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Bringing purpose to life

The changing understanding of the role of the corporate Board

Until recently, and in many companies still today, the role of the Board is understood first and foremost as to protect and enhance shareholder value. The Board appointed by shareholders are regarded as being there to ensure the company is well run in their interests. This powerful mindset reflects a dominant way of thinking advanced by Milton Friedman and others, where the company is conceived in terms of property law. Shareholders own the company, and the core responsibility of the Board is to solve the agency problem, which is to make sure that the managers do what the shareholders want.

This is in fact not the law either in the US or the UK, where the duties of directors are owed to the company itself. As Lynne Paine and Joseph Bower make clear in their HBR article The Error at the Heart of Corporate Leadership, the fiduciary obligations of Directors to the company (in both US and UK law) give a clear mandate to, and indeed obligation upon, directors to act in the best interests of the organisation:

Within this legal framework, managers and directors are fiduciaries rather than agents—and not just for shareholders but also for the corporation. The difference is important. Agents are obliged to carry out the wishes of a principal, whereas a fiduciary’s obligation is to exercise independent judgment on behalf of a beneficiary. Put differently, an agent is an order taker, whereas a fiduciary is expected to make discretionary decisions. Legally, directors have a fiduciary duty to act in the best interests of the corporation, which is very different from simply doing the bidding of shareholders.

In a purpose-led company, the best interests of the company are identified with the successful pursuit of its purpose. The Directors then become the collective trustees of the purpose. This shift is encouraged both by the Financial Reporting Council Corporate governance code for public companies and also by the Wates Principles for large private companies. Both position the Board as having ultimate responsibility for bringing purpose to life in the business, ensuring that the company’s decisions serve to pursue its purpose and thereby deliver long term sustainable performance.

If a Board is to govern as trustees of the purpose, it demands a shared mindset so that the Board members act collectively in a way that advances the purpose and respects and cultivates all the relationships on which the long term successful pursuit of that purpose depends, and through which the company makes its profits. How investment and capital allocation decisions are made, the consideration of strategy and the integration of sustainability considerations in decision taking – a purpose-led Board will seek to ensure that in all these areas management adopt an integrated approach.