The very foundation of companies – that they exist to generate shareholder value – is being questioned as companies focus on their purpose.
The supremacy of shareholder interests has always profoundly influenced modern capitalism and corporate strategy. CEOs and boards have long been guided by a primary duty to deliver shareholder value.
However, society has transformed in the past decade. Between the fallout of the global financial crisis, increasing resistance to the forces of globalisation and digitisation, and increasing climate activism corporates today face unprecedented volatility and levels of scrutiny as to how they do business. In a new era of social consciousness – and social media – brand equity built up over centuries can be lost in seconds.
As Charles Wookey, a founder of A Blueprint for Better Business, points out: “It is much harder now for organisations to say one thing and do another, because of media and public scrutiny. Companies can’t manipulate their reputation the way they could in the past.”
A new generation of chief executives is emerging who recognise the new landscape and understand that capitalism itself is on trial. A greater focus on environmental, social and governance factors is required if the principle of private enterprise is to endure.
Their response - putting societal purpose at the heart of a company's strategy instead of shareholder interests - will profoundly change a company's approach to everything it does. Further, it will lead the next iteration of the role of general counsel.
Founder of 'A Blueprint for Better Business'
It is much harder now for organisations to say one thing and do another, because of media and public scrutiny.
For those that believe that the concept of corporate purpose is faddish - or perhaps even non-existent - there are signs across the globe that a greater focus on environmental, social and governance (ESG) factors is here to stay. Boardrooms, academia, regulators and investors are all signalling that there can be no return to the 'greed is good' culture.
This is being led in many instances by chief executives themselves. 181 of them signed a 'Statement on the purpose of a corporation' in August in a move organised by chief executive association Business Roundtable. The statement, from what is sometimes viewed as a somewhat reactionary institution, committed signatories to "lead their companies for the benefit of all stakeholders – customers, employees, suppliers, communities and shareholders". It represents a stark evolution from Business Roundtable’s previous principles of corporate governance, which approved that ‘corporations exist principally to serve shareholders’.
Not to be outdone, in October the World Economic Forum announced that it would aim to develop a "‘Davos Manifesto 2020’ to reimagine the purpose and scorecards for companies and governments". Speaking at the time of the announcement, professor Klaus Schwab, founder and executive chairman at the World Economic Forum, observed that, “People are revolting against the economic ‘elites’ they believe have betrayed them, and our efforts to keep global warming limited to 1.5°C are falling dangerously short."
Professor of Management Studies at Saïd Business School, University of Oxford
There is a view that focusing on shareholders’ interests is not the only way to make corporate valuations go up.
Regulators are also responding to the new normal. In the UK, the Financial Reporting Council (FRC) has established a new Corporate Governance Code, which ‘puts the relationships between companies, shareholders and stakeholders at the heart of long-term sustainable growth in the UK economy’. The code applies to accounting periods that start on or after 1 January 2019 and asks that companies include a statement in their strategic reports, pinpointing how directors have considered relevant provisions of the Companies Act 2006.
The Act also demands that directors consider factors beyond the interests of the shareholders, including supplier and customer relationships, and the interests of employees; they must also consider the long term consequences of any business decision.
Regulation on its own will not change a company's culture, but it does help a company to begin to change how it conducts itself and makes decisions according to EasyJet general counsel Maaike de Bie.
"I don’t think that many companies today are solely focused on shareholder profit. Even so, the corporate governance code is encouraging us to do more, including making sure that conversations at board level take into consideration all stakeholders’ interests and then evidencing how we have done that," she said.
GCs should be advising not just on how decisions are made, but providing insight on what behaviours regulatory demands are seeking to drive. This provides them with an opportunity to help define a company's approach to the biggest questions it faces.
Bringing organisational purpose into those conversations is not easy: the concepts involved in purpose, values and strategy are hard to define and articulate. But putting these issues in a commercial context and guiding the company through them is an important part of a forward-looking GC's role.
The process naturally generates tension with shareholder interests, which will remain vital to a company. Corporate and ESG expert Martin Webster of Pinsent Masons said companies need to ask themselves:
Are we here to make profit and produce long-term value for the owners of the business? We need to concentrate on having a good purpose, to stick to that for our stakeholders, while continuing to produce value.
