply not sustainable. We cannot cal side: what is wrong here and what many different shareholders with too have endless growth on a finite planet. should we adjust? It does not make many different opinions about the This year, in 2020, we marked Earth any sense to debate whether we should multitude of possibilities for maximiz- Overshoot Day on August 22nd, in retain capitalism. But just as Franklin ing return. We have created far more recognition of the fact that every day Roosevelt created the New Deal that money than when Milton Friedman we are now using more resources than allowed the U.S. to pivot to a period was writing. We have created financial the planet can replenish. We are steal- of prosperity, I think we desperately instruments worth $500 to $600 trillion ing from future generations. Our annual need another new deal. While many of in a world with a real economy that is climate change is projected to be rising at the things that Bengt said will work for less than a $100 trillion. And all that over 3%, imposing enormous costs. Our responsible companies with responsible money is chasing returns and becoming inequality is going up. And the global leaders and responsible governments, we shorter and shorter-term. There is much financial crisis was just another recent do not have enough such responsible more distance between the underlying symptom of our shortcomings. It shows, institutions. Collectively, the numbers shareholders and what the agents for above all, that we cannot have healthy do not add up. those shareholders are doing on their Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 65 ROUNDTABLE behalf. They seek different things and was driven by the issues of hygiene in Why are these shareholder-owned companies disappearing? The average have die ff rent opinions about what they Victorian Britain when one out of two expect from companies. This mismatch babies born did not live past the first life of a publicly traded company in the is confusing, and the confusion can be year. He wanted to invent products that U.S. was 67 years when I was born. It is seen as much at the board level as at the solved hygiene problems. In his case, now less than 17 years. We are driving shareholder level. those included Lifebuoy and Sunlight these companies into the ground. It is So, broader corporate governance bar soaps. In fact, the man never really not that everything moves faster and that needs to evolve with a sense of urgency had money. He was always reinvesting companies ought to have a shorter life. because climate change and the fate in his business. He built houses for his This development cannot be explained of the planet will not wait. They are workers before he had his enterprise by technological change. Most of these sending us invoices to be met now. The fully running. He introduced pension public companies have disappeared in the business that understands the need for plans in the U.K. and guaranteed jobs last 10, 15, or 20 years. change will be the business that will be for those workers who went to war What’s more, the average tenure of successful. I won’t talk about maximiz- when they came back. Not only that, a CEO has fallen to less than four and a ing shareholder return because this is he paid the wives when the men were half years. No wonder that their incen- a real discussion with a pressing time gone. Unsurprisingly, Lever’s company tives are shorter term and they make frame. We will maximize all stakehold- was among those that sent the largest the most of it when they are there. No ers return if we have more room and can number of volunteers. He believed wonder they cater to the shareholders work for the longer term. If we focus only in something that was called shared who make the most noise, and extract on maximizing shareholder return, and prosperity. as much cash as they can from their the n fi ancial market makes decisions on So creating and running great businesses for short-term advantage. a shorter and shorter-term basis, as many companies is not about maximizing When I was CEO of Unilever, we CEOs will say, then the system is going shareholder wealth. The reality is that got a hostile takeover bid by Kraft- to implode. Bengt rightfully said the many if not most people in this world Heinz that made it very clear to me that system was not designed that way, but will never have an opportunity to become a variety of legal and generally accepted it certainly is behaving that way. If you a shareholder. It is a duty and an obliga- business practices needed to be addressed doubt it, consider that some 95% of the tion for any responsible citizens, in quickly or all humanity would sink in the profits reported by U.S. companies in the whatever function you are, even if you same global boat. We have a system that last 10 years were returned to their share- run a company, to ensure that you have a focuses on the few billionaire investors holders in the form of dividends or stock net positive impact in this world and that rather than the billions of people that you repurchases. Very little was reinvested in you optimize the net return and take care serve and employ. Our system is focused the business. Collectively, the airlines of all your stakeholders. Interestingly, only on creating shareholder value rather have used 95% of their free cash flow to shareholders would be much better off than cultivating the values need to create buy back shares over the last 10 years. than they now are if their companies were value itself. We have a system that aims Now they are desperately asking for help. managed in this way. only for profit rather than creating Companies have failed to invest in The number of U.S. publicly traded purpose-driven systems that produce their future. And we have not invested in companies over the last four decades has profit. These are fundamental issues in our people either. Nor have we created fallen in half, dropping from over 8,000 moral leadership and in the standards a very inclusive economy. COVID has to 4,000. I know there is a new economy needed to run these companies. made it clear that our social network is developing, and that many companies So, our current governance system broken. As citizens, we have a collec- are choosing to stay private. But the does not encourage the right individual tive responsibility to make this work. going or staying private movement is behavior. We do not live in an ideal world excluding a lot of people from value No long-lived company has dedicated and the changes we needed to make to creation. We are depriving a lot of itself just to maximizing shareholder the governance system are formidable. people of good pensions who cannot value. Lord Lever did not found Unile- We need to lengthen the decision-making ver to maximize his own wealth. He invest directly in such companies. time horizon of the financial markets to 66 Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 ROUNDTABLE give us time to address issues like climate capital. But if you pay attention to social the global consumer goods industry to change, poverty, and food security. We and environmental capital as well, then work together to stop deforestation, we need to decarbonize this global economy. I think capitalism is very well placed to will pay the price. If we cannot get the We need to create what I would call a optimize that. global consumer goods forum together regenerative economy. Currently, only When I was born, 85% of the to prevent obesity, the costs to our health 9% of what we produce is reused; the value of a company was explained by care system will go out of proportion. rest is thrown away, incinerated, or ends the current accounting methods. Now Companies need to take responsibility up in the oceans. it is only 18%. Yes, we have moved to of their total footprint in society. And finally there is the huge social a service economy and, yes, there are Corporate Social Responsibility is problem of income inequality. The some other changes, but the effects of the no longer sufficient. “Less bad” cannot system is working for a few but clearly intangible assets that today make up over be the standard. We need partnerships not for many. The people will ultimately 80% of a company’s market value can in between the different stakeholders rebel against the system when too many fact be quantified and measured. We can because we have this gap in governance. people feel that they are not included or measure culture, we can measure value We need to bring together a critical mass benefit from that system. If it were not chain responsibility, we can measure of people to get the change ultimately for COVID, we would have the whole treatment of people. needed. We cannot solve climate change world demonstrating. At present, our companies are collec- with only the 25% of companies that are So, the issue is, first and foremost, tively just not scoring very high on these now moving in the right direction and one of leadership. We have never been measures. The good news is that we are have science-based targets. so forewarned about something that now discovering that companies that Today, to be sure, business has is going to happen that we need to do treat people better, pay more than the another reason to step up to these social something about. We have solutions to minimum wage, have plans to combat challenges. For the first time, the finan - most of the dangers that put the future climate change, and treat suppliers cial market is really waking up to ESG of humankind at stake. We know how better also tend to have more engaged at a level we have never seen before. to produce food without cutting down workforces, greater innovative success, During COVID, more ESG funds were the forest. We know how to produce and higher prot fi ability. The bad news is founded because fund managers saw toilets yet one and a half billion people that such companies and changes are not the demand for them, and not simply still must resort to open defecation. We operating at the scale that we need, so because they were persuaded of the ESG know how to create wealth and could we have to find ways to accelerate such view themselves. also ensure that it is distributed a little change. So, you might say, the free market bit more. So, along with leadership, we must works. But, my response to this is: No, All these things are known. What adjust our performance measurement it has not worked, because the changes we are missing is willpower. Do people systems to include environmental and have come far too late and not at the really care? And do we have the right social capital as well as financial capital. scale and intensity we need. If sharehold- leaders? When we looked recently at the And the third thing we need are die ff rent ers were really responsible, why didn’t top companies in the world, we found forms of partnership to hold governments they demand that companies tackle the that 40% of them have had three or more accountable. Businesses need to work for issues of climate change or ensure that CEOs in the last 10 years. What are the the common good and to understand we had fair representation on our boards boards doing? Who are they selecting? that, by investing in others, they make or in our management? Why didn’t they These are critical questions we need to themselves better off ultimately as well. oppose slave and child labor? answer. We do not have the right leader- Henry Ford understood this very well. This is this higher level of corporate ship at the scale that we need. We need to do the same but on a vastly change that we now need. We must upgrade our corporate governance, The second thing we need to do larger scale. is to start measuring what we treasure. We need companies to work leadership, and moral codes. If we can If you pay attention to only financial together on these areas that relate to also inu fl ence governments in the right capital, people will optimize financial the future of mankind. If we cannot get directions, then we have a wonderful Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 67 ROUNDTABLE world to live in. But if we fail now in problems” and setting the company’s stuck their heads in the sand and lost 50% of their shareholder value in the this, we will be failing humanity. That purpose around their own values. Can we start with you, Bengt? is why it is so important to put purpose last two years while green energy gained at the center of a company’s mission, 50%-60%. There are now Nordic wind the top of its list of priorities. Purpose Holmström: To answer your question, it’s and solar companies with bigger market comes from your values, your beliefs. very important to understand why we left caps than Exxon. Neither shareholders Companies that are driven by stronger stakeholder value in the 1970s and 80s. nor management were persuaded of the purpose, that are anchored in strong We needed to find a way to move capi - importance of climate change. In fact, values and beliefs will be the companies tal from so-called “sunset industries” to oil company management was actively that will succeed in the long run. The “sunrise industries.” In the U.S. this was boycotting the whole debate on climate ones that do not will all disappear in accomplished through takeovers and change. So did airline management. In the graveyard of dinosaurs. And I will stronger financial incentives. As a result, fact, they were negotiating to be excluded stop there. there were massive numbers of mergers from the Paris agreement. and acquisitions and restructurings, and Polman: Bengt is right. How can we Stakeholder Capitalism to a single-minded focus on shareholder exclude some industries and still expect Shareholder Capitalism and Back value. to solve a global problem? It is an unfor- Henry Tricks: Thank you, Paul—and Why are we now seeing a shift back tunate reality that we miss responsible thank you, Bengt. Those were both toward a stakeholder focus? Because management at scale. extraordinary presentations. I thought popular attitudes changed and corporate So this begs the question: how should it was fascinating that Bengt starts by governance changed accordingly. People we intervene with the outliers. The bulk making a very provocative address in today, and I include myself among them, of the investors want good long-term favor of the Coase-Friedman model of see these issues as much more important returns for their pensioners. Rather than shareholder primacy, albeit with stake- than we used to. Paul just spoke of them say “maximize,” I prefer to say we need holder enhancements. And it’s funny to with great eloquence. And we read about to optimize long-term. think that that is now provocative. Not them daily. Social media have enabled For Unilever, it was not prot fi per se long ago, it was the established view but activists like Greta Thunberg to have that was uppermost; it was the long-term it does sound interestingly provocative great impact. She suddenly came on the cumulative growth of the company that these days. Paul, in his remarks, made it scene and a lot changed. counted. That builds the share price. I clear that there is also a failure of govern- But I do not know what most could easily maximize prot fi and kill the ment and that it is up to companies to companies could have done apart from company over a 5- or 10-year period, make purpose central. recognizing the social changes around while being viewed as a hero CEO until Let me ask each of you two related them. Nevertheless, at the same time, the fall. But I would have been doing questions. Bengt, you made it clear I congratulate and admire Paul for neither the company nor society a favor. that the enhanced shareholder value Unilever’s progressivism. Unilever has The financial market in the aggregate idea is now part of the times. We have benefited many people by going in that wants good longer-term returns for their moved from stakeholder to shareholder direction. Paul saw how to invest die ff r - pensioners. But institutions also increas- to now enhanced shareholder or stake- ently but not everybody is capable of ingly understand that their pensioners holder again. Could you explain why following him. If not everyone is of the must be able to live in the world they that movement has happened? Is it same caliber as Paul, we have to provide retire in. because, as Paul suggests, there is this other mechanisms to ensure that we all There are very few CEOs who seek global governance failure that it is up move in the right direction, and not out the right investors or go to the inves- to companies to step up to the plate? have to wait for Greta. There were even tor base and explain what they’re trying And if that is the case, I would like Paul a few industries that were continuously to accomplish. There are about 600 different companies that provide ESG to explain how CEOs could do that denying climate change: the airlines, the car industry, and the fossil fuel industry, without appearing to try to play God, measures but standards differ, there is a implying: “I know the answer to these unsurprisingly. The fossil fuel industry lot of greenwashing and so the system 68 Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 ROUNDTABLE suffers from a lack of clarity. Creating nies convince governments that they’ve recognize when a backlash starts to build, uniform standards across asset owners, got the problem under control because because that can have outsized effects asset managers, and asset creators is an on shareholder value. They need to be