The Wall Street Journal - USA (2020-12-07)

THE WALL STREET JOURNAL. Monday, December 7, 2020 |R5

T

he ideathat com-

panies need to

pursue a purpose

beyond profit has

gained traction in

recent years,

growing stronger

in 2020 with the

pandemic and so-

cial-justice protests.

But 50 years after University of

Chicago economist Milton Friedman

argued in a seminal essay that the

only responsibility of business is to

make money for shareholders, cor-

porate purpose remains a contro-

versial topic. Indeed, many inves-

tors, academics and even executives

say that trying to overhaul capital-

ism by requiring firms to be pur-

pose-led could make things worse,

not better, for those such efforts

are intended to help.

One concern is that corporate

purpose reduces accountability.

Shareholder value can be clearly

measured, so it’s easy to assess

whether a company is delivering it.

But “purpose” is nebulous and

means different things to different

people. An energy firm that closes

coal-fired plants, causing mass lay-

offs, could be deemed purposeful as

it’s serving the environment. But

one that keeps such plants open to

preserve employment might be

viewed as purposeful through an-

other lens. If all sorts of actions can

be consistent with purpose, there’s

no way to hold an executive to ac-

count—anything goes. Evidence sug-

gests that reducing accountability

to investors reduces long-term

value, with no corresponding benefit

to other stakeholders.

A second concern is that often a

stated purpose is generic and

doesn’t tell you what the enterprise

stands for. A purpose to “build a

sustainable company that creates

value for our investors and stake-

holders” is meaningless, as any

company could have this purpose.

Or a company issues an inspiring

purpose statement, but never puts

it into practice. Under cover of an

ill-defined purpose, a CEO might

pursue his or her pet social causes,

rather than the ones most mate-

rial to the company’s business.

This matters: Research shows

that only performance on mate-

rial social issues ultimately bene-

fits investors.

So should we abandon the

whole idea of purpose? Not nec-

essarily. The trick is to find a way

for firms to pursue purpose while

remaining accountable to inves-

tors and ensuring that state-

ments translate into action. Our

proposal is to give investors a

“say on purpose” vote, similar to

thetwo-part“sayonpay”votes

that investors have in Europe.

Hereishowitwouldwork.A

company issues a statement

stating its purpose beyond prof-

its. Importantly, it would clarify

the principles that would apply to

implies. The statement is impor-

tant, but what matters most is

whether it is put into practice.

Therefore, every year investors

also would have an “implementa-

tion vote” on whether they are

satisfied with how the company is

delivering on the statement.

The power of the say-on-pur-

pose approach is immense. First,

the policy vote would give clear

guidance to companies on how to

make decisions that involve trade-

offs, but with the legitimacy pro-

vided by investor support. In a re-

cent paper, Oliver Hart of Harvard

University and Luigi Zingales of

the University of Chicago noted

that investors might be willing to

sacrifice some value for social ob-

jectives, and suggested that com-

panies hold a shareholder vote on

BYALEXEDMANS ANDTOMGOSLING

each major decision. The problem

is, companies often need to make

decisions on a timely basis, such

as whether to continue paying fur-

loughed staff in a pandemic. Inves-

tors also might not have capacity

to vote meaningfully on multiple

decisions a year. Say-on-purpose

achieves the same objective but in

a more practical way that retains

decision rights within the board.

Second, the implementation

vote will enrich the dialogue be-

tween investors and management.

The power isn’t just the vote itself,

but the process that investors

must undergo to cast it. A com-

mon complaint is that investors

focus excessively on short-term

profit, but they will need to deeply

scrutinize a company’s long-term

value and stakeholder relation-

ships to vote meaningfully. This

feeds back into the first advan-

tage: Knowing that investors will

evaluate the company based on

long-term performance, executives

will have the confidence to make

long-term decisions.

Many proposals to reform capi-

talism seek to weaken investor

rights, reducing accountability.

Rather than moving from share-

holder capitalism to stakeholder

capitalism, those proposals would

lead to “managerial capitalism”

where CEOs pursue their own in-

terests, shrinking the pie for both

shareholders and stakeholders.

Say-on-purpose goes with the

grain of investor oversight, but

provides a way for factors beyond

shareholder value to be taken into

account with legitimacy. Impor-

tantly, say-on-purpose can be initi-

ated by companies themselves,

without the need for regulation.

By proactively elevating the dia-

logue beyond short-term profit,

firms will have the freedom to fo-

cus on long-term value—benefiting

both shareholders and society.

Dr. Edmansisaprofessorof

finance andDr. Goslingis an

executive fellow at London

Business School. They can be

reached [email protected]. MIKEL JASO

JOURNAL REPORT|INVESTING IN FUNDS & ETFS

Sustainable Investing

Who Sets the ‘Purpose’?

Investors should have a say in a company’s goals beyond profits

trade-offs the company might

make between investors and

stakeholders (say, it will sacrifice

profits to reduce carbon emis-

sions) or between different stake-

holders (it will decarbonize even

though doing so will lead to lay-

offs). Every three years, investors

would have a “policy vote” on this

statement, to convey whether they

buy into it and the trade-offs it

Corporate purpose

is a controversial

topic. One concern

is that it reduces

a company’s

accountability, write

these academics.

Company Name Symbol Weight

Chevron CVX 23.08%

Exxon Mobil XOM 20.73%

ConocoPhillips COP 4.81%

Schlumberger SLB 4.49%

EOG Resources EOG 4.43%

Kinder Morgan KMI 4.24%

Phillips 66 PSX 4.21%

Marathon Petroleum MPC 3.98%

Williams WMB 3.85%

Valero Energy VLO 3.41%

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