The Modern Corporation Project is an academic project led by Dr. Jeroen Veldman and Prof. Hugh Willmott, both at Cass Business School, City University, London, which studies how political economy conditions corporate governance theory and practice. The Project has invited leading academics to prepare memos on the framing and effects of maximizing shareholder value from their respective fields.
500 corporations control about seventy percent of world trade and each year approximately 3 million new limited liability companies are registered. The way these corporations are managed can therefore affect the potential for either positive or negative change, depending on the chosen stewardship. The biggest question we face go to the very core of business:
What is the purpose of these corporations?
The popular conception is that corporations exist principally for the purpose of maximizing shareholder value (MSV). This idea is firmly embedded in business thinking; it is taught in business and law schools around the world, and it provides a theoretical basis for corporate governance regulation.
Corporate governance organizes internal structures, allocates resources and defines the division of value to various stakeholders. Modern corporate governance is heavily reliant upon a number of taken for granted assumptions which include:
- Shareholders own corporations.
- Company directors and senior executives are the agents of the shareholders.
- Shareholders are the sole residual claimants in corporations.
- Company directors are legally obliged to maximize shareholder value.
- Shareholders provide capital to corporations.
- Maximizing shareholder value provides better returns to shareholders, is better for the corporation and is in the best interests of the economy.
- It is also often assumed that firms or businesses are legal entities.
However, these assumptions are not supported by law and the empirical evidence against MSV now seems to be overwhelming. The idea is implicated in a range of unintended consequences including:
- an inappropriate focus on the short-term that has prevented businesses from investing in innovation to foster long-term sustainable growth.
- potentially (and paradoxically) sub-optimal returns to shareholders.
- narrowly focused remuneration schemes that result in excessive executive pay.
- increase of inequality, in part due to the failure to translate corporate profits into increased salaries across the firm.
- a range of other negative social and environmental externalities including the global financial crisis and climate change.
When corporations are governed as if only maximisation of shareholder value matters, they are often forced to make decisions that are not always good for their long-term success. This narrow focus on short-term returns has affected the very core of corporate governance.
The unexpected impacts
Shareholders are an important class of stakeholders in a corporation. They have unique rights in corporate governance but in the case of public companies with dispersed shareholdings, their perceived interests, or more precisely the dynamics of the financial markets, often result in short-term decision making within the company. Efforts to boost share price result in a number of adverse impacts:
- MSV has led to a massive extraction of value from the economy through the phenomena of dividend payments and stock buy backs, where companies repurchase their own shares from shareholders.
- Such efforts to maximise share price in the short-term are often financed by debt and/or carried out at the expense of investment in innovations as well as social and human capital. At the same time, in the USA, CEO pay in 2012, was 354 times that of an average worker.
- Linking top executives' pay to share price encourages excessive risk-taking, side-lines the company's long-term performance, and emphasis on environmental and social criteria in managing the company.
- In 1960, the average holding period of stock in the S&P 500 was eight years. Today it is four months. In the 1950s, the average life expectancy of a Fortune 500 company was 50-60 years, now it is 15 years.
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It is widely acknowledged that the global financial crisis has been linked to the drive to maximize shareholder value yet many of the current policy responses to that crisis serve only to further entrench this sole purpose. However, there are opportunities to take action and motivate major change.
- The Non-Financial Reporting Directive will come into effect in 2017. Over 6000 large public-listed companies will be required to report on environmental, social and governance issues. This will allow investors and society at large to understand salient risks of adverse impacts linked to the company as well as those risks that have already materialized. The objective is to lay the foundation for a new model of corporate reporting that complements financial transparency with other information necessary for understanding of a company’s development, performance and position, as well as impact of its activity on society. Frank Bold has been involved in the legislative process since its inception and continues to monitor and assist in the transposition to national law. We also advise companies on how to comply with the requirements and improve their corporate governance.
