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.
Many corporations have a greater turnover than the GDP of most countries. 500 corporations control about seventy percent of world trade and each year approximately 3 million new limited liability companies are registered. Therefore, the way these corporations are managed can 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 buy back 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 Purpose of the Corporation Project has launched a global roundtable series on corporate governance bringing together experts from business, academia, regulators and civil society to discuss the future of big business. The first event was held in September 2014 at Cass Business School in London and it has been followed by discussions in New York (June 2015), London (September 2015), Zurich (October 2015) and Breukelen (The Netherlands - February 2016). Further events are being planned in France, Germany, Norway and Belgium. Interested parties are encouraged to contact Frank Bold.
- Frank Bold co-organised a panel on human rights due diligence in law and practice at the UN Forum on Business and Human Rights hosted in Geneva (November 2015). Speakers included Robert Brooks (Norton Rose law firm), Sandra Cossart (Sherpa) and Richard Howitt (S&D Member of the European Parliament).
- Filip Gregor, Head of Responsible Companies at Frank Bold, participated in a panel discussion at the e2020summit organised by CSR Europe (November 2015). The objective of this event was to encourage businesses to contribute to achieving the Europe 2020 goals by delivering high levels of employment, productivity and social cohesion.
- Frank Bold partnered with CORE to deliver a workshop in London, UK in July 2015 on corporate governance. The workshop for civil society organisations addressing corporate responsibility connected corporate governance to issues that are directly relevant to their work, including sustainability, inequality and poverty.
- Frank Bold and Future Agenda held an expert workshop on the Future of the Company on 5 May 2015 at the Royal Society of Arts in London.
- Paige Morrow, Head of Brussels Operations at Frank Bold, presented at a joint EcoDa/ACCA event on “Creating value through governance: channelling corporate culture and ethics in boards?” on 5 May 2015 at EU Parliament in Brussels. The outcomes of the event can be found here
- 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 notes from a variety of disciplines written and endorsed by senior academics. Disciplines include accounting, law, politics and business management.
- 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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The Purpose of the Corporation Conference
Professors Johnston, Robé, and Stout on the Purpose of the Corporation, Company Law, and real world implications of the Maximising Shareholder Value theory.
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 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.
We launched a global roundtable series on corporate governance in London in September 2014, with subsequent discussions held around the world. The objective is to identify the outcomes that corporate governance should deliver, envision a desired future and show the way forward. The authors welcome corrections, comments and suggestions for improvement.
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.
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. Not to be cited without prior permission. Comments welcome.
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 initial perspective on the future of business by Paige Morrow. Workshops on 2015 will contribute to a book published by Future Agenda.
The Purpose of the Corporation project takes on the ‘shareholder value myth’, as Paige Morrow of public interest law firm Frank Bold explains in the ACCA Accountancy Futures journal (Spring 2015).
Article by Christopher Halburd linking the discussion on shareholder primacy in Australia with the Purpose of the Corporation Project. This article was first published in the December 2014 issue of Governance Directions, the official journal of Governance Institute of Australia.
Responding to proposed EU Directive 2014/0121
Analysis of impacts of MSV on the development of methods, purpose and standards of accounting and on accountability as such. A memo prepared and endorsed by leading academics in the field.
Summary of certain fundamentals of corporate law, applicable in almost all jurisdictions. A memo prepared and endorsed by leading academics in the field.
Memo explaining some aspects and economic consequences of MSV. Prepared and endorsed by leading academics in the field.
Summary analysis of impacts of MSV doctrine on corporations and their governance. A memo prepared and endorsed by leading academics in the field.
Memo explaining political consequences of MSV in corporate governance. Prepared and endorsed by leading academics in the field.
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
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.Go to the article
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.
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
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.
McKinsey&Company, September, 2014 by Eric Beinhocker and Nick Hanauer. Despite its ability to generate prosperity, capitalism is under attack. By shaking up our long-held assumptions about how and why the system works, we can improve it
European Financial Review, April 19, 2013 by Lynn Stout
TIME, September 25, 2013. Rick Wartzman.
CNN, January 24, 2014 by Andre Spicer, Special to CNN
Financial Times, July 7, 2013 by Sarah Murray
Harvard Business Review, June 2, 2014 by Roger Martin
Harvard Business Review, May 15, 2014, Interview with Gautam Mukunda by Sarah Green
Harvard Business Review, September 2014 by William Lazonick
Human rights should be on the MBA curriculum. Business schools are ignoring the emergent role of companies in modern society
Financial Times, March 16, 2014 by Ken McPhail
Forbes, March 14, 2014 by Steve Denning
High Pay Centre, March 6, 2014, Interview with Andrew Smithers
Sustainable Economy Project, January 15, 2014 by Paul Polman, CEO of Unilever
On Directorship, October 29, 2013 by Peter Tunjic
The Washington Post, September 6, 2013 by Steven Pearlstein
The Washington Post, August 27, 2013 by Jia Lynn Yang.
The Atlantic, June 19, 2013 by Justin Fox.
Financial Times, September 5, 2011 by Didier Cossin
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
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/bHXZLL
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.
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.
The SCP is an international academic project which aim has been to find out how to integrate environmental concerns better into the decision-making in companies.
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.
Carrying the legacy of Peter Drucker, Drucker Institute is on a mission of strengthening organizations to strengthen society.
An initiative launched by the Church in the UK, rallying business leaders to explore the business need for change and how a rediscovery of corporate purpose and a focus on personal values might best be brought together in the service of society.
A business philosophy and emerging network of Conscious Capitalists - entrepreneurs who integrate higher purpose, stakeholder orientation, conscious leadership and conscious culture into their business.
An international, multi-stakeholder initiative hosted by Tellus Institute. Its goal is to develop and disseminate a vision, pathway for the 21st century corporation in which social purpose moves from the periphery to the heart of the organization.
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.