Corporate Purpose and Sustainability

European Corporate Governance Institute - Law Working Paper #559/2020

An edited version of this paper will be published as a chapter in Danny Busch, Guido Ferrarini and Seraina Grünewald (eds.), Sustainable Finance, Palgrave MacMillan (forthcoming)

74 Pages Posted: 23 Dec 2020

See all articles by Guido Ferrarini

Guido Ferrarini

University of Genoa - Law Department and Centre for Law and Finance; European Corporate Governance Institute (ECGI); EUSFIL Jean Monnet Center of Excellence on Sustainable Finance and Law

Date Written: December 7, 2020

Abstract

An increasing number of firms make reference to the pursuit of environmental and social goals in the definition of their purpose. This raises important issues with respect to the way in which the trade-offs between profit maximization and social value are solved. As I show in this chapter, there are different perspectives that can be adopted to this end depending on the field of scholarship selected: economics, finance, management and law. Each perspective offers different nuances as to the way in which corporate purpose is defined and the conflict between the pursuit of profit and social value is dealt with.

In section II of this chapter, I argue that a broader concept of corporate purpose has gradually emerged over the years in economics, finance and management studies, as a result of various approaches to corporations such as corporate social responsibility (CSR) and stakeholder theory, which have been gradually integrated into the corporate governance framework. Environmental and social sustainability have come to characterize most of the instances of CSR and some core aspects of stakeholder governance, without discarding the pursuit of corporate profits as a long-term goal of the corporation. At the start of this century, sustainability concerns have entered into the area of finance studies through the theory of “enlightened shareholder value” (ESV) and its homologues like “shared value”.

In section III I argue, from a comparative law perspective, that corporate purpose has been variously defined in different jurisdictions, while European laws often consider the company’s interest rather than corporate purpose. However, corporate purpose is generally identified in practice with the pursuit of corporate profits, albeit with variations concerning the relevance of given stakeholders and social values in corporate governance. In general, legal definitions of corporate purpose are flexible and allow for different types of solution of the conflict between economic value and social value at firm level and within a given system.

In section IV I critically analyse recent economics and management studies which argue that corporate purpose should be modified to reflect the prevalence of social value over shareholder value, and that the latter should be pursued by managers only derivatively, as a result of pro-stakeholders actions directed to increase the “total pie”. I object to this recent trend from a law and finance perspective and show my preference for keeping the relevant discussion within the confines of ESV theory. However, I admit that corporate purpose should be larger than profit from a behavioural perspective if we want to motivate people to perform outstandingly and sustainably in organizations.

In section V, I emphasize the mounting role of regulatory and ethical constraints to business conduct deriving from sustainability concerns. These constraints go beyond the mere calculus required by ESV, which asks management to pursue stakeholder interests only to the extent that this increases the long-term value of the firm. Indeed, ethical considerations as reflected by international standards and consolidated best practices should apply to the running of businesses without necessarily requiring a prior analysis of their precise impact on financial performance.

Keywords: Corporate purpose, corporate governance, corporate social responsibility, shareholder primacy, shareholder value, shared value, social value, stakeholder theory, stakeholder governance, stakeholder capitalism, sustainability

JEL Classification: G30, G32, G38, K20, K32, L21, M14, P12

Suggested Citation

Ferrarini, Guido, Corporate Purpose and Sustainability (December 7, 2020). European Corporate Governance Institute - Law Working Paper #559/2020, An edited version of this paper will be published as a chapter in Danny Busch, Guido Ferrarini and Seraina Grünewald (eds.), Sustainable Finance, Palgrave MacMillan (forthcoming) , Available at SSRN: https://ssrn.com/abstract=3753594 or http://dx.doi.org/10.2139/ssrn.3753594

Guido Ferrarini (Contact Author)

University of Genoa - Law Department and Centre for Law and Finance ( email )

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16126 Genova, 16100
Italy
+39 010 209 9894 (Phone)
+39 010 209 9890 (Fax)

HOME PAGE: http://www.clfge.org

European Corporate Governance Institute (ECGI)

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

HOME PAGE: http://www.ecgi.org

EUSFIL Jean Monnet Center of Excellence on Sustainable Finance and Law

Italy

HOME PAGE: http://www.eusfil.eu

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