- The Project launched a global roundtable series on corporate governance that brought together experts from business, academia, regulators and civil society to discuss the future of big business. Events were held in London (September 2015), New York (June 2015), Zurich (October 2015) and Breukelen (The Netherlands - February 2016). Paris (April 2016), Oslo (August 2016). The results of the global roundtable series were presented at a high-level conference inn September 2016.
- In its first major event, the Purpose of the Corporation Project brought together in excess of 120 thought leaders, drawn from a diverse range of stakeholders including academia, business, civil society and policy makers, in the European Parliament. The videos of the event are available here.
- The aim of the Sustainable Companies Project has been to find out how to integrate environmental concerns better into the decision-making in companies. The goal is through that to contribute to sustainable development. The Project prepared a paper for the Purpose of the Corporation conference and will present its latest research in Brussels later this year.
- The Modern Corporation Project at Cass Business School has published succinct statements written and endorsed by senior academics from a variety of disciplines, namelylaw, accounting, politics and business management. The statements have been published in the Social Science Research Network.
- In order to create a new generation of globally responsible leaders it is necessary to re-visit the purpose of the corporation. One outcome of that process is the 50+20 Agenda which has produced a vision of the future of management education.
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'What is the purpose of the corporation?' video animation
Corporate culture only started shifting in the 1970s, when US scholars promoted the idea of maximising shareholder value as a company’s sole purpose. This belief has led companies to excessively focus on on short-term profits and is now embedded in business thinking and education. Frank Bold has released a video animation to review the purpose of the corporation and the myths of the shareholder value maximisation model. In earlier times, corporations were not only about generating profits. A backgrounder is also available online offering further information and data studies.
Compliance and reporting under the EU Non Financial Reporting Directive: requirements and opportunities
New reporting rules require certain large EU companies to include in their management report a non-financial statement. The objective is to lay the foundation for a new model of corporate reporting that complements financial transparency with environmental and social information necessary to understand a company’s development, performance and position, as well as the impacts of its activities on society. This briefing identifies who will be affected and explains how to comply with the new reporting requirements, as well as discussing the implications of the Directive for organisations generally.
The report is the result of a two-year global roundtable series organised by Frank Bold and Cass Business School. It presents an emerging comprehensive approach to corporate governance that can assist corporations to develop a broad understanding of their purpose, as well as build a corporate strategy that will deliver long-term sustainable value, build organisational resilience, and sustain a strong social license.
This document presents the main conclusions of the global roundtable series which are also compiled in the 'Corporate Governance for a Changing World' report. This executive summary synthesises the results and recommendations reflected in the different sections of the report.
In Spring 2017, Cass Business School and Frank Bold hosted a series of discussion events on corporate governance aimed at charting the development of practice and policy towards a governance model fit for the challenges of the 21st century. The first event focused on three key topics: executive pay, fiduciary duties and stakeholder engagement. The discussants equally examined how recent calls for a change in various aspects of the corporate governance system are connected to a broader rethink of governance models.
The second event of the series hosted by Cass Business School and Frank Bold in Spring 2017 focused on how broad systemic risks from the environmental and social areas relate to corporate governance; how these medium and long-term risks can be assessed and reflected in business, investment, and insurance strategies; how regulators can best address these risks; and what relevant economic models are available to engage with these broad systemic risks.
Building on the results of the previous two seminars on directors’ duties and systemic risks, the third event of the series on corporate governance hosted by Cass Business School and Frank Bold in Spring 2017 focused on best practice and the desired development of reporting and accounting practice and policy. The participants engaged with corporate purpose, fiduciary duties, long-term and ESG risks and related these to new and evolving legislative requirements that aim to support long-term oriented governance.
In Spring 2017, Cass Business School and Frank Bold hosted a series of discussion events on corporate governance. The purpose of the series was to respond to the renewed interest among practitioners and policy-makers, including the UK Parliament, Government and the European Commission in modernising corporate governance. The series aimed to provide answers to the key questions raised in this debate. The organisers of the events have drawn the following conclusions from the speakers’ remarks and subsequent discussions with the public.