they are driven by pro-social purpose that absolute must. And CEOs must also regulators will let them get away with aware of the total impact their company walk the talk themselves. Look at their whatever they want to do? has on people and address the relevant own compensation system and investor issues. So, if Facebook, for example, does relations practices. I stopped quarterly Holmström: There is a risk because the not get involved in privacy issues, or in reporting the day I came in and moved regulatory system is highly imperfect. limiting hate speech, then they’re failing compensation system to the long term Most notably, governments have been to fulfill their duties and responsibilities for everybody. unable or unwilling to put in place effec - to society. Ultimately, public companies We can also work with our boards to tive CO taxes. But I see the main force need society’s approval as well as their be sure they understand their fiduciary for change coming from four groups: shareholders’. And society includes, of duties. In most jurisdictions in the consumers, public opinion, regulators, course, their own employees. In the case world, it is not true that maximizing and institutional investors. I have only of Amazon, Je B ff ezos got interested in, shareholder wealth is the only fiduciary admiration for Paul in recognizing these and started moving on, climate change duty boards have. Much has already failings, but it has always been the case only when 8,000 employees threatened been written about this. Even in the that some CEOs have insights not shared to walk out. That should not have U.K., company code 172c makes it by the broader public or even other been necessary. Jeff Bezos should have clear that firms have responsibilities CEOs. To engage the broader public, we anticipated that reaction from his work to multiple stakeholders. It is now also need robust ESG measures. And with the force. becoming part of European law. help of advances in AI, I think we can see I work with quite a lot of boards that we are on the right track. Holmström: Speaking of Amazon, it’s on a daily basis, and I’ve heard many Nevertheless, I continue to believe interesting to me that the most valuable board members say “I don’t want to get that wealth maximization, the Coasian companies today are those that have involved in ESG. It’s too much risk for mechanism, is fundamental to a success- made a point of ignoring the market and me.” First of all, you have to ask your ful economy. Take the case of a company downplaying reported earnings. Steve board members what they stand for? Are like Amazon. In a sense, Unilever was a Jobs never talked to investors. Larry Page they helping the company or are they template for Amazon given Unilever’s and Sergey Brin focused just on building only protecting their own reputation or focus on the customer and long-term the best search machine. So it is funny risk? If boards find ESG too risky, then orientation under Paul. Amazon has that the CEOs who seemed least atten- you should consider changing them. done fantastically well using much the tive to the financial markets have created Only 7% of the boards have people same approach. Yet, when one looks at the most shareholder wealth. In some there that are climate competent. You Amazon now, we also wonder about the sense, that is also completely consistent would never run your audit committees social impact it has had in terms of, for with what Paul has been telling us about like that. example, the loss of small businesses in Unilever. In quite a number of cases, So, we need to speed change to get rural communities. And this brings to the most socially responsible companies the critical mass to address these issues, mind the question of trade-os ff . I would have also turned out to be the ones most otherwise we will never succeed. And we like to ask Paul how you conveyed to prized by their investors, by our suppos- will then be doing our children a great your board that one particular impact edly shortsighted financial markets. was worth accepting, whereas another disservice, letting them down. impact was not tolerable? How did you Tricks: I’m afraid we are out of time, so we have to call an end to a fantas- Tricks: Bengt, a question on regula- make such trade-os ff ? tion. Isn’t it the role, to a certain extent, tic session. It has been a privilege to be of regulators and governments to be Polman: CEOs and board members part of this panel, and thanks Paul and handling these externalities and social must take responsibility for the entirety Bengt very much indeed for your contri- problems? Is there a risk that if compa- of their business models. And they must butions. Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 69 IESE ECGI CONFERENCE ON CORPORATE PURPOSE SESSION IV: Corporate Purpose, Ownership, and Performance Ernst-Ludwig von Thadden: Good after- sor of Strategy and Innovation at the standard of living goes up. One major noon, I’m Ernst-Ludwig von Thadden, a Questrom School of Business at Boston challenge to study this empirically arises professor of Economics and Finance at University. Caroline is also a leading from “greenwashing,” the propensity of Mannheim University and a fellow of expert on corporate social responsibility some senior managers to see advantage the ECGI, the co-organizer of this event. and is uniquely positioned to comment in conveying the appearance of purpose I am grateful to be asked to chair this on Claudine’s work. without delivering the substance. One most interesting session, whose subject With that, let me turn things over sees a great deal of what Colin described is corporate purpose, ownership, and to Claudine. yesterday as “twaddle.” Before becoming performance. We will discuss some of an academic, I worked in consulting for the issues that Bengt and Paul raised Purpose, Meaningful Work, and 10 years, and about half of that time was earlier, and see what two distinguished Firm Value spent in Silicon Valley. Unfortunately, academics can tell us about these diffi - Claudine Gartenberg: Thank you all nonsense purpose statements are quite cult questions. so much. As Ernst just told you, I’m common in the Valley. I want to start by quoting Karel Claudine Gartenberg, I teach at the Here is a recent example—one that Lannoo, the distinguished leader of the Wharton School, and have done empir- I’m pleased to have called out to my CEPS, the European think tank whose ical research on corporate purpose for MBA students long before it actually formal name is the Center for European nearly ten years. My plan is to review the imploded. If you read WeWork’s Policy Studies. In commenting on the n fi dings of some of that research today. pre-IPO filings about their purpose, it last session featuring Bengt Holmstrom And before I start, let me mention my was what one of my former colleagues and Paul Polman, Karel said: “Most collaborators in this effort. They are at NYU used to call “yoga babble.” academics are still behind and they George Serafeim at Harvard Business The statement proclaimed, “We are a cannot adapt to the new challenges in School, Andrea Prat at Columbia, and community company committed to their paradigms.” What’s more, he goes Shun Yiu, one of my graduate students maximum global impact. Our mission on to say, “markets are radically wrong.” here at Wharton. is to elevate the world’s consciousness.” But my expectation is that this next General interest in the idea of corpo- It’s impossible to know what this stu ff session will provide persuasive evidence rate purpose has increased substantially means, yet virtually every company that scholars in fact have been able to over the last few decades. Since publica- has some form of a public purpose adapt and respond to new paradigms or, tion of the seminal Bartlett and Ghoshal statement. And as I said before, the as Bengt Holmström might have put it, paper in 1994, there has been a dramatic abundance of such cheap and vacuous that markets are quite good at recogniz- increase in the number of published talk makes empirical investigation ing constraints and doing the best they articles on corporate purpose. And difficult. can to operate within them. And let me surveys of millennials consistently show So let us define first what we mean start by telling you a little about our that a sense of purpose remains at the top by purpose. One definition I like is a distinguished participants: of what they look for in the workplace. statement by Rebecca Henderson— We will hear first from Claudine At the same time, other studies have who will speak tomorrow—and Eric Gar t enb er g, who is Professor of reported that the importance of finding van den Steen at HBS. They define it Management at the Wharton School meaning in one’s vocation increases not as “a concrete goal that reaches beyond at the University of Pennsylvania, and a only with one’s age, but also appears profit maximization.” The defini- leading expert on corporate purpose and to have been increasing generally over tion we use in our research is “a set of what it means for concrete issues such time, presumably at least in part as a beliefs about the meaning of a firm’s as employee satisfaction and corporate function of economies achieving greater work beyond quantitative measures of behavior. wealth. Seeking a sense of purpose in financial performance.” The meaning Claudine’s presentation will then be one’s work appears to be a universal of a firm’s work is sufficiently broad to discussed by Caroline Flammer, a profes- tendency, especially as one’s wealth and capture purpose for our intent. Corpo- 70 Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 ROUNDTABLE believe that this session provides persuasive evidence that scholars have been able to respond to new paradigms and, as Bengt Holmström might have put it, that markets are quite good at recognizing constraints and doing the best they can to operate within them . – Ernst-Ludwig von Thadden rate purpose enables a shared sense of So, how do we share this sense of Motivating the fundraisers was meaning around a common endeavor. meaning within companies? What hard because the callers were not paid e Th words “shared” and “meaning” is our shared endeavor? One of my much and suffered frequent rejections are both important here. Victor Frankl, favorite examples involves Legos. A lab from people unhappy about getting a mid-century social scientist and study divided the lab participants into calls during dinner. Turnover among the Holocaust survivor who wrote about two groups to build Bionicle Lego men. callers was high and morale usually low. his experiences, concluded that we are Each group was paid the same piece rate, In designing his study, Grant arranged not motivated primarily by money or the same money. Although the finan - for one group of call center workers material objects, but by a fundamen- cial rewards were identical between the to meet with some of the scholar- tal need for meaning in our lives. That two groups, the researchers treated the ship students who benefited from the meaning may come from family or Bionicle Lego men of the two groups fundraising and ask them about their religion, or from one’s vocations and very differently. They took the Lego studies. Although they met for only work, but meaning is the motive force men of one group and displayed them five minutes, those callers were far of who we are as individuals. in such a way that the results of their more successful over the next month, And this idea has even made its way efforts could be seen easily. But when spending more than twice the time into economics, a putatively value-free the other group constructed a Lego on the phone and raising nearly three discipline, to some degree. As Keynes man, the researchers took it apart and times as much money. Another study of wrote in 1936, “If human nature felt no threw the Lego pieces back into the box. radiologists found that those who met satisfaction (profit apart) in constructing And that simple die ff rence ae ff cted with patients directly produced longer a factory, a railway, a mine or a farm, the productivity of the two groups write-ups and more accurate diagnoses there might not be so much invest- significantly. The group that could see than those who were simply given test ment merely as a function of cold the fruits of their work was 50% more results to work from. calculation.”1 productive despite receiving the same I think most people can see how That qualification “profit apart” financial reward. So, endowing work this works at the individual level. But is quite important. We need a sense with even a modicum of meaning explaining how to make this work at the of meaning in what we do to truly be engages people in greater eo ff rt. company level has proven dic ffi ult. We motivated. Social psychologists and One much-cited study by Adam have had a lot of theoretical discussions marketing academics know this at the Grant published in 2007 studied the and case studies, but not made much individual level. And there have been a productivity of university fundraisers empirical progress. multitude of lab studies on the impor- at a call center who were cold calling There are at least three important tance of meaning, some of them by my potential donors to the university.2 reasons for this. The first is that purpose Wharton colleague Adam Grant. is a highly intangible idea. The second 2 Adam Grant, Elizabeth M. Campbell, Grace Chen, is the difficulty of measurement, and Keenan Cottone, David Lapedis, Karen Lee (2007), “Im- 1 John Maynard Keynes, The General Theory of Em- pact and the Art of Motivation Maintenance: The Effects ployment, Interest and Money, Palgrave Macmillan, of Contact with Beneficiaries on Persistence Behavior,” es, 103: 53-67. 1936. Organizational Behavior and Human Decision Process- Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 71 ROUNDTABLE ur studies suggest that having employees with a strong sense of purpose is correlated with higher long-term perfor- mance. And companies with more committed owners appear to have a stronger or clearer sense of purpose and to make different choices about governance, performance measures, and time horizon. – Claudine Gartenberg the third is what we academics call employees was based on the premise through in our study, appears to be “identification”—that is, disentangling that it is employees’ collective attitudes causal. Companies in the top decile in purpose from all the other aspects of the that determine how credible purpose is purpose clarity have an operating return company. These are large, thorny empir - at the firm level. on assets that is 4% per annum higher ical issues. We have made some progress So what did we find? The first thing than companies in the bottom decile. on the measurement side. We know our is that employees’ sense of purpose And the top quintile in terms of clarity metrics are not perfect, but we use what declines with rank in the organization. is also associated with about a 7% alpha we call a “preponderance of evidence” The second thing we find is that there annual stock return; that is, the compa- approach to try to disentangle purpose are two primary kinds of purpose in nies outperform the broad market by from the other aspects. organizations. We call the first high- 7%. That 7% is quite remarkable. In a recent study,3 George Serafeim, purpose-camaraderie. In this version, By way of comparison, Alex Andrea Prat, and I asked the question: employees find meaning in their work Edmans reported finding in a 2011 what do we know, and what more can and feel the organization is somewhat study that the Fortune Best Companies we learn, about the link of purpose like a family. The second type we call Top 100 list that is derived from the and performance in large commercial purpose clarity. We infer clarity from overall GPTW data earns a 4% annual - enterprises? Our measure of purpose employees’ responses to questions that ized stock return. It is also of the same was intended to reflect the meaning that had the word clear in them. This classi- magnitude of other studies of intangible employees find in their job. We used a fication came straight out of the data; we drivers of firm success, such as the 4.6% variety of survey questions to measure did not impose this name on the data. for high R&D capital reported by Lev the strength of purpose. We have data In such cases, employees say they find and Sougiannis in 1996, the 6.1% for from about half a million employees for a high sense of meaning in their work, r fi ms in the top quintile of R&D flows this first study, which looked at some have a clear view of what they need to reported by Chan, Lakonishok, and 500 public U.S. companies. do to be successful, and believe that Sougiannis in 2001, and the 8.5% for Companies that we deemed success- management has a clear view as well. firms with strong governance reported ful in propagating corporate purpose What we find, then, is that purpose by Gompers, Ishii, and Metrick in a were those whose workforces said they per se has no relation to performance. 2003 study. n fi d a strong sense of meaning in their If anything, the correlation is negative Another major finding of our study work. This was our way to separate those as it relates to performance. We also is that the connection between purpose companies with real purpose from those n fi d high-purpose-camaraderie to have and performance is driven entirely by with vacuous statements. Our focus on zero correlation with performance. the middle ranks of the company. If But clarity of purpose turns out to be it is only senior executives who feel highly predictive of performance in a a sense of purpose, the relationship 3 Claudine Gartenberg, Andrea Prat, and George Serafeim, “Corporate Purpose and Financial Perfor- way that, after all the tests that we go between purpose and performance is mance,” Organization Science, 30(1), pp.1-18, 2019. 72 Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 ROUNDTABLE zero to weakly negative. If only hourly holding periods of their institutional weak sense of purpose, or whether it was investors, which for U.S. investors employees feel a sense of purpose, there the lack of purpose that was attracting today averages around nine months. is no correlation with performance. shorter-term owners. And it appears to But when the middle ranks of employ- After classifying our sample companies’ us that a bit of both is going on, and that ees feel a high sense of purpose clarity, institutional shareholders into two the causality thus runs in a circle. There those companies outperform. In sum, groups—“dedicated holders,” those appears to be both a “sorting” or self- there is no connection between stated with highly concentrated portfolios selection effect—that is, the tendency of purpose and performance unless that and holding periods of at least two years, investors or their agents, the managers, purpose is clear and credible, and unless and “transients,” those holding lots of to choose certain kinds of ownership or it is found to be so by the middle ranks stocks for average periods of less than governance structures--and a treatment of the organization. six months—we then subtracted the effect, which are the consequences, or What accounts for differences in number of transients from the number causal ee ff cts of such choices. purpose across companies? To answer of dedicated shareholders to arrive at a In sum, purpose appears to comple- this question, we undertook another measure of long-term ownership. Using ment and contribute to or reinforce survey with a dramatically expanded this measure, we then found that our performance in the sense that having sample of 1.5 million employees at over measure of long-term ownership was employees with a strong sense of 1,000 companies over a longer time positively correlated with corporate purpose is correlated with higher long- period. We found significant differ- purpose. term performance. And companies with ences between publicly traded firms, We also found that companies more committed owners appear to have private firms, and other private compa- controlled by “less committed” inves- a stronger or clearer sense of purpose nies owned by private equity. We found tors—a group that often includes hedge and to make different choices about employee’s views of corporate purpose funds and activist investors—are also things like governance, performance to be weaker in public than in private more likely to choose outsider CEOs measures, and time horizon. companies, and that this die ff rence was and CEOs with finance backgrounds. But that said, there does seem to be a most pronounced within the salaried Such companies also do more corporate paradox between activist and hedge fund middle and hourly ranks, as opposed restructuring, particularly more mergers investors wanting prot fi s but apparently to senior executives. Purpose was also and acquisitions, and have larger pay making decisions that appear to weaken lower in PE-owned firms than among gaps between the CEO and the average the sense of corporate purpose among other kinds of private firms. Among employee. employees. Although we cannot prove public companies, we found the sense of But all these findings raise the it den fi itively from our study, we think purpose to be weaker in companies with question of causality: do hedge funds it has something to do with a charac- high hedge fund ownership, but higher and activist investors weaken corporate teristic Bengt Holmström explored in for companies with disproportionately purpose, or are hedge fund activists his Nobel Prize-winning work—namely, large shares of long-term investors. attracted to low-purpose firms because “observability.” Outside active investors In sum, greater ownership commit- they see opportunities for significant with an average holding period of, let’s ment appears to be associated with improvement? My husband works say, nine months get involved with a a stronger sense of purpose among for a hedge fund, and he will tell you company and engage in highly visible employees. In public companies, the that they look for companies that are actions. They may kick out the CEO, sense of purpose tends to weaken as one underperforming, and where there is force some restructuring actions, and moves down the organizational hierar- considerable room to increase efficiency change the compensation structure. chy—but this is not the case in private and value. And I’m inclined to agree What is not observable by outsiders, r fi ms, where middle- and lower-ranked with that. however, are the effects of such visible employees profess a notably stronger My co-authors and I went to great changes on the sense of purpose in the sense of purpose. lengths to try to g fi ure out whether less middle ranks of the employees. We Our measure of ownership commit- committed investors were somehow have proprietary survey data on this but ment in public companies was the causing—or at least contributing to—a Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 73 ROUNDTABLE investors do not. So observability may looks at the identic fi ation problem that authors used the survey conducted by makes this research so challenging. the Great Places to Work Institute, have an eec ff t on purpose. The larger question posed by this Let me start with the two elephants. which has been used by other research- conference is: “Can purpose deliver The first elephant in the room is about ers to examine corporate culture4 and better corporate governance?” Our the meaning of “purpose.” As Claudine employee satisfaction.5 In their 2019 findings suggest that there may be a pointed out, it is very hard to capture study, Claudine and her co-authors substantial role for institutional inves- purpose. What does corporate purpose George Serafeim and Andrea Prat tors in reinforcing purpose. Long-term really mean? measure corporate purpose by focusing ownership is related to a strong sense To their credit, the authors are very on four specic fi questions. of purpose among employees. Share- clear in den fi ing purpose as “a concrete 1. Does your work have special holder concentrations have gone up as goal or objective that reaches beyond meaning? Is it more than just a job? has private equity ownership. SPACS, profit maximization.” And they also 2. Do you feel good about how you special purpose acquisition compa- make clear that such a purpose need not and your employer contribute to the nies, are now taking private companies be explicitly pro-social. So, this defini - community? public, but it is unclear how the priori- tion hypothetically includes weapon 3. Do you feel a sense of pride when ties of the new shareholders die ff r from manufacturers that aim to produce you look at what you accomplish? those of the older ones. I think there the most effective deadly weapon, and 4. Are you proud to tell others that may be an important role for institu- cigarette companies that aim to produce you work here? tional investors in encouraging credibly the best smoking experience possible, or It is important to note that these implemented purpose. perhaps the most addictive cigarette. four questions relate to employees’ So, I will stop there and turn things Now, I doubt this is what the perceptions about the meaningfulness over to Caroline. authors believe corporate purpose to of work, regardless of the purpose or be, nor is it what most people think mission of the company. Purpose-Driven Employees, when they hear corporate purpose. In their follow-up study, Claudine Meaningful Work, and Corporate I believe what the authors aim to say and her co-author George Serafeim use Performance is that corporate purpose relates to a a slightly different measure for corpo - Caroline Flammer: Thank you so much company’s mission, and its contribution rate purpose—one that added two more to the organizers for this fantastic to society and the natural environment questions to the original four and that conference. And thank you Claudine for that goes beyond profit maximization. relate to management clarity. your accounts of two fascinating studies. This is often called “corporate social One specific suggestion I would I find much to like about Claudine’s responsibility.” offer to the authors is to better align studies. They are both very interesting But this raises the question: how their theoretical construct with what and multi-disciplinary. They offer a does corporate purpose really differ they actually measure —namely, richness of insights about employees’ from other familiar concepts such as “employee work meaningfulness and perception of the meaningfulness of corporate mission or social responsibil- management clarity.” Also, I think the their work, and, perhaps most impor- ity or ESG? How, for example, should authors should be more consistent when tantly, they offer relevant implications a board of directors think about a measuring this construct across all their for practice. I encourage managers, firm’s purpose? Is it a substitute for or studies. Because it is so hard to capture boards of directors, and investors to a complement to the firm’s mission and corporate purpose—and employee pay attention to these intangible factors. its CSR? So, I suggest the authors try work meaningfulness and management to be more precise and explicit about In my discussion I will focus on four 4 Luigi Guiso, Paola Sapienza and Luigi Zingales, what corporate purpose means and main comments. The first I refer to as “The Value of Corporate Culture,” Journal of Financial doesn’t mean, and how it differs from “The Two Elephants in the Room and Economics 117(1): 60-76, 2015. 5 Alex Edmans, “Does the Stock Market Fully Value the Big Picture.” The second is about other well-known concepts. Intangibles? Employee Satisfaction and Equity Prices?” the underlying channels. The third is on The second elephant in the room Journal of Financial Economics, 101(3): 621-640, is the measurement of purpose. The investor influence. The fourth and last 2011. 74 Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 ROUNDTABLE he existing literature suggests that “voice” is likely to be more effective in triggering positive changes in corporate behavior than “exit.” It would be interesting to understand exactly how investors inu fl ence their portfolio companies in a way that affects employees’ perception of their work meaningfulness. – Caroline Flammer clarity—in a metric, it is important to efficiency and value, we may want to Another question raised by these be as clear as possible about what you investigate whether these factors might findings—and this is my third obser - are measuring and use the same measure be more valuable and cheaper than vation—is how and to what extent across studies. the other mechanisms. I think there do investors influence their portfolio Now, let me bring these two is a lot of unexplored potential here, companies? We know they can do so elephants into the bigger picture. On and I encourage the authors to discuss passively through ESG screening or one end, we have corporate purpose and the bigger picture that we gain from integration and, more actively, through mission at the firm level. On the other, the insights of the collective body of shareholder engagement and proxy we have employee work meaningful- research and its importance for practice. voting. The existing literature suggests ness and employee satisfaction6 at the Let me now turn to my second that “voice” is likely to be more effec- individual level. And in the middle, we comment pertaining to the underlying tive in triggering positive changes in have something called corporate culture7 channels. In their 2020 study, Claudine corporate behavior than “exit.” It would and management clarity. What I find and George Serafeim examined how be interesting to understand exactly striking, and reassuring, about all these different types of ownership relate to how investors influence their portfo - studies is that they tell a very coherent employee work meaningfulness and lio companies in a way that affects story. Corporate culture, meaningful management clarity. They found that employees’ perception of their work employee work, and employee satisfac- work meaningfulness and management meaningfulness. tion all appear to be positively associated clarity is stronger in private firms than Last but not least, let me say with financial performance. in public firms; and, intriguingly, this something about the empirical analy- e Th findings of this overall body of difference was more pronounced for sis. Claudine has already mentioned literature has some important impli- lower- level employees. the endogeneity concerns that arise cations. First, corporate culture and This raises several questions. First, when comparing, for example, public employee work meaningfulness and what is the underlying mechanism and private firms. The authors used a satisfaction are valuable, and managers between ownership and employee matching technique to overcome this and investors can benefit from paying attitudes? How does the ownership challenge. Because most private firms attention to them. Second, to the extent structure influence employees’ percep - are much smaller than public firms, they that these intangible factors add to the tion of their work meaningfulness? sought to match private and public firms broader bundle of governance mecha- Second, why are lower-level employees of similar size. But however sensible, nisms that help companies increase such as technicians or janitors more that approach is tricky because private responsive? Third, to what extent are firms are typically much smaller than 6 Alex Edmans, “Does the Stock Market Fully Value such employees aware of the firm’s public firms. For example, it may be that Intangibles? Employee Satisfaction and Equity Prices?” ownership structure and higher-level unusually large private firms are so well Journal of Financial Economics, 101(3): 621-640, 2011. policies? These are questions worth run and successful that they can afford 7 Luigi Guiso, Paola Sapienza and Luigi Zingales, exploring, perhaps by interviewing to remain private despite their large “The Value of Corporate Culture,” Journal of Financial employees at die ff rent levels. size; and to the extent that it is the case, Economics 117(1): 60-76, 2015. Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 75 ROUNDTABLE the matching could produce mislead- importance, what the company was all We were able to strip out employee ing results. To address this endogeneity about, and what the long-term goal was. engagement from aggregate meaning- problem, the authors could use a quasi- fulness across the firm by using an natural experiment that compares firms Von Thadden: I have two questions exploratory factor analysis that enabled that IPO’d successfully with those that from the audience: What role does us to “orthogonalize” the vectors that filed for IPO but had to withdraw for the concept of “shared values” play in fall out of this survey. In layman’s “quasi-exogenous” reasons and, as a the corporate governance debate? And terms, this means that overall happi- result, remained private.8 how would a company create a mean- ness is stripped out of our analysis. To conclude, overall, I think these ingful KPI system to increase employee We have not just been measuring are very interesting studies. This is engagement in corporate performance? happiness or satisfaction, but more multi-disciplinary work that bridges specifically the sense of meaning that academic silos. They offer a richness Gartenberg: We are fairly agnostic employees feel about the way their jobs of insights about employees’ percep- about shared values. The line between contribute to society or, at least, to the tion of the meaningfulness of the work academic research and advocacy is not stated mission of the company. and oe ff r important implications for all clear; what might be socially beneficial parties, including managers, boards of to me might not be so to you. Employ- Flammer: I totally agree with Clau- directors, and investors. ees of Smith and Wesson might feel they dine. I think the authors circumvented a Th nk you. are defending freedom and the Second the question about shared value versus Amendment but that might not feel corporate purpose elegantly. The Gartenberg: I agree that the mechanisms very pro-social to me. But if the employ- beauty of these studies is they have should be studied. In a longer version ees feel meaning in their work, then that real data about employee work mean- of our second paper, we present case qualie fi s as purpose in our work. So, in ingfulness. studies that show owners’ different pref - that sense, our findings are somewhat The question about meaning- erences when running companies. For agnostic about values. ful KPIs is good. I would like to find example, after Bain Capital took Toys- There is, however, one empirical indicators related to the concerns Paul R-Us private, they changed practices at result that is less agnostic. That is the Polman mentioned earlier. How can the store level in terms of shifts, perfor- relationship between CEO pay and we engage not just managers, but also mance metrics, the work structure, and average employee pay. There is very lower-level employees, in longer-term the messages they gave to employees strong evidence that the more the CEO thinking and more sustainable business and people outside the company. We is paid relative to the most common practices? Can we find ways to link also studied a performing arts company salaried role, the weaker the sense of executive compensation to social and I cannot name but that would be famil- purpose, especially, again, among mid- environmental performance criteria and iar to almost everyone watching this and lower-level employees. longer-term performance outcomes? webinar. It was bought as a vanity proj- With respect to meaningful KPIs, When you think about new KPIs, you ect by a very prominent hedge fund I would say that we need to look at must focus upon KPIs that capture owner. But as soon as the company more data. As Caroline mentioned, these longer-term values. I have done was bought, its message changed from one weakness of our study is that we research on precisely these questions.9 “we are involved in the fine arts,” to measure aggregate meaningfulness as “we’re an awesome real estate play.” purpose. That is also an unavoidable consequence of the data desert we That completely changed the messages 9 Caroline Flammer, Bryan Hong, Dylan Minor, sent down to the employees about their found ourselves in. We do not have great “Corporate Governance and the Rise of Integrating Corpo- rate Social Responsibility Criteria in Executive Compensa- measures of purpose. So the more data tion: Effectiveness and Implications for Firm Outcomes,” that is produced and publicly available, Strategic Management Journal, 40(7): 1097-1122, the better o w ff e will be. 2019; Caroline Flammer and Pratima Bansal, “Does a 8 See Shai Bernstein, “Does Going Public Affect Long-term Orientation Create Value? Evidence from a Re- I will say, though, that our data is Innovation?” Journal of Finance, Volume 70, Issue 4, gression Discontinuity,” Strategic Management Journal, pp. 1365-1403, August 2015. predictive of a lot of different things. 