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. In a recent paper, an edited version of which will appear in a forthcoming volume, I critically review the main theories and the current trends concerning corporate purpose and try to understand the role played by sustainability in this context. I conclude that sustainability can be seen as a game changer, to the extent that not only regulation but also conduct guidelines and ethical standards operate as constraints on the behaviour of enterprises and their pursuit of profits.
As already argued by other scholars (E. Rock), corporate purpose can be analysed from different perspectives with different aims in mind. Lawyers look at corporate purpose mainly to establish for whom the corporation is run and what the duties of directors are. The main legal systems diverge on definitions but not very much on substance, given the limited relevance of corporate purpose in the practice of law. Economists focus on corporate purpose to define the role of firms in a market economy and the incentives—including the pursuit of profit—through which business corporations efficiently serve their productive function. Finance scholars are especially interested in valuation issues and mainly think of corporate purpose in terms of either shareholder value or firm value maximization. Recent works by finance and management scholars argue, however, that the value to maximize is not only shareholder value (or firm value) but also (and, for some, predominantly) social value. Management studies in particular show how corporate purpose and its derivatives (like corporate mission, vision and values) can be resorted to in orienting the corporate organization towards the goals that directors and managers choose to follow in the strategy and activities of their firm. Clearly these goals are not identified exclusively with the pursuit of profit but also extend to social responsibility issues.
Amongst existing theories, I express my preference for the enlightened shareholder value (ESV) theory, which requires stakeholder interests to be satisfied subject to shareholder value maximization. After being suggested by economics and finance scholars, ESV is widely adopted in policy discussions and in corporate practice, possibly with variations such as those suggested by the theory of ‘shared value’. However, ESV needs refinement today to take account of some of the criticisms and insights found in recent scholarly works stressing the social values that should be pursued by corporations. Stakeholder protection should not be seen exclusively as instrumental to long-term value maximization—as narrowly suggested by ESV—but also as an outcome of the compliance with legal rules and ethical standards, which apply to different types of firms and aim at controlling externalities that either directly or indirectly derive from their activities. In a rising number of situations firms internalize externalities not only because they find it profitable in the long-run or at least suitable to reduce their risk exposures, but also to comply with the regulatory or ethical standards that protect relevant stakeholders.
The role of regulation in constraining firm value maximization is easily understood. Environmental protection, to make an obvious example, largely depends on government regulation, which is binding on firms and models their actions. Stakeholder protection in similar cases cannot be seen as directly instrumental to firm value maximization, for it is primarily required by regulation to reduce externalities. Many other actions are performed by firms, particularly the large ones, in compliance with ethical standards that are globally recognized in statements and guidelines issued by international organizations and subscribed to by firms for the protection of relevant stakeholders. Prominent examples are found in the UN Global Compact and the OECD Guidelines for Multinational Corporations. These documents are not binding per se, but their principles are often reflected in the applicable national laws and for the rest are followed voluntarily by the corporations concerned, especially when their managers have officially committed to respect the relevant standards. The calculus of instrumentalism is ‘indirect’ in similar cases and the protection of stakeholders simply derives from the compliance with the relevant standards. To the extent that discretion is left to the managers under the individual standard, the managers will also refer to the impact of their actions on the long-term value of the firm. But they may also decide on similar actions on purely moral grounds, filling their discretion in a way that they deem consistent with the content and spirit of the standard to apply.
Guido Ferrarini is Emeritus Professor of Business Law at the University of Genoa, an Academic Member at the EUSFiL and a Fellow and Research Member at the ECGI.