To foster the debate on how corporate governance can contribute to long-term sustainable value creation for corporations, shareholders, and society, Frank Bold and Cass Business School jointly organised the Creating Sustainable Companies Summit. The summit gathered leading thinkers, businesses, policymakers and civil society in Brussels on September 28, 2016. This summary presents a selected high-level reflections expressed by summit speakers and the outline of the summit agenda.
This publication provide civil society organisations and responsible businesses with an introduction to corporate governance, an overview of potential corporate governance models and potential avenues for future policy reform. Second edition. Not to be cited without prior permission. Comments welcome.
Frank Bold published this paper on the occasion of the Business and Human Rights conference organised in Amsterdam during the Dutch presidency of the EU in spring 2016. The document analyses the current situation of corporate governance in Europe, first by identifying the problems and then by suggesting several alternative to the current shareholder-centric approach to corporate governance and company law. Our proposals are aimed at making European companies and the European economy more socially and environmentally sustainable, as well as more innovative.
Frank Bold, together with the Modern Corporation Project (Cass Business School) launched a global roundtable series on corporate governance in 2014, with subsequent discussions held around the world. Roundtable events have been held at major business centres around the world, including London (Cass Business School, Sept 2014 and 2015), New York (NYU Stern School of Business, June 2015), Zurich (University of Zurich, October 2015), the Netherlands (Nyenrode Business School, February 2016), France (April 2016), Norway (University of Oslo, August 2016) and Brussels (September 2016). This document draws together all the executive summaries produced after each roundtable.
The roundtable, co-organised by Frank Bold and the SMART Project, University of Oslo Faculty of Law, brought together leading experts on governance from across Scandinavia to discuss corporate purpose and best practice how should corporate governance contribute to long-term sustainable value creation. The keynote speech was delivered by Idar Kreutzer (Finance Norway). In addition, Markus Kallifatides (Stockholm School of Economics) presented research on the corporate governance practice of the Nordic region, while Prof. Beate Sjåfjell (University of Oslo) introduced recent corporate governance developments and updates in the European Union.
Frank Bold organised a roundtable on corporate governance in Paris with Affectio Mutandi and Cass Business School. Building on previous events held in London, New York, Zurich, and Breukelen (the Netherlands), the discussion in Paris focused on corporate purpose and the creation of long-term sustainable value. Keynote speeches were given by Professor Alexis Constantin (Université de Versailles Saint-Quentin) and Thierry Philiponnat (Institut Friedland, Forum pour l’Investissement Responsable, French Financial Markets Regulator (l’autorité des marchés français, AMF) and formerly of Finance Watch).
Frank Bold in partnership with Nyenrode Business University and Cass Business School held a roundtable on February 2016 that focused on corporate purpose and the creation of long-term sustainable value. This document was submitted to the Monitoring Commission of the Dutch Corporate Governance Code in response to the public consultation on the code's revision. The roundtable event was part of the "Corporate Governance for a changing world" global roundtable series.
Frank Bold in partnership with the University of Zurich Centre for Human Rights Studies and the Institute for Business Ethics at University of St. Gallen held a roundtable on the purpose of the corporation and the future of corporate governance in Zurich on October 29, 2015. The roundtable was a part of the series organised by the Purpose of the Corporation Project with support from the Modern Corporation Project based at the City University London Cass Business School.
This event held in London on September 2015 was part of the "Corporate Governance for a changing world" global roundtable series. It was co-hosted by Frank Bold and Tomorrow’s Company at Cass Business School. The event focused on how to capture long-term value by integrating environmental, social and governance factors into investment and management decisions.
This event was part of the "Corporate Governance for a changing world" global roundtable series launched by The Purpose of the Corporation Project. The New York round held on June 2015 was co-hosted by NYU Stern and Law, Aspen Institute Business and Society Program, the Conference Board Governance Center and Frank Bold. The summary provides a comprehensive overview of the different sessions held throughout the day. By Paige Morrow and Jeroen Veldman.