38(9): 1827–1847, 2017. 76 Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 ROUNDTABLE Gartenberg: Let me comment on rela- added to the German DAX, an index and forced Google, Amazon, and I think tional contracts. A relational contract is of the top 30 German publicly listed to some degree Microsoft to withdraw a kind of “repeat game” type of contract firms. People loved to work there, and from some of their defense work on that is meant to encourage long-term its corporate atmosphere and corporate facial recognition technology for border thinking and avoid opportunistic culture was much admired. control. behavior. And your contracting prob- Unfortunately, this firm turns Another company called Palantir lems are the greatest among middle out to have been a complete fraud. Its picked up that technology. Interest- managers. It is easier to handle CEO business model was built on decep- ingly, Palantir is also a purpose-driven compensation by linking it to stock tion and accounting misstatements. So, company. It is just a different purpose returns and other corporate metrics. although Wirecard seemed to have a lot from most of the rest of Silicon Valley. At the factory floor level, you can use of purpose in terms of employee identi- Different companies will aggregate piece rates or link to whatever metrics fication with management goals and different social preferences. I think you have. It is in your middle profes- employee satisfaction, the firm turned information disclosure and voice are sional ranks where you have the largest out to be a complete fraud. two important mechanisms for allowing contracting problems and, arguably, And this begs the question: how do group preferences to coalesce. The alter - where a lot of the intangible value we distinguish good corporate purposes native would seem to be some central comes from. So, our paper may allow from bad ones? How do we decide what arbiter who would decide what social purpose to be used as a solution to the purpose actually is? Nothing in our purpose should be and that makes me a contracting problem inside of firms. empirical research seems to answer that. little bit uncomfortable. Von Thadden: In the last few months Gartenberg: In my MBA class we talk Von Thadden: I will now draw this one of the most fashionable companies about Google and the tech walkouts in session to a close. Thank you, Caroline in Germany collapsed in a very ugly Silicon Valley last year over collabora- and Claudine, for such an interesting way. Wirecard provided digital payment tion with government on defense work. discussion, one that ties nicely back to services. It grew very quickly and was Employees decided to exert their voice Bengt’s and Paul’s. Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 77 IESE ECGI CONFERENCE ON CORPORATE PURPOSE SESSION V: Unpacking the Purpose of the Corporation Marco Becht: Good afternoon, I’m ing, at least in part, the higher perceived of Law and Economics. Jill is a prolific Marco Becht, Professor of Finance at risk associated with media scrutiny and contributor to the “purpose literature” Université libre de Bruxelles, and Exec- political and regulatory reaction. So, and is also a board member of the ECGI. utive Director of the ECGI. For those that’s the negative externality. On the of you just joining us, let me briefly positive side, Claudine Gartenberg Jill Fisch: Thanks, Marco, and let me summarize our proceedings thus far. presents the findings of her work with also start by thanking the ECGI and In our first session on corporate George Serafeim and other colleagues other conference organizers for includ- purpose two days ago, Colin Mayer and showing that companies with “clarity ing me in this special program. Luigi Zingales made the case for rethink- of purpose,” especially in their middle Our featured speaker today is ing, and modifying, the Friedman-Coase ranks, outperform their less purpose- Rebecca Henderson, who is the John view of maximizing long-run share- driven counterparts. and Natty McArthur University Profes- holder value. But in yesterday’s session, But up to this point, we have not sor at Harvard Business School and an Nobel laureate Bengt Hölmstrom heard much about the financial services expert on innovation and organizational disagreed forcefully, arguing that today industry. Banks and financial markets change. Rebecca’s research explores the we are still very much experiencing the have of course played critical roles in the major role the private sector can play in social benefits of the efficiency that progress of capitalism. Without banks building a more sustainable economy. comes from the Coase system, and that to move capital from England in the In a pair of recent books that call for wholesale changes in capitalism at this 19th century, railways could not have a “reimagining” of capitalism, she point are unwarranted. Paul Polman, been built in America. And without pays special attention to the challenge the former CEO of Unilever, then financial markets, we would not have of climate change and the role of the responded by disagreeing with Bengt, the instant transmission of information private sector in dealing with it. noting that much needs to evolve. across the globe. Rebecca’s presentation will be Along with undeniable increases in At the same time, of course, we followed by comments from Jordi global wealth and living standards, the also know that financial services, and Gual, who is Chairman of CaixaBank, last 40 years of economic gains have also banks in particular, have contributed to a large Spanish bank with a highly inflicted more damage on the environ - problems. The financier J.P. Morgan did unusual ownership structure and corpo- ment than the entire history of mankind move capital from England to America, rate mission, as well as a Professor of and, in this sense, we are now borrowing but he also facilitated the horizontal Economics at IESE Business School. from future generations. merger of companies into gigantic trusts Previously, Jordi was CaixaBank’s execu- Consistent with Bengt’s endorse- that were then broken up by Antitrust tive director of strategic planning and ment of market-based capitalism, two action. And banks played a similar role chief economist, and he has written a of our speakers have also presented in finanzkapital in Germany, creating number of excellent books on banking suggestive evidence that investors cartels at the expense of consumers. and other subjects. recognize “externalities”—positive as Financial crises seem to recur with Welcome Rebecca, welcome Jordi. well as negative—when valuing compa- almost predictable regularity; but the Rebecca, the floor is yours. nies. Patrick Bolton, for example, by most recent one, in 2008-2009, had a showing that high-carbon emitting shattering effect on public confidence Reimagining Capitalism companies earn higher returns over long in capitalism and financial institutions. Rebecca Henderson: Thanks, Jill, and periods of time, demonstrates that such Our next panel will touch on some thanks to the ECGI for a fantastic companies have a higher cost of capital, of these questions, and I will now turn conference. I am very excited to be here. or what amounts to the same thing, things over to the moderator of this I want to start by talking about why a lower multiple and overall value for session, Jill Fisch. Jill is Professor of Law purpose might matter. Several previ- the same earnings stream. This return at the University of Pennsylvania Law ous speakers have discussed whether premium can in turn be seen as ree fl ct - School, where she heads the Institute a strong sense of purpose can really 78 Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 ROUNDTABLE drive firm performance, and whether I suggest that there are three major the push toward a cleaner environment firms will evolve successfully without reasons for this discontent. First, we are and increase human welfare, such prices outside action. I want to persuade you seeing massive environmental degrada- must reflect all real costs. Electric power of two things. First, we need systemic tion and singularly failing to address it. is of course valuable, but the burning of change to reimagine and save capital- California remains literally on fire. I am coal to generate ten dollars of electric ism. Second, purpose-driven firms can sure you remember the fires in Australia power also causes, on average, at least play an important catalytic role in this last year. This summer Bangladesh was eight dollars of unpriced harm to human transformation. 30% underwater with a third of its land health because burning coal emits toxins As Jill was kind enough to mention, area covered by the sea. We are already like mercury, lead, and particulates. My I have recently published a pair of books seeing massive floods, accelerating fires, colleagues at Harvard’s School of Public on this topic, and the most recent one is and the possible collapse of agricultural Health say that burning coal results in called Reimagining Capitalism in a World systems in more vulnerable places like U.S. healthcare costs equivalent to five on Fire. It is not an academic treatise, Africa. We have huge environmental or six percent of the GDP a year. But it is a work of rhetoric that makes the problems and accelerating inequality. these costs are currently “negative exter- case for transforming capitalism; it So, yes, capitalism is a fantastic nalities” that are not priced into what says that this process of transforma- wealth generator. A billion people consumers pay for electricity. As a conse- tion is already underway, and that the have been brought out of poverty in quence, the usual welfare theorems do purpose-driven firms are central to what China. But in much of the developed not apply and many prot fi s are coming we see happening. It is full of fun stories world, growth in wealth and income at the expense of massive social and but also deeply rooted in the work of has been concentrated at the top of the health damage. We need our govern- hundreds of researchers. I draw on the social pyramid. Indeed, social mobil- ment to price such externalities. latest research to make my case. ity in the U.S. has fallen consistently This is not a radical idea. It has long Why is system-wide change needed? over the last 20 years. The average been supported by most economists, As Paul and Bengt reminded us, capital- U.S. adult cannot expect their children and even social thinkers as libertar- ism has been tremendously successful. I to do better than they are doing now. ian as Friedrich Hayek. We need free routinely open discussions of my book We have huge social and environmental politics to balance free markets and by saying that free markets are one of the issues. This creates social unrest and a strong civil society to sustain both. great inventions of the human race, an disquiet, leading directly to declining Having the rule of law, a free press, unparalleled source of innovation and trust in elites and institutions. respect for minority rights, and a voice prosperity. I say this because so many of Business school professors or for employees all sounds conventional, the groups I speak to ask: “Why should business people often say to me: “But but they are all critically important and we reimagine capitalism? Why don’t we wait Rebecca. These are public goods should be central concerns for business. just throw it out?” problems. They should be fixed by Business people tend to think, “OK, And these are not people on the government.” And, indeed, these are no problem. Why do we need to worry fringes, by the way. massive collective action problems that about purpose and other stu? ff As long In February 2020, when we asked may only be fully addressed by strength- as the government prices in externali- the first-year class of Harvard Business ening our institutions. Prosperous free ties, we can just put our heads down and School if capitalism was broken, fully societies rest on three foundations. The maximize prot fi s.” half said yes. Most people under 30 in first is free markets. Free markets are Why we do we need business the U.S. now claim to prefer socialism at the heart of freedom and prosperity, to act, to help address these social to capitalism. Perhaps, they mean only but to remain free and fair, they need problems? The short answer is, because that they want decent health care, but effective supervision by democratically our governmental institutions are not that result is not a good sign for those elected, transparently accountable, and performing very well and because in of us who are fans of capitalism. What capable governments. the short term, business is better placed is going on? Why do we need systemic Climate change illustrates this to deal with many of these problems. change? clearly. For market prices to encourage Collectively, business enterprises have Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 79 ROUNDTABLE hy we do we need business to act, to help address these social problems? The short answer is, because our govern- mental institutions are not performing very well and because in the short term, business is better placed to deal with many of these prob- lems. Collectively, business enterprises have a deep economic interest in solving problems like climate change, racial exclusion, and inequality. – Rebecca Henderson a deep economic interest in solving social problems. Purpose-driven compa- people, significantly reducing environ - problems like climate change, racial nies have a central role to play. I den fi e mental impact and effecting change in exclusion, and inequality. e e Th vidence purpose-driven companies as those that their industries. And at HBS we have suggests that economic growth is stron- are authentically committed to a goal put together more than 300 cases featur- ger and more sustainable in societies beyond profit maximization even as they ing companies pursuing these kinds of with strong, democratically account- still generate adequate returns for their opportunities. able governments that provide the investors. I believe that you can have a Once one company shows that institutional guardrails that enable goal beyond profit maximization and there is money to be made, many prot fi maximization to work its magic. do very well financially. We all have to others follow. Elon Musk’s focus on Business thus has strong incentives to breathe to live, but breathing is not the electric vehicles has certainly acceler- strengthen our institutions. point of life. For purpose-driven firms ated the transformation of the world’s My mother was an entrepreneur, making money and creating long-run automotive industry by probably five and I myself have 25 years of cumula - value for their investors are essential, or six years. Individual firms can have tive experience on major corporate but they are means to an end, not the real impact in industries that are in boards. And I remain convinced that goal of the firm. the middle of transformation such as economic growth is the only way to solve Purpose-driven firms are ideally electric power, electric distribution, the social problems we face. We need poised to exploit what my colleagues transportation, agriculture, construc- massive innovation and millions of new Michael Porter and Mark Kramer have tion, infrastructure, and food, as distinct jobs. Capitalism is the only thing that is called the “shared value opportunity.” from agriculture. going to get the job done. But even if the That is, to solve big problems and make But why then is purpose necessary? economic rewards are evident, we still money at the same time. We are now If there is money to be made, won’t have a huge collective action problem to seeing enterprises at billion-dollar scale everyone be doing it? Many people overcome. People and companies have to embracing solutions to large social believe that capitalism will just do it as be persuaded to make voluntary contri- problems and making money while long as there is a financial reward. But I butions to the outcome—investments they do so. disagree. I was Eastman Kodak Profes- of time, energy, and, in some cases, Walmart is one of my favorite sor of Management at MIT for more capital for which the payoffs are neither examples. They added a billion dollars than 20 years. Although completely immediate nor certain. to their bottom line by reconfiguring coincidental, the association with So, faced with this enormous their trucking fleet to reduce fuel use Kodak was also deeply ironic because collective action problem, how do we and greenhouse gas emissions signifi - I spent the first 20 years of my career get where we need to go? We cannot cantly. Changes made by Walmart have studying firms like Kodak, General simply click our fingers to solve big transformed the lives of millions of Motors, and Nokia that recognized the 80 Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 ROUNDTABLE world was changing, but were unable ments that may not pay off right away. many historical examples of voluntary to respond effectively. To be authentically purpose-driven, you collective action working to overcome As a result, I am one of the world’s must at least occasionally value purpose “the Tragedy of The Commons.” 