By George Serafeim, Daniela Saltzman, Bronagh Ward
Lots of business leaders want their organizations to have a positive social impact. They’d like to pursue a purpose and do good, not just deliver financial results. So why don’t they? In our conversations with business leaders we have heard two recurring obstacles: a culture of short-termism and the fact that corporate law puts shareholders first.
While culture relates to the informal rules that influence behavior (such as societal norms and codes of conduct), law addresses the formal rules that govern the behavior of individuals and institutions. But which is more important in shaping how firms behave? Our new research on the value of corporate purpose suggests that both law and culture are important.
We created a measure of how oriented a country’s laws were toward shareholder primacy by analyzing and coding legal documents from the Sustainable Development Task Force of the American Bar Association, which provide a standardized list of questions and answers from law firms on the legal frameworks underpinning the fiduciary duties of directors. To measure the short-term orientation of a country, we gathered information on the cultural dimensions of the sample countries using information from Geert Hofstede’s dimensions of national culture.
Using data for 32 countries, we compared a country’s level of shareholder primacy in the law and its short- or long-term cultural orientation to the number of certified “B Corps” present. B Corps are companies that have signed up to have their social and environmental performance assessed by an organization called B Lab. The emergence of over 2,000 B Corps around the world is significant because these organizations are redefining the idea of success in business to include social and environmental goals alongside profits. Our analyses control for the number of corporations and economic development in each country, to account for different levels of private sector development.
Our aim was to see how both law and culture affect how companies think about purpose and long-term thinking. Would law and culture predict the number of B Corps in a country? The idea isn’t that more B Corps in a country means more purpose-driven firms, since companies can pursue purpose without B Corp certification. (In fact, as we’ll explain, we expected to see more B Corps in places less friendly to long-term and purpose-driven firms.) But a correlation between the number of B Corps and our measures of law and culture would suggest that these two factors influence companies’ positioning and decision making around purpose and long-termism.
We discovered that there are more B Corps in countries that are culturally more orientated toward the short term. This is because in environments where short-termism is more prevalent, there is a higher need for differentiation and commitment to long-termism. In places where culture prioritizes the short term, entrepreneurs seeking to build purpose-driven organizations feel the need to seek out supporting institutions like the B Lab, whereas in long-term-oriented cultures they’re freer to pursue purpose under traditional structures.
The same can be said of environments with legal interpretations that prioritize shareholders over other stakeholders. We also found that there are more B Corps in countries with a higher degree of shareholder primacy present in the law. The evidence suggests that law and culture both play an important role in enabling purpose-driven companies to scale and achieve profitability.
Unfortunately, in our experience the dialogue around creating a more inclusive and sustainable form of capitalism is happening in silos. There’s one conversation happening about culture, and another one, largely disconnected, happening about law. Given the critical interplay between law and culture, that needs to change.
A cultural shift away from short-termism can create momentum to effect change in corporate law. And by changing the law, we receive formal recognition and enhanced legitimacy for the culture to shift even further. Business leaders interested in promoting purpose-driven organizations must recognize that neither force will succeed without the other.
Source: Harvard Business Review