The current state of the law on fiduciary duties is uncertain and it is unlikely that the courts will have adequate opportunities in the near future to clarify matters. It would therefore be extremely helpful to have clarification at the EU (and national) level about the scope of discretion available to pension fund trustees. Many investors are willing to consider taking account of ESG risks in their policies and decision-making but are currently held back by legal uncertainties and (ill-founded) fear of liability. By Andrew Johnston (University of Sheffield) and Paige Morrow (Frank Bold). April 2016.
Frank Bold, with the support of ACCA (the Association of Chartered Certified Accountants), organised a roundtable on responsible investment and reporting on March 2016. The event was particularly relevant in view of the two current consultations published by the European Commission on non-financial reporting and long-term and sustainable investment.
How can corporate governance make big businesses financially, environmentally and socially sustainable? With this question in mind, the Purpose of the Corporation Project partnered with CORE and Cass Business School for a roundtable event.
In April 2014, the European Commission proposed to amend the Shareholder Rights Directive with the aim of improving corporate governance and promoting long-term shareholder engagement. This briefing outlines several key provisions in the Directive. We support the objectives of the Directive and believe that it will strengthen corporate governance of EU enterprises. The importance of good corporate governance extends beyond the narrow interests of either short- or long- term shareholders in an individual company.
This concept note outlines the objectives that we pursue and the ideas behind the Purpose of the Corporation Project (an initiative of Frank Bold).
The statements on Company Law, Economics, Accounting, Management and Politics seek to foster the development of a wide-ranging debate on the nature and consequences of contemporary corporate governance, which has put radical shareholder primacy at the centre of corporate attention. Prepared and endorsed by more than 250 high-level experts versed in a variety of legal systems, the statements provide a cross-jurisdictional and cross-disciplinary consensus for the development of a new vision on corporate governance. The work has been coordinated by Dr Jeroen Veldman, Senior Research Fellow at Cass Business School to support the Purpose Corporation Project.
In its first major event the Purpose of the Corporation Project brought together in excess of 120 thought leaders. The event, hosted by Richard Howitt MEP, was a collaboration between Frank Bold and the Modern Corporation Project at Cardiff Business School.
Short media articles
Responsible Investor, January 5 2017. By Paige Morrow.Go to the article
E!Sharp, January 2017. By Paige Morrow.
Board Agenda, January 2017. By Paige Morrow.
NewCo Shift. December 2016. By Paige Morrow.
Oxford Business Law Blog, November 2016. By Jeroen Veldman.
Financial Times, October 2016. By Stefan Stern.
Triple Pundit, October 2016. By Paige Morrow
E!Sharp, September 2016. By Paige Morrow.
Financial Times, September 2015, by Stefan Stern. The author revisits Sir Adrian Cadbury's work and questions the effectiveness of compliance in corporate governance. Stern refers to our global roundtable series and summarises our recent London event.
Europolitics, May 2015, by Paige Morrow. In a strong signal about the importance of fostering sustainable and transparent companies, the European Parliament’s Committee on Legal Affairs (JURI) approved, in May, a number of revisions to the shareholder rights directive that aim to enhance the role of long-term shareholders in corporate governance.
ACCA Accountancy Futures journal, Spring 2015, by Paige Morrow. The Purpose of the Corporation project takes on the ‘shareholder value myth’.
McKinsey&Company, September, 2014 by Eric Beinhocker and Nick Hanauer.
The Corporation as Time Machine: Intergenerational Equity, Intergenerational Efficiency, and the Corporate Form
Prof. Lynn Stout argues a board-controlled corporation can be understood as a legal innovation that historically has transferred wealth for the benefit of present and future generations. The modern embrace of “shareholder value” and “shareholder democracy” is damaging the firm’s ability to serve this role.
European Voice, November 8, 2014 by Paige Morrow. The emerging “Lux leaks” scandal, which revealed that Luxembourg approved questionable corporate schemes to avoid tax by major companies including Ikea, Pepsi and Deutsche Bank, has two interesting dimensions
December 2014, Governance Directions, the official journal of Governance Institute of Australia, by Christopher Halburd.
The initial perspective on the future of business by Paige Morrow. Workshops on 2015 will contribute to a book published by Future Agenda.
