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SUSTAINABLE MATTERS
| 3 minutes read

Set adrift or in full sail? Corporate purpose and “ESG risks”

According to a new briefing from the Financial Reporting Council (“FRC”), corporate purpose can serve as a company's “moral anchor”. This anchor can protect a business from the changing tides of “cultural drift”.

The recently published briefing In Focus: Corporate Purpose and ESG serves as a companion piece to the Creating Positive Culture – Opportunities and Challenges report (released in December 2021).  The FRC’s briefing looks to draw out what it views as an “inherently interlinked” relationship between a company’s purpose, values and culture and its ESG objectives. Whilst the idea of linking corporate purpose with ESG is not new, it is notable, however, that the FRC have decided that it now warrants a publication in its own right.

The briefing builds upon the “Principles” and “Provisions” included in the FRC’s UK Corporate Governance code (“the CGC”). In particular, “Principle B” – “[A] board should establish the company’s purpose…and satisfy itself that [it] and [the company’s] culture are aligned.” The CGC, aimed at premium-listed companies, is intended to provide a framework for good corporate governance. Whilst the CGC is not mandatory, the FRC does require that those companies to which the code applies either “comply” or “explain” should they elect to depart from the CGC. 

In the briefing, the FRC goes to considerable lengths to stress that the adoption of a corporate purpose does not “come at the expense of profit”. Rather, examples are provided of successful “purpose-led” businesses across a number of sectors.

Whilst not a panacea, a well-embedded corporate purpose can help to foster a culture where decision-makers not only take into account short-to-medium term objectives, as may be articulated in a company’s strategy, but also consider the impact of their decisions in the longer-term and through the lens of the values which flow from a well-articulated corporate purpose. 

An organisation which has a value-centric culture, supported by appropriate corporate governance arrangements (i.e. which ensure board-level accountability), can provide a fertile ground for consideration of ESG-issues, including, for example, climate-related risks. Where decision-makers are empowered to consider and monitor their organisation’s progress on ESG-issues, both at a strategic and operational level, they will, ultimately, be best placed to determine whether any mitigation is required to protect the long-term value of a company. This is clearly in the interests of all stakeholders.

Stepping back and taking the FRC’s briefing in a wider context, it is possible to see it as part of a wider movement in the corporate landscape. Increasingly, businesses are departing from the orthodox approach centred on “shareholder return maximisation” towards one of “stakeholder value creation”. This emerging shift has come about in response to concerns that “shareholder primacy”, as a model for corporate governance, leaves businesses ill-equipped to respond to ESG-related risks. 

Even the UK’s own model of “enlightened shareholder value”, as drafted in Section 172 of the Companies Act 2006, has been found wanting. The UK’s approach of allowing directors to consider the interests of other stakeholders, beyond shareholders (insofar that the interests of the former align with the latter), is creaking under growing pressure from investors and consumers. As a consequence, corporations in the UK and across the “developed” world are increasingly turning to market-based “soft law instruments” (i.e. the OECD’s Principles of Corporate Governance) to fill perceived voids in mandatory or quasi-mandatory corporate governance frameworks.  

As the stark reality of the limitations on national governments to curb GHG emissions, tackle modern slavery in supply chains and address entrenched inequalities becomes increasingly clear, the need for businesses to step up to the plate is more apparent now than ever. Similarly, just as expectations on businesses have risen, a growing chorus of voices in the business community are calling on governments to do more. In the UK for example, the “Better Business Act” campaign, is lobbying to amend the law to embed purpose and stakeholders’ concerns into all businesses by default.

Legislators across the globe have long since struggled to keep pace with societal change and reflect this in law. As such, it may be a while before we see substantive legal changes which codify a “stakeholder value creation” model. Nothing, however, in the UK’s existing legislative framework prevents a business from considering whether their existing corporate purpose can be said to be “ESG-aligned” and whether it cascades through its culture to its strategy and long-term objectives.

For a further insights into how a business can look to align its strategy with ESG, Slaughter and May’s Azadeh Nassiri and Jeff Twentyman discuss this issue in this podcast

An organisation which has a value-centric culture, supported by appropriate corporate governance arrangements (i.e. which ensure board-level accountability), can provide a fertile ground for consideration of ESG-issues, including, for example, climate-related risks.

Tags

governance, shareholder activism, risk, corporate governance, sustainability, business strategy

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