Corporate purpose statements: Mostly hot air?

One thing that I was always sceptical about in my career is the tendency of corporations to develop corporate purpose statements. I know they sound good, and I know it is important for any organisation to know what its goals are so it can move towards these goals and not get sidetracked. But every company I ever worked for had corporate purpose statements that were either so trivial as to be inconsequential or phrased in such lofty qualitative terms that they had hardly any impact on the day-to-day work of the employees.

Good news then that a couple of silverback gorillas of economists (Raghuram Rajan, Luigi Zingales, and Pietro Ramella from the University of Chicago) did some work to analyse corporate purpose statements of the 150 largest companies in the US from 1955 to 2020, and their impact on corporate performance.

Using natural language processing methods, they were able to identify which companies made corporate purpose statements in shareholder letters, what these purposes were, and how they linked to executive compensation and the performance of the company. Below is a chart that summarises their results and shows that corporate purpose statements have shifted over time. In the 1960s, companies had mostly no purpose or one purpose – to be profitable and grow these profits. Over time, and particularly starting in the 1980s, more and more companies introduced additional goals to the point where the average large company today aims to meet 7.4 goals on average.

Companies’ corporate goals

Source: Rajan et al. (2023)

As you might expect, many of these goals are related to ESG and other nonfinancial metrics. The chart below shows that practically all companies have goals related to corporate performance, typically phrased as market share goals or profitability goals. However, almost all companies also state goals relative to other stakeholders, most commonly to serve their customers well and to be a fair employer. What really has proliferated in the last decade are goals related to society at large.

Types of goals stated by US corporations

Source: Rajan et al. (2023)

What was surprising to me was that these broader societal goals are nothing new. In the late 1960s and throughout the 1970s we saw a proliferation of these societal nonfinancial goals before. Looking at the kind of goals that were formulated back then, we can see that just like today these goals were mostly environmental goals and social goals.

Types of societal goals stated by US corporations

Source: Rajan et al. (2023)

If you think about it, there are good reasons for that. Back in the late 1960s and early 1970s, the US had major social issues. On the one hand, we had the racial tensions that boiled over after the desegregation of the South and the mass movements for racial justice led by Martin Luther King and others. On the other hand, we had environmental pollution that was so bad that people couldn’t ignore them anymore. The Cuyahoga River in Ohio was literally on fire in 1969 and that doesn’t make for nice TV pictures. The end result was the establishment of the Environmental Protection Agency (EPA) by President Nixon in 1970 and pressure on corporations to reduce the pollution they caused as part of their business operations.  

This past episode is emblematic of a general finding of the study. Companies use corporate purpose statements in reaction to public pressure to become better citizens and address certain issues. The bigger the public pressure, the more likely it is that a company will address these issues in a corporate purpose statement.

But does it change anything? Apparently not. The study found that companies who state that their only purpose is to maximise shareholder value (i.e. they only have corporate performance goals and ignore other stakeholders or society as a whole) are no more profitable or have better share price returns than companies that follow a multitude of goals. Conversely, there is also no evidence that companies following shareholder maximisation alone are any worse than companies that have a multitude of goals. It simply made no difference.

And it seems one key reason why having a multitude of corporate purposes makes no difference is the lack of an effective incentive structure. In 2008, 81% of the total compensation of executives in these large US corporations was based on financial metrics. 3.2% of the compensation package was driven by nonfinancial metrics and the rest was at the discretion of the compensation committee of the board. In 2020, 86% of total compensation was driven by financial metrics while 3.9% of total compensation was driven by nonfinancial metrics. The rest again was at the discretion of the compensation committee.

But what gets measured, gets done, as they say. And inversely, what doesn’t get measured has a good chance of being ignored. Executives are busy people and as long as their compensation remains only marginally tied to nonfinancial metrics, we shouldn’t expect them to pay much attention to these metrics. And as long as executives don’t pay attention, their corporate purpose statements remain largely hot air.