The Financial Reporting Council (“FRC”) recently published a briefing entitled, In Focus: Corporate Purpose and ESG, this spring as a companion piece to the Creating Positive Culture – Opportunities and Challenges report, which was 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 environmental, social, and governance (“ESG”) objectives. While the idea of linking corporate purpose with ESG is not new, it is notable that the FRC has 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 (“CGC”), in particular, “Principle B,” which states that a “board should establish the company’s purpose … and satisfy itself that [it] and [the company’s] culture are aligned.” The CGC – which is aimed at premium-listed companies – is intended to provide a framework for good corporate governance. The CGC is not mandatory, but the FRC does require that those companies to which the code applies either “comply” or “explain” should they elect to depart from the CGC.
Most readers will be familiar with the concept, succinctly articulated in the FRC’s briefing, that corporate purpose can serve as a “moral anchor” for a company. Readers may also be familiar with the potential risks in the event that a business finds itself without a strong corporate purpose and thus, exposed to changing tides of “cultural drift.”
In its 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, it provides examples of successful “purpose-led” businesses across a number of sectors. While 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 organization that 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 an organization’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 considering 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 centered on “shareholder return maximization” 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 to be limited. 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. Consequently, 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 is more apparent than ever. Similarly, just as expectations on businesses have risen, a growing chorus of voices in the business community is 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 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 in the UK’s existing legislative framework, however, prevents a client 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.
Dean Hickey is an associate at Slaughter and May in London, where his practice focuses on Sustainability and Climate Change.
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