And if companies don’t focus on balancing financial returns with societal value, investors will do it for them. Many institutional investors have made it clear that they want businesses to address climate change, for instance. The number of institutional investors cutting fossil fuel stocks from their portfolios has risen from 180 in 2014 to over 1,100 in 2019, according to a Financial Times analysis.
Mari Sako, professor of management studies at Saïd Business School, University of Oxford, believes that the shifting notion of what drives a company's purpose is already leading businesses in Europe and the US to make considerable changes: “There is a view that focusing on shareholders’ interests is not the only way to make corporate valuations go up. Whether it is environmental concerns or poverty reduction, ultimately corporations have a high regard for risk and reputation. Every hard-nosed board member knows that.”
Martin Webster said that companies should not underestimate the scale of the task ahead for companies committed to change. “This is not just a PR exercise,” he said. “This is a cultural change that needs to be driven from the top and percolated down through the business. The GC needs to be at the forefront.”
There is a central role here for GCs prepared to take it on. “I do believe that a GC does not simply answer the question 'what is legal?', but also asks 'what is the right thing to do?'” said Maaike de Bie.
Pinsent Masons' head of client strategy Alastair Morrison agrees: "GCs are in an unparalleled position to act as the conscience or moral compass of the business. By using hard and soft power within their organisation, they can drive values and behaviours into the DNA of an organisation's critical functions."
Morrison believes that while the purpose agenda must be driven from the top, by the chief executive and the board, there is a pivotal role for the GC and the legal team in informing the boardroom discussion, then enacting sustainable change to ensure that organisational purpose weaves its way into all aspects of corporate life.
Mari Sako, who has researched the role of the GC for over a decade, agrees. Sako believes that that chief executives and corporate boards are consulting the GC on issues far beyond legal interpretation, and in-house professionals are responding to that.
Head of Client Strategy
GCs are operating in a more contextualised environment now. You can’t have the legal department separated from the rest of the business.
“Where corporates are going to be quite visible to social media, traditional media and civil society, I would say that in-house lawyers have to be sensitive to what the expectations are from society at large," she said.
GCs have to rise to this challenge to act in a wider role, moving beyond regulatory compliance to becoming a force for real change in their company.
Alastair Morrison said that GCs and their teams are much better equipped to engage with the business than they used to be: “GCs are operating in a more contextualised environment now. You can’t have the legal department separated from the rest of the business.”
Over the last decade or more, in-house departments have become much more embedded within the wider business. Departmental influence now reaches far beyond narrow legal questions and into areas such as environmental impact, resources overuse and the provenance of goods and services.
And mature in-house house departments are increasingly populated by people who have always worked in-house. No longer do businesses automatically seek to hire experienced lawyers from law firms to move into the GC role or other senior legal positions. This means that GCs and in-house teams often have a more finely tuned sense of how to wield the soft power of the office of the general counsel in order to drive organisation-wide outcomes than was the case in the past.
Further, GCs feel increasingly compelled to think more widely about ethical and reputational issues, beyond what they may have done 10 or 20 years ago.
This has been evident in how companies now approach non-disclosure agreements (NDAs) in the aftermath of the #MeToo movement. GCs nowadays will recognise that the use of NDAs might protect the business in the event of an employment dispute, but that their use can have significant costs in other ways if they are seen as tools to silence victims of abuse.
Martin Webster says that GCs will now think differently about how to mitigate risk in light of non-legal consequences, and the same will be true in other areas of business conduct which run counter to organisational purpose.
Mari Sako believes that the purposeful corporate phenomenon is a perfect opportunity for GCs to truly demonstrate their value to the business: “For GCs, it would be good to think about what their role is," she said.
For the past decade, the image and requirements of the general counsel have changed dramatically. No longer are GCs dismissed as risk-averse naysayers. Instead, they are increasingly seen as creators of solutions, and business enablers. The very best are viewed as innovators who have shifted the perception of legal from that of a cost centre to a function which is critical to driving material value for the business and its stakeholders.
Notwithstanding a reputation for conservatism, senior in-house lawyers have adapted admirably in the wake of the global financial crisis. The next challenge now awaits. As capitalism itself stands on the precipice of revolution, so too the general counsel role faces the prospect of its next metamorphosis.