How Great Companies Deliver Both Purpose and Profit

The Harvard Law School Forum on Corporate Governance and Financial Regulation 2020-10-01

Posted by Alex Edmans (London Business School), on Thursday, October 1, 2020
Editor's Note: Alex Edmans is professor of finance at London Business School. This post is based on his recently published book Grow the Pie. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here); For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); and Toward Fair and Sustainable Capitalism by Leo E. Strine, Jr (discussed on the Forum here).

In turn, companies were responding—or at least appearing to. Sustainability became the corporate buzzword of the day. It was the theme of this year’s World Economic Forum in Davos. Last August, the US Business Roundtable radically redefined its statement of the “purpose of a corporation” to include stakeholders, rather than just shareholders. BlackRock chief Larry Fink, in his annual letter to CEOs the last few Januarys, has stressed that their companies must serve wider society.

But it wasn’t clear whether these leaders genuinely meant what they said. Critics argue that Davos is more about appearing to do good than actually doing good. Skeptics speculate that the Business Roundtable made that statement to pre-empt anti-corporate regulation. Indeed, out of the 20 companies whose CEOs sit on the Business Roundtable board, not one has changed its corporate governance guidelines in the light of the new statement. Cynics claim that Fink’s letters are a response to accusations that index funds are excessively passive and don’t hold companies to account.