1 We experts on the difficulty of transforming over prot fi . My position is that compa- know that there have been times when large organizations. When faced with nies can be purpose-driven and thrive in voluntary self-regulation has proved shrinking markets, the large established competitive markets—and in so doing, immensely successful in solving the companies—we call them the “incum- they are also much more likely to be collective action problem. That is the bents”—often go through almost innovative and creative. good news. The bad news, however, is psychological stages of decline, starting Some of my research has focused on that the examples have been so few and with denial. Then people acknowledge the critical role of trust. For example, in far between. So, while we know it can be that change is happening, but say that work with Professor Robert Gibbons at done, we also know it is quite dic ffi ult. they cannot find ways to respond that MIT on what economists call relational It is particularly hard to sustain volun- will allow them to make money. And contracts and everyone else calls trust, tary self-regulation at a global level. then, even as change does create profit we found that organizational perfor- So what can be done? We need a opportunities, the incumbents say they mance can be significantly improved focus on the long term and make a strong are too busy to pursue them. if firms build relational contracts with economic case for cooperating, but we During over 20 years of research, their employees. also need to find ways to monitor others’ when I examined those firms that had People understand that individual behavior and to sanction those who managed to respond and outperform, I companies can be innovative, but we “cheat.” Interestingly, there is increas- found that they were purpose-driven. By need broad-based systemic change ing evidence that if you include people performance, I do not just mean financial because action by individual firms will with an “irrational” commitment to performance. I mean innovation, creativ- not be enough. Most firms can reduce doing the right thing in the mix—that ity, and productivity. In every industry their carbon emissions by 30% to 40% in is, begin with pro-social players—it is a we have looked at, we have found that ways that are NPV-positive, but further lot easier to build cooperation. Purpose- the 10% most productive firms are, on gains are very hard to achieve unless driven firms will be critical to launching average, more than twice as productive you are in Texas and have cheap wind and sustaining these kinds of coopera- as the lowest decile of firms. We cannot power right outside your window. In tive efforts. But you must also be able explain all the differences among firms industry after industry, we see compa- to sanction those that fail to live up to within the same industry, but it is very nies saying, “We would all benefit if we their commitments. Otherwise, some clear that very high-performing firms addressed these massive social problems will defect and cooperation will fall apart. have different management practices. collectively.” For example, Paul Polman’s Who outside government could They have much higher levels of commu - Unilever committed to buying only impose sanctions? Investors could and nication, much more decentralized sustainable palm oil, but then discov- would be motivated to do so for at least power, and much higher levels of trust. ered it was 20 times more expensive than two reasons. First, because focusing All of which is to say that manage- the old kind and no one was willing to on these big problems has the poten- ment really does matter. Purpose pay for it. But they still had a brand to tial to create a road map to growth produces qualities associated with higher protect and needed to secure supply for and employee engagement, ESG may organizational performance—alignment the long term. So, they persuaded buyers provide a road to alpha. Second, because of performance measures and incentives, of more than 70% of the world’s publicly very large investors are too large to intrinsic motivation, and high levels of traded palm oil to commit to buying only trust. Over the last two days, we have sustainably grown oil. 1 See, for example, Elinor Ostrom, Governing the Commons: The Evolution of Institutions for Collective heard several presentations suggesting The good news, then, is that the Action, Cambridge, UK: Cambridge University Press, collective action problem, or “the that sometimes purpose leads to higher 1990 ISBN 978-0-521-40599-7; and Elinor Ostrom, prisoner’s dilemma” as it’s sometimes Larry Schroeder, and Susan Wynne, Institutional levels of financial performance, but incentives and sustainable development: infrastructure called, can be solved. The economic sometimes it does not because pursuing policies in perspective, Boulder: Westview Press, 1993. historian Elinor Ostrom has shown 978-0-8133-1619-2. purpose is expensive and requires invest- ISBN Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 81 ROUNDTABLE diversify away major systemic risks like lobbying hard for the reversal of court ism,” particularly negative externalities climate change and political instability, rulings like Citizens United, which has and very skewed income distributions. the very largest investors may have a flooded the American political system She is worried, as we all should, that the suc ffi iently powerful economic incentive with money and is bringing the entire harmful ee ff cts of capitalism may under - to solve the collective action problem— system into disrepute. I provide three mine the political legitimacy of the free and because there are not that many of major historical examples of business- market system, which on its own has them, they may be able to reach agree- government collective action in my done so much to raise global standards ment and cooperate. book: Denmark in the 19th century, of living. How might that work? Purpose- Germany in the 1940s, and Mauritius I will focus on her two central driven investors could give us a whole in the 1960s. In each of these three points. The first is that companies have range of new ESG performance metrics. cases, representatives of the private a moral duty to mitigate these harmful Billions of dollars now flow into ESG sector, faced with the collapse of the effects. The second point is that this is funds. This change will not happen society, sat down with government and not only a moral obligation, but it is also overnight. It took 50 years to build with representatives of labor to rebuild in their own long-run economic inter- modern financial accounting, and we will the society’s institutions. est. The idea is sometimes expressed as need at least five or ten years to find ways o Th se of us who are academics and “doing well by doing good.” And let me to link purpose to financial and operat - researchers can contribute to this in elaborate a bit on this. ing performance measures. But change many ways. Let me close by saying, it’s Saying we have a moral obliga- is underway and it has momentum from just the right thing to do. Thank you tion to act is quite a strong statement. purpose-driven firms, leading with exper - very much. Such a statement calls for a rethinking imentation and investor communication. and possibly a complete reformulation Purpose-driven “universal inves- Jill Fisch: Thank you, Rebecca, that was of the purpose of the company. More tors” could also drive systemic change. fantastic. You gave us an awful lot to specifically, it asks companies to think I had the pleasure of working with Hiro think about. Jordi, you’re up next. long and hard about each of its impor- Mizuno, Chief Investment Officer at the tant stakeholders and, in this sense, to GPIF, Japanese Government Pension Call for “Type 2” Firms embrace a kind of “stakeholder” theory Fund, the largest pension fund in the Jordi Gual: Thank you very much. It is of the firm. Companies must take their world, with $1.7 trillion under manage - a pleasure to participate in this exciting stakeholders into account for their own ment. He came to believe that he had a conference. I truly feel at home today, sake, as Colin said earlier, not merely as fiduciary duty to address climate change having been a member of the board instruments but as ends in themselves. and social inclusion because doing so of ECGI and a faculty member of Rebecca’s second major point is that, would ensure good long-run returns for IESE Business School. Thanks, Marco even if it is not in the interest of each Japanese pensioners. and Jordi, for putting this conference r fi m to correct the externalities individ - And Mizuno is not alone. Genera- together. ually, it is in their collective interest. But tional changes in the big family firms are Let me start by conceding that I there is a collective action problem that pushing in this direction. Groups like am unlikely to do justice to the work makes it challenging for companies to Climate Action 100+, with $40 trillion of Professor Henderson, having read internalize the externalities. Rebecca of investments, focus on the 100 largest only a summary of her book. But let argues that when take governments fail carbon emitters in the world, demand- me offer a few thoughts in response to to take action, the private sector should enforce cooperation and self-regulation ing the emitters produce road maps and her presentation. milestones to a low-carbon future. Rebecca starts by recognizing the that has the effect of “internalizing” tremendous possibilities of capitalism But can business help rebuild our those externalities. institutions? Would this increased as an engine of wealth creation—and I find Rebecca’s second point to be I concur completely in this. She also concentration of wealth—and power— somewhat contradictory with her first. emphasizes the potentially adverse lead to good citizenship or crony If you can internalize the externalities capitalism? I believe business should be ee ff cts of what she calls “global capital - and solve the collective action problem, 82 Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 ROUNDTABLE he limitation of [Rebecca’s] second approach is, as I suggested, its view of stakeholders as instruments, means to an end, not ends in themselves. In the case of regulation, companies are forced to do the right thing; and in the case of enlightened shareholder value, they do it because in the end it will maximize long-term shareholder value. But there is a fundamental tension between these two approaches that needs to be recognized and addressed. – Jordi Gual you can achieve the “r fi st best solution” government regulation. Type 1 restric- can Type 2 firms compete with Type 1 with proper government regulation. tions today include those imposed by firms, which do not choose to bear the And if you can do so voluntarily with ESG indicators that institutional inves- same social and environmental costs some sort of enlightenment share- tors watch as well as the reputational borne by Type 2 firms? holder value motivation, so much the pressure exerted by consumers and the It will take some time, but I believe better. The limitation of this second political system. Type 2 firms maximize that in imperfectly competitive markets approach is, as I suggested, its view of financial and non-financial value for where excess rents can be generated, stakeholders as instruments, as means the sake of all stakeholders that work some Type 2 firms can create sustain - to an end, not ends in themselves. In in, collaborate with, or buy from the able competitive advantage thanks to the case of regulation, companies are firm, often trading off one stakeholder the contribution of all stakeholders and forced to do the right thing; and in benefit against another while ensuring generate adequate returns for investors. the case of enlightened shareholder that the company still earns the cost of Colin Mayer has developed the commit- value, they do it because in the end it equity required by the markets. In the ment framework which captures this will maximize long-term shareholder case of Type 2 firms, although all stake - idea, and so have, to a certain extent, value. As the Financial Times put it in holder groups have an interest in the Michael Porter and Mark Kramer with response when the Business Round- long-run success of the firm, conflicts their shared value approach. Table published their letter in 2019, among stakeholders continuously arise There are two obstacles to the “In companies we face the tragedy of and must be addressed. Even when you success of Type 2 r fi ms. First, corporate the corporate commons, and we should succeed in creating aggregate value, law imposes restrictions on the develop- solve it ourselves instead of waiting for you still have competing stakeholder ment of stakeholder firms. Second is the governments to do so.” But there is a claims to that value and the rules for challenge of resolving conflicts between fundamental tension between these two distribution are far from obvious. The the interests of different shareholders. It approaches that needs to be recognized enlightened shareholder value paradigm is hard for diverse shareholders to agree and addressed. is of little use here and those conflicts on common, non-financial goals. Such Let me try to clarify this basic will have to be resolved somehow. an agreement is easier in the presence of trade-off. Imagine a world where you The financial goals of Type 1 firms a “reference” shareholder. have two distinct kinds of companies, are relatively straightforward, but Type 2 To support my case, let me just close and let us call them Type 1 and Type firms must somehow obtain a minimum by mentioning the special arrangements 2. Type 1 firms maximize long-term risk-adjusted return to satisfy investors, at our company, CaixaBank, which we shareholder value subject to the restric- and then try to satisfy the rest of its manage with a stakeholder approach. tion of capital and labor markets and stakeholders. And the big question is, CaixaBank has a “reference” shareholder, Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 83 ROUNDTABLE a nonprot fi foundation that owns 40% government and concentrate on making firms today to commit to being Type 2 firms. But there is a whole gray area in of the bank and has been undertaking money. The other approach, which is essentially Paul Polman’s, says to move social work for more than 100 years. the middle. You focused on purpose- The combination of such a founda- everyone onto the stakeholder model.” driven firms as responses to collective tion with the usual presence in public I come out, confusingly, somewhere action problems. But if some of my capital markets has allowed us to pursue in the middle. I do not believe that firms are out there trying to deal with long-term value strategies. The founda - business passivity will result in the kind climate change, and some are interested tion supervises management to make of regulation that will enable Type 1 in wealth and income inequality, and sure that our “shared,” socially oriented r fi ms to maximize prot fi s while leaving some are focused on social justice and principles are upheld, while we maintain the rest to government. So, doing diversity, I’m not sure how we either a continuing dialogue with the capital nothing is unadvisable. solve the collective action problems markets to ensure that our enterprise At the same time, depending on the or provide the impetus for necessary model, which is somewhat unusual, is region of the world, it is also unrealistic regulatory change. fully understood. and unadvisable to allow or encourage So, I believe our situation is desper- Unfortunately corporate gover- everybody to be Type 2 firms. It would ate; we have unaddressed public goods nance guidelines and most corporate put far too much discretion in the hands problems and I am looking for some law are designed for the conventional of managements that have already been solution, for any solution. I agree with shareholder-owned corporation, and running Type 2 models—though that you: I do not think an end-state economy sometimes it is difficult to accommodate might work in countries like Japan or where everyone is a Type 2 firm is the within the same legal rules other owner- Germany, which have strong institutions solution for the reasons you laid out. It ship structures. I strongly believe that it that constrain and support the actions of won’t be viable because investors will would be good if the positive aspects of managers in running their firms. still be bottom line oriented, and capital having a diversity of enterprise models What I would propose, then, is that markets won’t provide funding for all were to be more fully recognized in the Type 2 firms that can only survive these firms. We must change the rules corporate governance legal frameworks. currently in certain markets with certain so that investor-oriented, bottom line I will stop there. Thank you. business models be allowed and encour- driven firms cannot continue generat - age to become drivers for achieving the ing massive negative externalities. For Fisch: Rebecca, do you want to respond conditions that will push Type 1 firms me, it is not a free market if firms can fix to Jordi briefly before we get to the ques - to internalize the externalities. But to the rules to suit themselves. That’s just tions. allow such companies to survive in not fair. And I fear we may go to very competitive markets, we need political dark places if we don’t move, that we’re Profit with Purpose: Toward an and regulatory change, and the right going to left or right-wing populism Intermediate Solution kind of pressure—and perhaps some and neither is good for business or for Henderson: Thanks, Jordi, for that forbearance—from the capital markets. society. I think Paul Polman was saying insightful summary of the issues that Purpose-driven firms can be important something similar. we face. And let me use your language catalysts in doing that. That said, I do Now, I also hear people like to suggest an answer. not believe trying to move everyone to Colin saying that such changes, if People today are recommending stakeholder capitalism is, in the long done properly, would actually end up what are basically one of two ways to go run, feasible. contributing to the bottom line. But forward. One says we should continue to I understood Colin to be saying for whatever reason, shareholders and, rely on conventional value-maximizing that it is desirable to have firms with a mostly, managers seem skeptical about Type 1 firms, and we just need govern - diversity of purposes. And diversity of and resistant to this possibility. They know change is necessary but they do ment to fix the rules. This approach purposes suggests some sort of spectrum assumes that it is not the business of not know how the market will react. of approaches to me, not necessarily just business to “internalize the externali- Maybe purpose is a tool that they can Type 1 and Type 2. We already have the use for getting buy-in from different ties”; we will leave that responsibility to public benet c fi orporation, which allows 84 Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 ROUNDTABLE stakeholders to do something that they do. We do not have to call it purpose; Henderson: Yes, I agree with you acknowledge has to happen anyway. it is just what good business decision- completely on this. making is about. As Jordi said, I do believe there is a fundamental moral case and authen- It’s becoming clear to many boards Fisch: There are many kinds of share - tic purpose, but even authentically that they need to shift because the holders in the world and several ways purpose-driven firms can uncover world is changing. Second, those of us to structure ownership. o Th se will ae ff ct prot fi opportunities that purely finan - who focus on purpose never tell firms the ability to achieve purpose. Having cially focused managers cannot find. we work with to ignore profits, but a charitable foundation as a substan- So, yes, I am saying both things are rather they should also be scanning tial shareholder may strengthen your possible. I published a piece called the world for social problems they can commitment to purpose. In the U.S. we “Climate in the Boardroom: Struggling address while seeking prot fi . see some shareholder and hedge fund to Reconcile Maximizing Shareholder I had the good fortune of facili- activism that could qualify as purpose Value with the End of the World as We tating Paul Polman’s strategic retreats driven. That seems consistent with the Know it.” What I am describing is the for the first few years of his tenure at story you tell. It may be a hedge fund reality I see faced by the managers I Unilever. He would give fabulous talks, that intervenes with a hide-bound board work with, who although forced to be saying the world is burning and we to recognize the importance of this ESG focused on the bottom line, are also need to do such and such. His senior stuff. That sort of activism can be very authentically purpose-driven—and the team would look at him and say, “Paul, powerful. big surprise here for many in all of this we still have to manage the deodor- One thing I worry about is how is their discovery that being authenti- ant business.” One of the strengths to deal with the shareholder drive for cally purpose-driven often turns out to of a leader like Paul is his ability to purpose when the shareholder is itself be good for the bottom line. negotiate the tension between compet- an intermediary, and when its ultimate I spent the early part of my career ing demands. He manages to pursue beneficial owners may have conflicting trying to persuade economists that both inner purpose and the bottom views about purpose. I had the good inertia was real. My first academic line. It is not an either/or approach, fortune to go to a conference a couple of paper was called “Underinvestment it’s a dynamic process. weeks ago on this idea that investment and Incompetence in Response to intermediaries are in fact agents for their Radical Change.” The editor of the Gual: I agree that the advice in Rebecca’s principals. And that in some cases they prestigious economics journal to book falls somewhere in between Type have a duty to pay attention to these which I sent it, sent it back saying, 2 and Type 1 in the terminology that I issues. If your agent, say it’s the Japanese “Rebecca, you have written a paper used. My preference is that all compa- government, wants you to focus on the about how the moon is made of green nies, at some point, become Type 2. long term and climate change because cheese, and economists have paid too But in very competitive industries this they think that is part of their fiduciary little attention to the motion of cheesy is difficult and I can see that we need duty, how do you respond to that? Leo planetoids.” both types. I believe that policy should Strine and Patrick Bolton have written Thanks to the revolution in behav - remain open to alternative corporate fascinating papers in this area, and I ioral economics, we know that there structures so that different models can think we need to talk much more about are persistent cognitive and percep- compete in the marketplace as well as in agency costs in the investment manage- tual biases. Thanks to huge amounts labor and capital markets. Under that ment business. kind of competition, the incentives of work in organizational and social But since I’m now compelled to call psychology, we know that groups would be right. Board members, as well a close to the session, let’s leave that for refuse to admit new reality and to shift as investors and employees, would join another meeting. Thank you, Rebecca, in response. And mobilizing authentic companies which have purposes that and thank you, Jordi. That was a fantas - they like, and neither the law nor the purpose to bust through these kinds of tic discussion. capital markets would prevent them barriers may be either instrumental or the most purpose-driven thing you can from achieving their purpose. Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 85 IESE ECGI CONFERENCE ON CORPORATE PURPOSE SESSION VI: How Should Boards of Directors Deal with Corporate Purpose? Jordi Canals: Welcome to this final tors, corporate purpose, and corporate a real troubleshooter during the 2008 session of the Corporate Governance governance. And let me say a few words financial crisis. Conference. During our three days, about each of them. These three highly experienced we have generated plenty of ideas, and We will hear first from Baron- board directors, chairmen, and chief possibly even a new paradigm, but we ess Denise Kingsmill, who has been executive officers will help us think still have a few questions to answer. a member of the House of Lords since about purpose and how it could serve to Rebecca Henderson, Jordi Gual, and 2006. She has had a distinguished improve the quality of corporate gover- Jill Fisch have helped us think about career in law, was a partner in one nance. Boards of directors are absolutely very important topics that built upon of the leading U.K. law firms, and essential in this debate because they have what we heard in the first two days of has been a board member of several the final say in and responsibility for the the conference. international companies over the long-term direction of the company, for More specifically, we have been past 15 years, most recently Inditex making specific strategic choices and discussing whether companies and AIG. acting as intermediaries between inves- should adopt statements of purpose, Next we will hear from Juvencio tors, the top management team, and whether such statements should be Maeztu, who has been deputy CEO of the many important stakeholders in the required and enforced by corporate INGK A, the retail arm of IKEA, since organization. Indeed, because of direc- law or not, and whether we can find 2018. IKEA is a very interesting case in tors’ critical role, it is important to get a balance between the shareholder part because it is owned by a founda- their perspective on what might work primacy and the stakeholder manage- tion. Different types of ownership and what will not work. ment paradigms. We also explored result in different types of governance. So with that, I will now ask each in detail the externalities created by Juvencio has had a long career of the three panel members to share our free market economies in terms at IKEA, holding senior leadership their views on corporate purpose and of the impact on the environment, positions in emerging markets, includ- the evolution of capitalism around the on the workforce, on social inequal- ing India, where he was the CEO and world. ity, integration, inclusiveness, and on led the establishment of IKEA and its Denise, will you please get things the impact of first-world companies on operations. started? developing countries. And we now face Our third panelist will be José the challenge of designing and putting V i ñals, who is the chairman of A Public-Private View in place new metrics to support more Standard Chartered, a leading inter- Baroness Denise Kingsmill: My perspec- sustainable growth over the next few national bank with a long history in tive is a little unusual in the sense that years. not only Western Europe, the Ameri- I have one foot in the political field and We have heard a number of cas, and Asia but also in emerging the other in commercial business. We interesting presentations by leading countries in Africa and Latin America. should be thinking about how to avoid scholars and CEOs, but in this final In addition to his distinguished career corporate financial failure and the loss session we want to focus more on how in financial services, José has spent of jobs, about how to engage employees boards of directors should think about a good part of this career in public in corporate purpose, and the criti- purpose. Do some of the solutions and service. He was the deputy gover- cal role of customers. This is important prescriptions suggested make sense for nor of the Bank of Spain for many because I see capitalism at risk of fail- boards? Could they be implemented? years and helped lead the European ing in the U.K. And do they hold out the best paths to Union into a single currency and the I sit on the Economic Affairs future progress? European Central Bank. He also was Committee of the House of Lords that To help answer these questions, we director of financial institutions and is undertaking an inquiry into what have three outstanding individuals on capital markets at the International government policy on COVID-related today’s panel about boards of direc- Monetary Fund where he proved to be issues should be, and about employ- 86 Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 ROUNDTABLE e should be thinking about how to avoid corporate n fi ancial failure and the loss of jobs, about how to engage employ- ees in corporate purpose, and the critical role of customers. This is important because I see capitalism at risk of failing in the U.K. – Baroness Denise Kingsmill ment post-COVID. Our somewhat nice attached to the side of the busi- The fourth dimension is leadership. right-wing government is trying to ness; it must be integrated in the way Among a company’s and its directors’ maintain employment by subsidizing you want to run the business. most important strategic decisions are companies struggling with the COVID I see the challenge as having five the people they hire and empower with crisis. Many companies are failing and fundamental dimensions. The first is decision-making authority, and how even more are now on the edge. This is ownership. In our case, we are owned they evaluate and reward the perfor- relevant given the previous discussions by the INGKA foundation that was mance of these operating managers. about how fragile capitalism can be and established by Ingvar Kamprad, the This kind of leadership is the begin - why it requires a strong underpinning founder of IKEA. Most of our profit ning and the end of everything. At of government support. after tax is reinvested in the business. INGKA, we measure performance based That relates very much to corpo - Dividends fund the charitable activities on four criteria: (1) creating value for rate purpose because of its relationship of the IKEA foundation. I don’t mean the company (business performance and to the workforce and human capital, to imply that companies must be owned financial resilience); (2) creating value generally. Purpose must be customer by foundations to have a purpose, but for consumers (affordability, accessibil - oriented and customer based. Boards, long-term commitment to purpose ity, and satisfaction); (3) creating value managements, and employees must begins at the shareholder level. for people (equality, diversity, inclusion, share and uphold their organization’s The second dimension is gover- coworker competence, leadership, and corporate purpose. There is no point nance, not just about the legal satisfaction); and (4) creating value for in having nice words in your annual procedure, but about how to infuse the planet (CO reduction and positive report if your people do not live up to a sense of purpose throughout the impact on the planet). All four criteria and carry out the purpose that you’ve organization that ends up guiding a play important roles in evaluating our committed to. wide variety of corporate decisions. In people. You will not be viewed as a good big companies, thousands of managers performer in the company unless you Canals: Thank you, Denise. Juvencio, make decisions every day and, collec- are successful in delivering all four kinds would you like to offer your thoughts tively, those decisions will determine of value. about these issues? whether the company achieves purpose. Finally, the fifth dimension is finan - The third dimension is values. cial resilience. Financial resilience is a Purpose at IKEA Values are the lifeblood of the system. precondition for sustainability. INGKA Juvencio Maeztu: I think the basic chal- IKEA is committed to eight values, at has clear rules about cost consciousness, lenge here is figuring out how to avoid least two of which are closely related: maintaining minimum financial liquid - conflicts between corporate purpose and cost consciousness, or efficiency, and ity and strong balance sheets and thus standard business practices. To do that, care for people and the planet. Efficiency is a precondition for making decisions companies must be built for purpose supports sustainability in the sense that in the short term that support the long and that requires a powerful vision. it involves using fewer resources to term; leading the company based on Purpose cannot merely be something deliver goods and services. generations rather than quarters. Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 87 ROUNDTABLE think the basic challenge here is figuring out how to avoid conifl cts between corporate purpose and standard business practices. To do that, companies must be built for purpose and that requires a powerful vision. Purpose cannot merely be something nice attached to the side of the business; it must be integrated in the way you want to run the business. – Juvencio Maeztu Canals: Thank you, Juvencio. Let’s now are authentic or meaningful; they are interests of society. In fact, you can’t turn to José. As the chairman of one of just PR exercises. Then there is the real do one without the other—and in this the largest financial institutions in the purpose, the authentic kind that den fi es sense, the interests of the private sector world, how do you see this debate on the soul of the organization. This is criti - and society at large are perfectly aligned. purpose from the perspective of a large cal internally because everyone in the e Th hard part, of course, is keeping this bank? organization needs to understand where unity of interest and long-run goals you want to go and how you expect to in mind when negotiating over the Purpose at Standard Chartered get there. Being clear about what you conflicts that are bound to arise. And José Viñals: When we talk about purpose want to achieve and how to get there let me stop there. at Standard Chartered, we are talk- is essential for your employees and for ing about something that profoundly your investors. Both groups want to Implementing Purpose affects the long-run viability as well as know, and they need to know for your Canals: Thank you, José, for your the market value of the organization. organization to prosper. thoughtful comments on purpose and It is about making organizations more Many people appear to believe that corporate governance. During the past human and behaving in the long-term nonfinancial performance and values two days, we have heard a lot of debate interests of humanity. Banks got a bad are inconsistent with strong financial about the usefulness of adopting a name during the last financial crisis, and performance, and that the two are inevi- statement of purpose. Some speak- we as bankers now understand and are tably at odds with each other. But that ers thought it was very useful, others responding to the need to change that. is not necessarily the case; in fact such believed otherwise. But all three panel- Organizations and companies have conflicts are relatively rare in my own ists in this session agreed that purpose a purpose just as individuals do. Why experience, where I’ve found that the is very important for management and are we here? What are our values? Why things you do to achieve purpose tend governance of the company. do we have a social license to operate as to produce better financial performance So, how do we unpack and unbun- a company? How are we going to make over time. dle purpose into operational and the world a little bit better? How are As Rebecca Henderson and Jordi strategic decisions that make sense for a we going to do that and make money Gual told us earlier today, the bottom specific company at a specific moment at the same time? These are all critical line need not be at odds with doing in its history? questions. things in the ultimate interests of I would like to ask Denise for her I distinguish between two types society. Companies should aim to perspective. Denise, you have a long of purpose: nominal and real. Many achieve both objectives because, most experience dealing with environmental companies have adopted apparent, or of the time, long-run profitability and and social issues at companies. How nominal, purposes. I call them nominal value can be achieved only by serving, do you bring this conversation into the because they are “in name” only, they not by undermining, the long-term strategy of the company when the board 88 Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 ROUNDTABLE of directors debates long-term orienta- to people at an affordable price. I see We knew that discontinuing the financing of coal would reduce our tion? similarities between the way we devel- revenues in the short term and that oped our corporate purpose as a start-up there would be some political conse- Kingsmill: My most recent experience bank and how a very large company has has been with Fintech start-ups, which also held true to its original purpose. quences as a result. But at the same has been very interesting. I was the time, we also announced that we would first chair of the online banking busi - Canals: José, how do you ensure that make substantial financing available ness, Monzo, which is very successful what you say about purpose and the for clean and renewable sources of in the U.K. and now expanding into long-term orientation of Standard & energy in those same markets. Two the United States. As we sat around Chartered Bank is actually taken into years later, we have found that our my kitchen table, we asked ourselves account by all the senior executives you revenues have not gone down. This was why we were setting up a bank. We deal with? also the only situation where we had a believed we wanted to make banks How does a chairman lead the conflict between what we thought was better and to help people. Gradually, process so that the outcome is purpose good for revenue and what we thought over time, we settled on being the best as well as profits when managers are was good for our social purpose and retail bank and focusing on providing under pressure to reach die ff rent finan - corporate purpose. We managed that the best service for our customers— cial goals? transition quite nicely and our business and our purpose has helped convince is now in a much better place in terms our investors, too. Viñals: I will answer with two exam- of ESG. We created a relatively large bank ples. We exist to improve the lives of with four million customers in a very the people in those countries which do Canals: Juvencio, you are the CEO of short period of time. As we proceeded, not yet have the standards of living that a large, complex company. You need we saw that our corporate purpose people in advanced economies have. to deal with both a supervisory board was becoming clearer. Rather than That is a powerful purpose that affects and your top management team and just wanting to make a better bank everything we do. to make sure that IKEA and INGK A account—a better mousetrap, if you Purpose is a necessary condition deliver what they have promised. You like—we realized we also wanted to help but it also needs to be translated into have had the advantage of a founder people manage their money better and a strategy. The strategy is proposed by who had a very clear sense of mission to make their money work for them, the executives and approved by the and purpose. How do you now make particularly for people who did not have board. It is very important that you sure purpose is followed when you very much. have the right individuals throughout discuss strategic issues, investment deci- I found it quite interesting that the organization for the right purpose sions, and enter-ing new markets with the founding board became more and to be implemented. your colleagues? more aware of our greater purpose as Our internal discussions have been we went along, and began to understand made easier because we share so many Maeztu: We do in couple of ways. The what our customers really valued. Our assumptions about purpose. One of the first is making sure that values are a purpose grew and developed, and the key objectives of Standard Charter is to living reality for us. Strong values are same can be said for some long estab- comply with the UN’s sustainable devel- not only an inspiration but also the lished companies where the founders are opment goals, or SDGs. For example, in equivalent of a map and compass for us when we face dilemmas. still involved. 2018, we decided to discontinue new Mr. Ortega established the amazing coal financing in emerging markets and And we try to be as clear as possible company Inditex (Zara) in 1963, and it developing economies. These countries about our goals. For example, by 2030, now has 8,000 stores across the world. still need to grow to provide their people we have committed to making 100% It has grown and developed but still with good standards of living, but their of the materials we use from renew- able or recycled resources. Today, we adheres to its original mission of provid- sources of energy are often still “brown” are at 60%. We now also produce ing well-made, well-designed garments sources of energy. Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 89 ROUNDTABLE e should not exaggerate potential conifl cts between purpose- oriented goals and n fi ancial performance because there are many more synergies and complementarities than are commonly imagined. As was mentioned in the fascinating discussion between Rebecca and Jordi, the bottom line need not be at odds with doing things in the ultimate interests of society. You should aim to achieve both objectives because, most of the time, protfi ability and the long-term interests of society align. – José Viñals more energy than we consume and we deciding on and making clear the their values and purpose at the forefront produce that from renewable sources company’s values, and integration of of everything that they do. Sadly, some such as sun or wind. We intend to the business with those values—are do not. operate only electric vehicles (EV) in fundamental to long-run success. There should be greater transpar - five years. By next year there will not be ency about who the investors are in a pay gap between men and women in Commitment to Purpose a company. Often, shares are held in the company and we now have as many Canals: I have a question for Denise that entities that do not have a clear identity female as male employees. And we I think is quite relevant here. and therefore it is not clear where have not only sustainable production Listed companies all have some legal their priorities lie and if the compa- goals but also responsible consumption requirements in terms of accountability. ny’s purpose is important to them. It goals and that means we have to create In your experience as a board member, would also be better if pension funds awareness among consumers, too. do you feel more pressure coming exercised more responsibility in relation We are committed to getting more internally from the notion of purpose to purpose. than one billion people to live within or more from the capital markets and I feel lucky that the companies on the limits of our planet. No one wants investors, many of whom now demand whose boards I sit have highly devel- to destroy the planet but many people a higher level of transparency and oped senses of purpose that they live do not know how to. We are commit- accountability in terms of ESG factors and breathe every day. There are too ted to helping them with solutions for from listed companies? many companies for whom it is just an a better life at home like home solar, afterthought. energy efficiency, water reduction, and Kingsmill: Things are changing as food waste reduction. And finally, it shareholders demand more nonfinan - Greenwashing must be affordable to many people. If cial information. While financial issues Canals: Juvencio, there is a question sustainability is just a luxury for the remain the priority, sustainability, in its for you about greenwashing. In this few, it will never fly. broadest sense, is increasingly becoming context, greenwashing could involve As a first step toward meeting these as important. statements of mission that are simply goals, I am happy to say that last year, The pressure to do the right thing PR exercises. Some critics of the Busi- when we grew by 6.5%, we also reduced comes much more from the culture of ness Roundtable Statement in August our carbon footprint by 4.3%. We are the company. Some companies under- 2019 claimed that those CEOs were decoupling our economic growth from stand the importance of purpose and conducting a very sophisticated PR exer- our environmental footprint. I think others have not developed a clear under- cise, and some went even further, saying that meeting these two challenges— standing of purpose. Some maintain that CEOs were trying to prevent addi- 90 Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 ROUNDTABLE tional regulatory requirements from the Viñals: Juvencio made the very impor- and, increasingly also, in the European U.S. government. tant point earlier that progress towards Union. This indirect approach can be e q Th uestion is, how do you ensure a desired destination matters very very helpful in pointing out shortcom- substantive commitment to purpose? much. We use “Sustainable Develop- ings in governance. How do you make sure that what the ment Goals,” or SDGs, to put our ESG board and the top management team goals into practice. SDGs include data, Doing Well by Doing Good at Ikea say about the purpose of the company metrics, and disclosure. These help Canals: Juvencio, Ikea has a tradition of trickles down to lower levels to be demonstrate how we are moving toward being consumer friendly and environ- something authentic and felt by most meeting ESG goals and investors can mentally friendly. Ikea also tries to sell employees? follow that. Our publicly available posi- as many goods as possible. How do you tion statements state very clearly where manage the trade-off between economic Maeztu: First, companies must be able our red lines are and our sustainabil- growth and environmental impact?” to show genuine progress. Reporting ity targets. We publish a sustainability is built not only on transparency, but summary every year that explains the Maeztu: Ikea is able to influence its on progress. Nobody will challenge progress we have made toward our vari- entire production value chain. This you if you are not perfect but people ous SDGs. gives us some power but also imposes will challenge you if you are not trans- responsibility. The good news is that parent or do not show progress. You Should ESG Be Mandated? using renewable or recyclable materials must have a plan, monitor that plan, Canals: Denise and José, you both have and having climate friendly operations and verify progress. Second, compa- many years of experience in public is also good business. It has turned out nies must integrate this plan with their policy and regulation. Should corpo- that it is good for business to be a good business model. For example, when we rate law in major jurisdictions require business. So there are many ways of first sold LED light bulbs, they were statements of purpose? achieving economic growth without priced at 9€. Today, we sell only LED causing environmental damage. light bulbs and the price is around one Kingsmill: Yes, such statements should euro. We also launched the “plantball” be required. I have pushed hard for a Canals: Your comments remind me of a as a meatball substitute. It has all the public interest test in regulations that well-known article by Professor Michael protein you need but with 96% less of should be more than just blackline law. Porter on the importance of regulation the environmental footprint, is afford - A public interest test would address to environmental issues. By studying able, and tastes fantastic. corporate purpose, sustainability and a number of industries in a number Such advances will never happen, the environment, human capital, and of countries, Porter found that raising though, if you do not have thousands customers. environmental standards often helps of leaders who are really engaged. The companies become much more innova- most important advocate of the corpo- Viñals: Well, I have a different view. tive and develop better business models. rate strategy does not work in corporate Having spent many years in the public Over time, companies often discover communications, it is your coworker. domain, I believe that purpose is that it is possible both to create wealth something that needs to develop endog- and have a cleaner environment. Evaluating ESG Investments enously within companies, rather than Canals: Here is a question from the being imposed exogenously. That said, Corporate Culture and Purpose audience for José: “We have lots of tools public policy could guide and assist Canals: Denise, how should boards of to project how certain decisions will companies in carrying out their purpose, directors attempt to shape and nurture ae ff ct prot fi ability and n fi ancial perfor - for example, by promoting common a strong culture of sustainability? mance. How do we get a similar tool reporting standards on environmental, set for assessing decisions affecting for social, and governance matters. As one Kingsmill: Directors must familiar- nonfinancial performance and specifi - example, regulators conduct external ize themselves with what is going on cally, for ESG factors?” board effectiveness reviews in the U.K. the shop floor and in the factory. They Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 91 ROUNDTABLE in this n fi al session we want to focus more on how boards of directors should think about purpose. Do some of the solutions and prescriptions suggested make sense for boards? Could they be implemented? And do they hold out the best paths to future progress? – Jordi Canals cannot simply sit in the boardroom. The the right thing. And that means doing related to sustainability is resilience. We only way to understand what’s happen- it always and