Financial Times, October 23, 2014 by Stefan Stern. A new initiative led by Frank Bold, a Czech a law firm, provides a welcome boost to clear thinking. Called simply the “Purpose of the Corporation” project, it is an ambitious attempt to get back to first principles.
CNN, January 24, 2014 by Andre Spicer, Special to CNN
European Financial Review, April 19, 2013 by Lynn Stout
TIME, September 25, 2013. Rick Wartzman.
Harvard Business Review, September 2014 by William Lazonick
The Washington Post, September 6, 2013 by Steven Pearlstein
The Atlantic, June 19, 2013 by Justin Fox.
Journal and research articles
Aspen Institute, May 2014Go to the article
Unrealized Potential: Misconceptions about Corporate Purpose and New Opportunities for Business Education
Miguel Padró, The Aspen Institute Business and Society Program, May 2014
Darrel West, Brookings, July 2011
Steven Pearlstein, Brookings, January 2014
Jean-Philippe Robé, Accounting, Economics, and Law, Volume 1, Issue 1, Article 5, January 2011
Links to books
The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations and the Public
Lynn Stout, Berrerr Koehler, 2012
Colin Mayer, Oxford University Press, February 2013
Rajendra S. Sisodia, David B. Wolfe, Jagdish N. Sheth, Pearson Education, February 2014, Second Edition
Studies and Consultations by Official Institutions
The High Level Expert Group on Sustainable Finance was set up in early January 2017 to help develop an overarching, comprehensive EU strategy on Sustainable Finance by giving operational, practical, and concrete recommendations. The questionnaire is aimed at gathering targeted feedback on the analysis and reflections in the interim report of the High-Level Expert Group and informing the preparation of the final report.Go to the link
Written evidence submitted by Cass Business School, Frank Bold and Sheffield Institute of Corporate and Commercial Law. The Green Paper was designed by the UK government to stimulate a debate on a range of options for strengthening the UK’s corporate governance framework, including options for increasing shareholder influence over executive pay and strengthening the employee, customer and supplier voice at boardroom level. The responses to the Green Paper will help the government understand the strengths and weaknesses of the different options and build a better evidence base.Go to the link
Written evidence submitted by The Modern Corporation Project at Cass Business School and Frank Bold. The consultation aims to examine the role and duties of directors, the duty to promote the long term success of the company and the integration of stakeholder concerns into corporate governance.Go to the link
First released in May 1999 and last revised in 2004, the OECD Corporate Governance Committee launched a further review of the OECD Principles of Corporate Governance. The review process started in 2014 with the objective of conclusion within one year. The OECD Principles are one of the 12 key standards for international financial stability of the Financial Stability Board and form the basis for the corporate governance component of the Report on the Observance of Standards and Codes of the World Bank Group. Frank Bold co-wrote a response to the public consultation with Prof. Andrew Johnson and input from several academic partners, available online.Go to the link
The Commission has proposed a 'Directive on the encouragement of long-term shareholder engagement', which seeks to revise the existing Shareholder Rights Directive with the aim of improving the corporate governance of listed companies. Frank Bold co-authored a commentary on the revision with Prof. Andrew Johnston and the input of several academics. Our commentary focuses mainly on the provisions relating to improving institutional investor and asset manager engagement, as well as those giving shareholders a right to vote on executive remuneration ('say on pay'). The commentary is available at the link below.Go to the link
Independent review on investment in UK equity markets and its impact on the long-term performance and governance of UK quoted companies. Professor Kay's analysis was accepted by the UK government.Go to the link
Important Consultations by Private Organisations
Following a public consultation in 2014, Mazars finalized its Board Charter provideing a structure for boards that are committed to adopting a societal approach to their business. The final version of the Board Charter is now available online.Go to the link
The consultation background paper finds there is little consensus about what corporate governance is for, making it difficult to assess whether it is doing a good job. The paper suggests the purpose of corporate governance should be to ensure companies create sustainable value and that governance practices should be evaluated on how well they achieve this purpose; it also advises that value should be considered in a wider sense than simply profit, and should consider societal and environmental value as well as economic value.Go to the link
About the Purpose of the Corporation Project
The Purpose of the Corporation Project provides a strategic, open-source platform for leading experts and organisations interested in promoting the long-term health and sustainability of publicly listed companies policy-making and business management. The Project works with academics and practitioners to develop new options for corporate governance models. We also liaise with business, policy makers and civil society organisations to encourage them to engage in an open public discussion with all stakeholders to properly consider the question of the purposes of the corporation.
