A project of the British Academy - 'The Future of the Corporation’ reached a major milestone on November 1, 2018 with the public discussion of a framework and supporting papers. The project is led by Oxford Prof. Colin Mayer.
In his framework, Prof. Mayer puts forth a radical reinterpretation of the nature of the corporation that focuses on the corporate purpose, its alignment with social purpose, the trustworthiness of companies and the role of corporate culture in promoting purpose and trust. This view of the corporation rejects shareholder primacy - that the sole social purpose of the business corporation is to maximize shareholder wealth.
Instead, Prof. Mayer ‘puts forward an alternative approach that emphasizes the role of corporate purpose, commitments, trustworthiness and culture in which companies specify their purposes, clarify their associated commitments and demonstrate how their ownership, governance, performance measurement and management enable them to fulfil their obligations. Corporate and social purposes are aligned in companies and activities of particular social significance but not necessarily elsewhere.’
Prof. Mayer would implement his view of the corporation of the future by:
- The starting point should be to recognize that the purpose of corporations is not simply to maximize shareholder value.
- Corporations should specify their corporate purposes.
- They should clarify the commitments that they make to the different parties to the firm associated with their purposes.
- They should demonstrate how they can be trusted to uphold their commitments.
- In particular they should record how their ownership, governance, performance measurements and incentives promote commitments to their purposes.
The ways in which corporations are encouraged to demonstrate commitment to purpose are in Prof. Mayer’s view:
- Corporate law should require companies to specify their corporate purposes.
- It should enable companies to adopt structures that are best suited to the delivery of their purposes.
- It should require companies to demonstrate how their ownership, governance, performance measurements and incentives encourage them to commit to the delivery of their purposes.
- It should require certain classes of companies that perform particular public and social functions, such as utilities, banks and companies with significant market power to align their corporate with their social purposes.
- The regulatory system should promote an alignment of corporate with social purposes where required and ensure that companies’ ownership, governance, measurement and incentive systems are appropriate for this.
The foregoing and much more is set forth in a just-published, must-read book by Prof. Mayer, Prosperity. The Mayer proposal for corporate governance and the policy changes that are necessary to develop it will return corporations to long-term sustainable investment, combine profitable operations with adherence to ESG and CSR principles, and sharply reduce short-termism and activist attacks.
Interestingly, on the same day as the British Academy program, the British Government agreed to amend the law to make it clear that pension plans have a fiduciary duty to protect long-term value by considering environmental risks of the companies in which they invest. The British Government stated that the new rules ‘will push consideration of long-term value and environmental risks down the investment chain to investee firms.’
The objectives of the British Academy project parallel those of the World Economic Forum’s The New Paradigm: A Roadmap for an Implicit Corporate Governance Partnership Between Corporations and Investors to Achieve Sustainable Long-Term Investment and Growth, the difference being the means by which they are achieved. The latter by voluntary action by corporations and investors, the former by legislation. Recent actions by the British Government and proposed legislation such as the Accountable Capitalism Act introduced in August 2018 by Senator Elizabeth Warren show that legislation impacting both corporations and investors is a distinct possibility. The case for change is compelling. One way or the other, Prof. Mayer’s concept of the corporation of the future will be achieved.
Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz.