Last month I attended “The Purposeful Company: a healthy prescription for UK public companies?” at the London School of Economics. The lecture was based upon a recent report published by the Big Innovation Centre (“BIC”) and focused on proposed changes to Company Law and Regulation, aimed at fostering a culture of corporate purpose. The presentation covered the importance of corporate purpose, the implications and failures of the current legal and economic ecosystem, and proposals for legislators, investors, and companies alike moving forward.
Read below for my notes on what it means to have corporate purpose, shareholder commitment to corporate vision, and proposals for decision makers.
Purpose: what does it mean, and why does it matter?
Purpose does not necessarily mean non-profit or charity. It could simply be a clear aim to be the very best in a field, to be innovative, or to present a fresh challenge to established companies.
“Purpose” was defined by the panel as “clearly defined visionary corporate purposes, which set out how the company will better peoples’ lives.” Enterprises such as Google, Tesla and Toyota were cited as examples of good purposeful companies.
The panel proposed that a clear purpose is beneficial to corporate and economic success. When compared to counterparts in Europe and the United States, the report concludes that British companies are inadequately organised around clear corporate purposes that unite all stakeholders in common goals and values.
There is a crucial distinction between the engaged owner shareholder and the short-term investor shareholder. BIC see the engaged owner shareholder as being crucial in the long-term success of a business, and therefore the economy as a whole.
One key function of the firm today should be to implement the visions of founders and entrepreneurs that are difficult to communicate to outside investors. Companies which are ambitious to create value and sustain purpose need devices to enable shareholder commitment. Examples of such commitment include staggered boards, takeover protection mechanisms, and dual shares.
Ownership and purpose
British companies often have a diversified and widely fragmented shareholder base. Conversely, many of the very largest and most successful non-British companies in the world have significant blockholders – shareholders who hold large amounts of stock, who are generally institutional investors. BIC therefore drew the conclusion that the British model serves to incentivise short-term performance in British businesses, at the expense of long term sustainable economic growth.
What can be done? Five key options:
- Business Implementation and Remuneration. Companies should make purpose more salient in their corporate thinking, company statements, business practice and remuneration structures.
- Corporate Governance and Commitment Devices. Modified or hybrid staggered boards and dual shares could be introduced along with strengthening the voice and power of stakeholder groups – whether through reform of Section 172 of the 2006 Companies Act or the establishment of new stakeholder panels. Restrictions could be considered on the rights of short-term shareholders during takeovers.
- Blockholding, Monitoring and Engagement. Loyalty shares, improved information disclosure and safe-harbouring large investors who in exchange for supporting purpose win access to privileged inside information could all enable more blockholding. Overhaul accounting standards and financial reporting to encompass the role of intangibles.
- Strengthen Capabilities of Asset Owners. Stewardship code to be strengthened along with tax incentives to encourage asset managers to sign up.
- Reverse Decline of British equity ownership. The equalisation of the tax treatment of debt and equity would promote equity issuance. Suggestions included Employee stock ownership schemes, Customer stock ownership plans (CuSOPs) would supplement ESOPs, and a British sovereign wealth fund to invest in purposed public and private companies.