The Project is kindly supported by the Charles Leopold Mayer Foundation for the Progress of Humankind, the Friends Provident Foundation, the Joseph Rowntree Charitable Trust, and the Wallace Global Fund.
A newsletter is sent every two months with the project's latest developments, upcoming and past events, publications, articles and related news. If you wish to receive it, please fill in the subscription form: http://eepurl.com/ciwcQD
The Purpose of the Corporation Project
is an initiative of .
Frank Bold is a purpose-driven law firm using the power of business and non-profit approaches to solve social and environmental problems. With six branches in three EU countries, Frank Bold provides legal expertise in corporate accountability to the European institutions as well as to NGO's in many countries.
The Purpose of the Corporation Project is extremely grateful for the counsel offered by the following members of our advisory group
- Paul Adamson
- Betsy Dietel
- John Montgomery
- Christopher Halburd
- Claire Thwaites
- Rick Wartzman
- Allen White
- Marcello Palazzi
Members participate in their personal capacities. Members do not necessarily endorse any view expressed by Frank Bold staff or any other person participating in any activity associated with the Purpose of the Corporation Project.
An international community of certified companies that aim to create public benefit as part of their business mission.
Sustainable Market Actors is a global research network involving scholars from universities all over the world, wishing to contribute to research that will promote global, sustainable development within a circular, low-emission economy compatible with the planetary boundaries and in line with the international development goals.
The BSP program is conducting a series of off-the-record and public dialogues among scholars, business leaders, and investors to broaden thinking about the corporate objective function beyond shareholder wealth maximization.
The GRLI's 50+20 Project aims to create a breakthrough in the transformation of management education to meet societal and environmental needs of the world in the 21st Century.
Carrying the legacy of Peter Drucker, Drucker Institute is on a mission of strengthening organizations to strengthen society.
Tomorrow’s Company is a not-for-profit think-tank that aims to encourage a business approach that creates value for staff, shareholders and society through a focus on purpose, values, relationships and the long-term. Their approach is to identify the changes needed to ownership and governance structures and government policy in order to create conditions in which companies can flourish.
Blueprint for Better Business is an independent charity that challenge and support businesses to realise their true long-term potential: to serve society, respect people, rediscover their purpose and thereby earn a fair and sustainable return for investors.
A business philosophy and emerging network of Conscious Capitalists - entrepreneurs who integrate higher purpose, stakeholder orientation, conscious leadership and conscious culture into their business.
Shift was founded as a non-profit organisation after the endorsement of the Guiding Principles on Business and Human Rights at the UN. Their mission is to put the Guiding Principles into practice in order to support greater respect for the human rights of all people affected by business.
Focusing Capital on the Long Term is an initiative for advancing practical actions to focus business and markets on the long term. They conduct hands-on research to develop practical structures, metrics, and approaches for longer-term behaviours in the investment and business worlds, and advocate for adoption of these structures and metrics within the these communities.
NYU Stern’s Center for Sustainable Business’s mission is to assist current and future business leaders develop the knowledge, skills, and experience needed to address environmental and social challenges, so their business can reduce risk; create competitive advantage; develop innovative services, products, and processes; while building value for society and protecting the planet.
The Institute of Business Ethics is a non-profit professional organisation that aims at promoting high standards of business practice based on ethical values through the dissemination of knowledge and good practice.
ETHOS is a leading centre for cutting edge thinking about responsible enterprise, based in the City of London at Cass Business School. The three key pillars for guiding exploration efforts at ETHOS are responsibility, sustainability, and governance.