Profound and unanticipated transformations are reshaping relationships between organisations and the societies within which they operate. Over the past five decades, organisational success – and specially that of firms – has primarily been measured by reference to financial performance metrics. However, a paradigm shift is now occurring in society's expectations toward firms, demanding their involvement in solving pressing environmental challenges (such as climate change and biodiversity loss) and addressing social inequalities.
In this new landscape, the multiple voices advocating for transforming the way businesses operate can no longer be ignored. These voices together wield considerable influence, urging firms to adopt sustainable practices and mitigate their environmental and social impact. Furthermore, consumers and employees, increasingly driven by a desire for purpose in their personal and professional lives, are paying close attention to how firms address social demands for more sustainable and equitable value sharing.
Embracing this new reality presents both opportunities and challenges for organisations. They must now navigate a complex landscape that demands innovative solutions and long-term thinking. The need for sustainable practices and responsible organisational behaviour extends beyond mere regulatory compliance. Today's organisations must engage in purpose-driven initiatives, actively seeking ways to reduce their carbon footprint, preserve biodiversity, and contribute to social justice.
It has taken some time for this moment to arrive. Ed Freeman, the American philosopher and Professor of Business Administration at the Darden School of Business at the University of Virginia, is arguably the father of modern stakeholder theory with the publication of his highly cited book Strategic Management: A Stakeholder Approach in 1984.
It took the Global Financial Crash of 2007-8 to change the frame of reference and accelerate the demise of single interest (shareholder) capitalism. Governments and taxpaying citizens were forced to bail out the banks after their irresponsible lending practices became public, and with that emerged a new consensus that organisations need to pay more attention to their role in society and look beyond shareholder metrics for measures of their success. Corporate purpose rocketed back up the agenda. Many of today's largest organisations now engage in purpose-driven strategic assessments, actively seeking ways to reduce their carbon footprint, preserve biodiversity, and contribute to social justice.
Critics of this new purpose movement have two lines or arguments:
- External – accountability to all risks accountability to none
- Internal – incorporating multiple stakeholder goals into decision-making processes is impractical.
There is merit in these two lines of argument. Taking account of multiple different stakeholders and different issues is complex and demands attentive management with distinctive skills. Addressing multiple interests and goals corrodes chains of command and chokes decision processes.
Our argument is that it is time for a renewal of governance structures. Merely incorporating some environmental, social and governance (ESG) concerns into strategic discourses is no longer sufficient.
In a new research paper, co-authored with a number of distinguished academics and practitioners from across Europe, we argue that a more balanced and comprehensive model of organisational purpose and governance, along with a fresh measurement approach for evaluating organisational contributions, is necessary. To achieve this, we now put forward a coherent set of principles and processes grounded in the fundamental characteristics of organisations, such as the delegation of authority, acceptance of risks, value creation, and value sharing. These principles are underpinned by the notion of corporate responsibility towards society and aligned with the prevailing organisational laws applied throughout Europe.
We start with some founding principles anchored in a clear understanding of the purpose of the organisation. Boards have a renewed responsibility to debate and agree a clear statement of organisational purpose, something that we have called for before in the Enacting Purpose Initiative . It is good to see momentum building for such action, and growing evidence that directors are spending time on this critical issue.
Second, we call for an increased sense of responsibility rather than an accumulation of layers of constraints. Renowned lawyers and economists have long highlighted the rapid acquisition of power by the structured and functioning enterprise as a legal entity, often rivalling that of the state as a political institution. This 'political' dimension of organisations, further amplified by their production of influential products and services that shape our way of life, forms the foundation for concepts such as corporate social responsibility (CSR) and purpose.
And third, we believe it is now time to reintroduce the notion of 'fair sharing' of the rewards of enterprise. The current period of societal and environmental transition presents an opportunity for re-evaluating the concept of sharing, particularly in relation to the delicate task of establishing a distribution that ensures both the economic equilibrium of the firm and the just remuneration of all parties involved in its success. This concept, we argue has now become central to the fundamental reputation of business.
In support of these fundamental principles, we outline ten specific recommendations for board members of organisations as follows:
- Reassess purpose: boards urgently need to reappraise the stated purpose of the firms they lead. Organisational purpose is the expression of how an organisation can contribute solutions to societal and environmental problems. Organisational purpose should create value for shareholders and stakeholders, all of whom are central to a firm’s success.
- Think beyond rights: ownership needs to incorporate responsibilities as well as rights. Shareholders possess ultimate decision-making authority concerning the fate of organisations, while the board is responsible for shaping strategy, considering all stakeholders' interests. Ownership should not be conceived of as an absolute right - it carries a social function similar to other forms of private ownership.
- Improve time allocation: boards need to allocate more time to strategic matters. An effective governance model should not rely on the assumption that shareholder preferences translate automatically into strategy and deliver long-term sustainability of the firm.
- Increase board agility: boards need to become much more agile, balancing the need for centralisation with delegation. The governance structure of any organisation must clearly define the roles of each corporate body and promote reciprocal information exchange, while emphasising accountability. This approach fosters efficiency and engenders trust.
- Construct a societal agenda: board discussions need to assess active as well as passive stakeholder interests. It is unreasonable to expect organisations to single-handedly solve complex challenges such as climate change, human rights violations, or biodiversity issues on their own. It falls within the board's purview to decide how the organisation’s activities should aim to avoid harm (to humanity and to nature) while actively contributing to their improvement in order to mitigate the accountability risks that could damage the firm’s license to operate.
- Increase employee engagement: employees represent a critical constituency within an organisation. They are the individuals responsible for implementing the organisation’s purpose on a daily basis and, therefore, deserve the board’s specific attention. This means reassessing how employee voice can be best represented in organisational governance.
- Create relevant measures: in order for decision-makers to be held accountable for adhering to organisational purpose commitments, a shift is needed in the metrics used to evaluate an organisation’s performance. Non-profit related measures of effort and performance must be transparent and accessible to customers, investors, and the labour market so that economic actors can adjust their preferences accordingly.
- Focus on fairness: fair sharing is less about philanthropy, social responsibility, or ethics, than about enhancing business practices while simultaneously promoting societal prosperity. Fair sharing needs to become an integral part of an organisation’s strategy, entwined with social and financial costs and benefits.
Invest for better regulation: it is crucial to foster a deeper understanding of the growing integration of social and environmental issues within competition policy. Economic law is entering a new age, and with this the mandate of economic regulators need to adapt accordingly.
- Prioritise collaborative governance: compliance obligations that business leaders often perceive as restrictive and bureaucratic also can contribute to progress, trust, and garner support from managers and employees. A more collaborative approach to defining and shaping the interaction between government and business is urgently required.
Our recommendations are pertinent to anyone affected by business activities, and within a European context they provide a perspective on how organisations can adopt a more structured approach to societal responsibility. We hope that they provide a valuable contribution to the current debate on governance where the pursuit of profit and shareholder interests on the one hand, and ESG, sustainability and stakeholder interests on the other, are mistakenly seen as being in opposition to each other.
This article is based on the research paper A European Corporate Governance Model: Integrating Corporate Purpose Into Practice for a Better Society which Rupert worked on with 14 colleagues from across various European institutions.
The full list of Rupert's fellow authors are as follows: Bruno Deffains, Xavier Dieux, Laurence Dors, Rodolphe Durand, Martin Fischer, Daniel Hurstel, Jukka Mähönen, Colin Mayer, Renate Meyer, Anne-Christin Mittwoch, Guido Palazzo, Markus Scholz, Beate Sjåfjell and Jaap W. Winter.