Corporate purpose from a company law perspective

Corporate purpose from a company law perspective

A business philosophy in search of new legal solutions

Do modern firms need a fundamental purpose that extends beyond pure profit making? Today, many corporate boards in Germany and abroad are embracing the so-called corporate purpose concept. Advocated by leading management scholars, the approach serves to convey the raison d’être and inner drive of an enterprise. A fundamental reorientation of entrepreneurial activity appears to be emerging.

In recent years corporate purpose has established itself internationally as a management philosophy. Leading purpose proponents are now also advancing policy proposals, such as corporate purpose being a component in the articles of association or say-on-purpose shareholder voting at the general meeting. Institute Director Holger Fleischer is exploring the field of corporate social responsibility (CSR) with his business law working group at the Institute. How does he view the prospects of anchoring the corporate purpose concept in company law?

Corporate purpose and CSR – where do these seemingly modern concepts come from?

“The discussion about the social responsibility of companies, especially corporations, has gained enormous momentum in recent years. However, the notion of CSR has deep historical roots. The articles of association of the first large northern Italian and southern German trading companies had already provided for the establishment of a “God's Account”, through which a certain percentage of the profit was regularly used for charitable purposes. The participation of the needy in a company's profits endured over the centuries in various forms of corporate generosity, and it can also be seen, for example, in the ideal of the honorable merchant.

The premise of social usefulness, as is inherent in a corporate purpose, also had early forerunners. According to the Prussian Stock Corporation Act of 1843, for example, companies had to state a social purpose in their statutes. Similar requirements existed in other legal systems, one example being the US corporate law regime of the late 18th century.”

What demands does purpose philosophy make on the legislation of today?

“Unlike CSR, with its focus on philanthropy and stakeholder relationships, corporate purpose emphasized economic success through the performance of socially useful activities: “Doing well by doing good” (Colin Mayer). This gives rise, for example, to the requirement that companies anchor a corporate purpose in their articles of association. But it is not always that easy to create a bridge between management theory and company law.”

Can corporate purpose be translated into legal obligations?

"Management experts and company law scholars often fail to communicate with each other effectively, as no uniform terminology exists. The term corporate purpose as used by management theorists is captured neither by the object of the company nor with the corporate purpose (Gesellschaftszweck) of German stock law. French reform legislation passed in 2019 opened the possibility for all companies to voluntarily name a raison d’être in the articles of association. Since 2018 the UK Corporate Governance Code recommends that the board specify the company’s purpose. In the USA it is presently being discussed whether the maximization of shareholder value should remain the primary objective of a company’s directors.”

What does all of this hold for corporate practice?

“The formulations currently being used by international companies to express their purpose and interest range from “First move the world” by Mercedes-Benz to “We connect for a better future” by Vodafone to “Organize the world's information and make it universally accessible and useful” by Google. These buzz phrases may be an integral part of corporate self-portrayal, but they leave considerable leeway for interpretation and are thus not particularly suitable as management tools. They also raise a number of unresolved legal questions. It is therefore unsurprising that thus far no DAX30 company has included its corporate purpose in its articles of association.

However, this is not to say that there is no utility in having voluntarily developed a purpose concept. Rather, it seems quite plausible that undiscovered value creation potential will be uncovered in the search for a structured purpose and that the company’s business model can be further refined. Yet in terms of its being a mandatory component in the articles of association, a corporate purpose as understood by management theorists does not promise any real profit.”

Does this mean that new company forms are needed to realize the corporate purpose concept?

“The US benefit corporation should be mentioned here as a forward-looking example. Variants of this type of company, which combine an orientation on both profitability as well as the common good, have gained a foothold in Italy and France. The call for such dual-purpose concepts also deserves serious consideration in Germany. More diversity stimulates the competition to discover new corporate forms, a dynamic which is generally to be welcomed.”

Further Reading

Holger Fleischer, Corporate Purpose: Ein Management-Konzept und seine gesellschaftsrechtlichen Implikationen, Zeitschrift für Wirtschaftsrecht 2021, 5–16.
Holger Fleischer, Corporate Purpose: A Management Concept and its Implications for Company Law, European Company and Financial Law Review 2021, 161–189.

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