The Purpose of Corporate Purpose Statements: A Response to 'Shareholder Voice and Corporate Purpose: The Purposeless of Mandatory Corporate Purpose Statements' by Paul Davies

Abstract

In his critique of the legal aspects of my book Prosperity: Better Business Makes the Greater Good, Paul Davies raises five objections. These are: (a) the inclusion of social or communal elements in mandatory business purpose statements; (b) the assertion that the envisaged adoption of purpose statements is “embarrassingly simple” because shareholders or directors accountable to them will not adopt them; (c) the use of the law to shield directors from adverse reactions from their shareholders; (d) the entity and managerial conception of the company; and (e) regulatory or court approval of corporate purposes. Davies’ analysis proceeds by considering two worlds where the Friedman Doctrine prevails and one where it does not, and companies have objectives beyond financial profit. In the former, corporate purpose statements will be ineffective or infeasible and, in the latter, they will be unnecessary or undesirable. In both cases they will not work. Objections (c), (d) and (e) are invalid because they are exactly contrary to what Prosperity is advocating – a strengthening not weakening of board accountability to shareholders; a proprietary not entity view in which the objectives of the firm are aligned with, not divergent from, those of its shareholders; and freedom of choice and plurality of purposes unconstrained by regulatory, court or government intervention. While Davies recognizes these points and the multiplicity of purposes companies can have, he erroneously believes that Prosperity seeks to promote communal or social objectives. It is this which he sees as lying behind legally binding purpose statements and therefore his objections (a) and (b). That is not the case at all. The sole objective behind legally binding purpose statements is to allow companies to make their statements credible. It is enabling not prescriptive or restrictive. It applies equally to private as well as communal or social objectives and it is potentially at least as significant in being value-enhancing for shareholders as it is for other parties, including customers, employees, and communities. Furthermore, Davies himself sets out how companies can make their purpose statements legally binding in an “embarrassingly simple” way without requiring any change to company law. Prosperity suggests that irrespective of the private or public nature of a corporate purpose, the ability to commit to it has immense potential benefit for all those affected by the firm, including its investors. While there is therefore no substance to the concerns and criticisms that Davies raises, there is a substantial issue that he does not address, which goes beyond the remit of Prosperity. This concerns the ability of companies to inflict negative detriments on others. It undermines the functioning of markets and the feasibility of companies to adopt positively beneficial purposes. It is this that may explain the limited extent to which large companies have committed to positive purposes to date, and it may provide a justification for the employment of private law and ordering as well as public law and regulation, and director duties as well as corporate obligations, in restraining corporate conduct.

Keywords: Purpose, director duties, entity theory, accountability, commitment, plurality

JEL Classification: D21, G3, K2, L2