everywhere, even when no don’t know where the next shock will ing in an organization is to visit different one is watching. Let’s earn our money come from so we must be able to with- places. I have been through flour mills, the right way. We have a board commit- stand many kinds of dic ffi ulties. electricity generating plants, construc- tee that oversees cultural conduct. tion sites, and many die ff rent factories, Canals: José, some final ree fl ctions? because that is the only way to learn Closing Thoughts Viñals: I think that business has a great what’s going on. Directors must speak Canals: Since we are near the end of opportunity now to participate in the to the people on the shop floor, in the this session, I will now ask each one creation of a new social contract that shops, in the hotels, and in the restau- of our panelists to share with us some emphasizes sustainability, social inclu- rants. Only then do you understand the final reflections on purpose. How would sion, and resilience. Purpose is the true corporate culture. you advise other senior executives and soul of the organization. Let’s make institutional investors attending this organizations more human through Canals: José, you have recent experi- conference to think about purpose? Let’s purpose. ence trying to transform some of the start with Juvencio. I would ask investors to do three values and elements in your bank. Any things: advice on how corporate culture can Maeztu: I would emphasize that purpose 1. Be very demanding in asking help make better governance decisions is never simply a nice statement writ- companies to show concrete progress and management decisions? ten on the walls of the company. Real towards full fi ling their purpose. purpose involves deep understanding 2. Think long term. Short term will Viñals: Yes, culture is critical to purpose. of that purpose and connecting that to take us nowhere. A few years ago, we had an enterprise- all decision making. I agree completely 3. Put your money where your wide process to rethink and redefine with José, that culture and values are the mouth is. If you really think that ESG our purpose. It was both a bottom-up right place to start. When the COVID or SDG is the right answer, vote with and top-down exercise. We surveyed pandemic hit us, we did not already have your shares. Either exit companies the whole organization, including a complete roadmap to navigate the not heading in the right direction or board members and executives, and crisis, but we did have a strong compass use your power in the annual general then put together a purpose statement in the form of values and purpose. meetings to push companies in the that says, “Prosperity and banking for direction you think they should go. better lives.” We have banks in 60 coun - Kingsmill: Sustainability must be part of tries, employ and serve people from 120 a company’s purpose. The purpose must Canals: Thank you very much, José, nationalities by providing many services look to the long term and must have a Denise, Juvencio. This has been a fantas - and products. moral element to it as well because we tic session with lots of insights. I would We wanted a culture that empha- are dealing with people. We employ like to highlight a couple that I think sizes key values. The first is always do people and we serve people. Closely resonate in a special way. 92 Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 ROUNDTABLE heard that corporate governance is more fundamental than purpose. Ownership and control dene fi purpose. Empirically, companies that use purpose as a management tool are more successful but using purpose to denote a particular type of corporate governance creates confusion. It was clear that neither markets nor the state acting alone will solve our sustainability problem. – Marco Becht First, we cannot speak about session. Denise, José, Juvencio, thank ments. Purpose must be built into purpose without speaking about the you very much. corporate governance, measured, and culture of the organization, the soul companies should be held accountable. of the company, and the values of Conference Wrap-Up Patrick Bolton showed that financial the individuals. Ultimately, purpose Marco Becht: Let me take a few minutes markets are already pricing in climate is implemented through individual now to try and summarize what have we risk but it is unclear whether investors actions. Second, although you come learned during the past three days spent are leaders or followers. The change in from different companies and indus - discussing the question, can purpose the premia he showed occurred when tries, you all agree on the need to deliver better corporate governance? the Paris Agreement was signed, and integrate purpose into corporate strat- I think we reached a consensus on the Paris Agreement was not a private egy, into organizational design, the several points. Jordi just mentioned initiative. Are companies leaders, or are business model, the hiring system, the some of them. There was unanimous they following their investors? We also nominating system, the compensation agreement that people are not univer- heard that private equity seems to be system, and reporting. sally motivated by money. They look for oblivious. We didn’t hear about family Finally, we face a collective action a purpose in what they do. There was r fi ms at all. problem in trying to do all this. also unanimous agreement about the I thought what we heard about Companies need to work with govern- urgent challenges that lie ahead. Unless enlightened leaders in the last panel was ments, investors, and other companies we can bring about radical change, very encouraging. Rebecca Henderson to create a sustainable system for we may be threatened with extinc- argued that capitalism must be reimag- all, not just for the privileged few. tion. Participants agreed there was an ined. Bengt Hölmstrom urged caution This requires new metrics, new ways inherent contradiction in the capital- and argued that capitalism is very good of reporting, and an education of ist system. Although very successful in at reinventing itself. Luigi Zingales investors that goes far beyond report- spurring growth, innovation, and allevi- broadly agreed, and called for freedom ing short-term performance. This is ating poverty, capitalism has also created of enterprise. Finally, Paul Polman a big challenge but we are beginning accelerating damage to the environment invited us to rethink how we think to provide some answers to the over the last 40 years. about growth and what is sustainable. challenge. But there was far less agreement So, what is the answer to our And I want to close by commend- on the way forward. Claudia Garten- question about the role of purpose in ing Denise, José, and Juvencio for their berg’s research showed that purpose improving corporate governance? Well, outstanding work in organizations and statements matter as a management I heard that corporate governance is for their clarity, good judgment, and tool and their use differs across owner - more fundamental than purpose. personal integrity they bring to this ship types. Colin Mayer argued that Ownership and control define debate. It has been a most insightful purpose goes beyond purpose state- purpose. Empirically, companies that Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 93 ROUNDTABLE use purpose as a management tool are their support to this conference and more successful, but using purpose to the Strategic Management Society for denote a particular type of corporate their endorsement and for giving the governance creates confusion. It was conference a wider audience among its clear that neither markets nor the state members. This would not have been acting alone will solve our sustainabil- possible without the support of many ity problem. of my IESE colleagues including Félix But that said, I want to finish on Sanchez, Sabrina Voss, Míriam Freixa, an optimistic note. The 2009 Nobel and many others here at the school. Prize in Economics award to Elinor Like Marco, I too want to finish Ostrom included the following words: on an optimistic note. I feel inspired by people such as Paul Polman, Denise It was long unanimously held Kingsmill, José Viñals, Juvencio amongst economists that natural Maetzu, and Sophie L’Helias. These resources that were collectively used by people are in the real world of manage- their users would be overexploited and ment, governance, and investment, destroyed in the long term, also known and are committed to bring about as the Tragedy of the Commons. positive change. This is a real source Elinor Ostrom disproved that idea. of hope for all of us. She showed that when natural resources If there is a final message from are jointly owned by their users, rules are this conference, it is that some compa- established over time to use those resources nies are already making significant in a way that is both economically and progress in the right direction. This ecologically sustainable. According to should inspire us and help keep us research cited by Noah Harari, homo committed to finding ways to make the sapiens have come to dominate the planet world a better place, to leave behind a because we are a cooperative species better legacy, and to make companies manipulated by our genes to survive. That more human. provides further hope. So, thank you all very much. We look forward to more collaborative With that, Jordi, I will now allow efforts to improve corporate gover- you the very last final word. nance to build more resilient and more respected companies. Canals: Thank you very much, Marco, for that wrap-up of the conference. This has been a fantastic three-day journey, very intense in terms of the quality of the debates, the depth of the ideas, and the transformational impact of some of those ideas. I would like to thank ECGI, Marco Becht, Elaine McPartlan, and Vanessa Koenig for their wonderful work on behalf of this conference. I want to thank the Social Trends Insti- tute and Professor Carlos Cavallé for 94 Journal of Applied Corporate Finance • Volume 33 Number 2 Spring 2021 ADVISORY BOARD EDITORIAL Yakov Amihud Carl Ferenbach Donald Lessard Clifford Smith, Jr. Editor-in-Chief New York University High Meadows Foundation Massachusetts Institute of University of Rochester Donald H. Chew, Jr. Technology Mary Barth Kenneth French Charles Smithson Associate Editor Stanford University Dartmouth College John McConnell Rutter Associates John L. McCormack Purdue University Amar Bhidé Martin Fridson Laura Starks Design and Production Robert Merton Tufts University Lehmann, Livian, Fridson University of Texas at Austin Mary McBride Massachusetts Institute of Advisors LLC Erik Stern Michael Bradley Assistant Editor Technology Stern Value Management Duke University Stuart L. Gillan Michael E. Chew Gregory V. Milano University of Georgia G. Bennett Stewart Fortuna Advisors LLC Richard Brealey Institutional Shareholder London Business School Richard Greco Stewart Myers Services Filangieri Capital Partners Michael Brennan Massachusetts Institute of René Stulz University of California, Trevor Harris Technology The Ohio State University Los Angeles Columbia University Robert Parrino Sheridan Titman Robert Bruner Glenn Hubbard University of Texas at Austin University of Texas at Austin University of Virginia Columbia University Richard Ruback Alex Triantis Charles Calomiris Michael Jensen Harvard Business School University of Maryland Columbia University Harvard University G. William Schwert Laura D’Andrea Tyson Christopher Culp Steven Kaplan University of Rochester University of California, Johns Hopkins Institute for University of Chicago Alan Shapiro Berkeley Applied Economics University of Southern David Larcker Ross Watts California Howard Davies Stanford University Massachusetts Institute Institut d’Études Politiques Martin Leibowitz Betty Simkins of Technology de Paris Morgan Stanley Oklahoma State University Jerold Zimmerman Robert Eccles University of Rochester Harvard Business School Journal of Applied Corporate Finance (ISSN 1078-1196 [print], ISSN 1745-6622 Statement on Research4Life [online]) is published quarterly per year by Wiley Subscription Services, Inc., a Wiley Wiley is a founding member of the UN-backed HINARI, AGORA, and OARE initiatives. Company, 111 River St., Hoboken, NJ 07030-5774 USA. They are now collectively known as Research4Life, making online scientific content available free or at nominal cost to researchers in developing countries. Please visit Postmaster: Send all address changes to JOURNAL OF APPLIED CORPORATE FI- Wiley’s Content Access – Corporate Citizenship site: http://www.wiley.com/WileyCDA/ NANCE, Wiley Periodicals LLC, c/o The Sheridan Press, PO Box 465, Hanover, PA Section/id-390082.html 17331 USA. Journal of Applied Corporate Finance accepts articles for Open Access publication. Information for Subscribers Please visit https://authorservices.wiley.com/author-resources/Journal-Authors/open- Journal of Applied Corporate Finance is published quarterly per year. Institutional sub- access/onlineopen.html for further information about OnlineOpen. scription prices for 2021 are: Print & Online: US$844 (US), US$1007 (Rest of World), €656, (Europe), £516 Wiley’s Corporate Citizenship initiative seeks to address the environmental, social, (UK). Commercial subscription prices for 2021 are: Print & Online: US$1123 (US), economic, and ethical challenges faced in our business and which are important to US$1339 (Rest of World), €872 (Europe), £686 (UK). Individual subscription prices our diverse stakeholder groups. Since launching the initiative, we have focused on for 2021 are: Print & Online: US$137 (US), $137 (Rest of World), €115 (Europe), sharing our content with those in need, enhancing community philanthropy, reducing £79 (UK). Student subscription prices for 2021 are: Print & Online: US$49 (US), our carbon impact, creating global guidelines and best practices for paper use, estab- $49 (Rest of World), €41 (Europe), £28 (UK). Prices are exclusive of tax. Asia-Pacific lishing a vendor code of ethics, and engaging our colleagues and other stakeholders GST, Canadian GST/HST and European VAT will be applied at the appropriate rates. in our efforts. For more information on current tax rates, please go to https://onlinelibrary.wiley.com/ library-info/products/price-lists/payment. The price includes online access to the cur- Follow our progress at www.wiley.com/go/citizenship. rent and all online back files to January 1, 2017, where available. For other pricing options, including access information and terms and conditions, please visit https://on- Abstracting and Indexing Services linelibrary.wiley.com/library-info/products/price-lists. Terms of use can be found here: The Journal is indexed by Accounting and Tax Index, Emerald Management https://onlinelibrary.wiley.com/terms-and-conditions. Reviews (Online Edition), Environmental Science and Pollution Management, Risk Abstracts (Online Edition), and Banking Information Index. Delivery Terms and Legal Title Where the subscription price includes print issues and delivery is to the recipient’s Disclaimer address, delivery terms are Delivered at Place (DAP); the recipient is responsible for The Publisher, Cantillon and Mann, its affiliates, and Editors cannot be held respon - paying any import duty or taxes. Title to all issues transfers FOB our shipping point, sible for errors or any consequences arising from the use of information contained in freight prepaid. We will endeavour to fulfil claims for missing or damaged copies within this journal; the views and opinions expressed do not necessarily reflect those of the six months of publication, within our reasonable discretion and subject to availability. Publisher, Cantillon and Mann, its affiliates, and Editors, neither does the publication of advertisements constitute any endorsement by the Publisher, Cantillon and Mann, its Journal Customer Services: For ordering information, claims and any inquiry concern- affiliates, and Editors of the products advertised. ing your journal subscription please go to https://hub.wiley.com/community/support/ onlinelibrary or contact your nearest office. Copyright and Copying Americas: Email: cs-journals@wiley.com; Tel: +1 781 388 8598 or Copyright © 2021 The Authors. Journal of Applied Corporate Finance published by +1 800 835 6770 (toll free in the USA and Canada). Wiley Periodicals LLC on behalf of Cantillon & Mann. Europe, Middle East and Africa: Email: cs-journals@wiley.com; Tel: +44 (0) 1865 778315. This is an open access article under the terms of the Creative Commons Attribution Asia Pacific: Email: cs-journals@wiley.com; Tel: +65 6511 8000. License, which permits use, distribution and reproduction in any medium, provided Japan: For Japanese speaking support, Email: cs-japan@wiley.com the original work is properly cited. Visit our Online Customer Help at https://hub.wiley.com/community/support/onlineli- brary Production Editor: Namrata Lama (email: jacf@wiley.com). Back Issues: Single issues from current and recent volumes are available at the current single issue price from cs-journals@wiley.com. Earlier issues may be obtained from Periodicals Service Company, 351 Fairview Avenue – Ste 300, Hudson, NY 12534, USA. Tel: +1 518 537 4700, Fax: +1 518 537 5899, Email: psc@periodicals.com View this journal online at wileyonlinelibrary.com/journal/jacf.

Journal

Journal of Applied Corporate FinanceWiley

Published: Jun 1, 2021

There are no references for this article.