The Purposive Transformation of Corporate Law

63 Pages Posted: 2 Apr 2020 Last revised: 17 Nov 2021

See all articles by David Kershaw

David Kershaw

LSE Law School and ECGI; European Corporate Governance Institute (ECGI)

Edmund Schuster

London School of Economics - Law Department

Date Written: March 31, 2019

Abstract

What is the purpose of a corporation? This fundamental question is as old as corporate law itself and traditionally it is asked with reference to the ultimate beneficiaries of a corporation’s activities. Modern management theory and the current technology-driven transformation of the economy, however, have breathed new life into the question about corporate purpose. Here, purpose is understood as an animated mission-purpose articulation of the reason for a corporation’s existence; an aspirational idea about its existence that has the capacity to bond internal and external stakeholders to the company, inspiring innovation, productivity and customer loyalty. This understanding of corporate purpose offers a pathway to a more inclusive and interconnected form of modern capitalism.

This approach to purpose is now gaining regulatory traction. In December 2018, the United Kingdom’s “comply or explain” Corporate Governance Code adopted a provision which provides that “the board should establish the company’s purpose.” This article takes the UK’s regulatory adoption of mission-purpose as a platform from which we can explore the economic and social benefits of purposeful companies and the legal and non-legal conditions that are necessary to support and nurture such companies. The article argues that in the absence of purposeful shareholders corporate law must enable companies to construct a zone of insulation which protects its purpose—whatever it may be—from the pressures of immediate shareholder preferences which can compromise mission-purpose. It argues that in jurisdictions where law and market practice prevents the construction of such a zone of insulation, the economic and social benefits of purposeful companies will be unavailable, as mission-purpose disintegrates into the prosaic or a mere marketing device. This claim generates several theoretical and empirical objections, which the article considers and rejects.

Keywords: Corporate Law, Law and Economics

Suggested Citation

Kershaw, David and Kershaw, David and Schuster, Edmund-Philipp, The Purposive Transformation of Corporate Law (March 31, 2019). LSE Legal Studies Working Paper No. 4/2019, Forthcoming, American Journal of Comparative Law, European Corporate Governance Institute - Law Working Paper No. 616/2021, Available at SSRN: https://ssrn.com/abstract=3363267

David Kershaw (Contact Author)

LSE Law School and ECGI

Houghton Street
London WC2A 2AE, WC2A 2AE
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Edmund-Philipp Schuster

London School of Economics - Law Department ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

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