Source: The Conversation – France – By Rodolphe Durand, Professeur, stratégie et Politique d’Entreprise, HEC Paris Business School
On April 24th, Veolia’s shareholders voted by more than 99% to inscribe the company’s corporate purpose into its bylaws. This means that Veolia’s board of directors will need to monitor the implementation of its corporate purpose by executive management even more closely than before. What approach will they take?
Rather examining how corporate management handles corporate purpose, we have been exploring how the boards of directors of major European companies orchestrate its administration. The board of directors, it is important to remember, is a body that organises decision-making powers, defines company strategy, and ensures its implementation.
A recent study conducted by HEC Paris and the University of Oxford with 21 major European companies, including Accor, Barclays, Decathlon, Enel, L’Oréal, Michelin, Philips, and RTL Group, reveals a nuanced approach to corporate purpose by their boards of directors. The study reveals a vision of corporate purpose as an organising principle that structures decision-making, defines activities and shapes company identity.
We found four approaches within boards of directors, which we have called “motto”, “guide”, “style” and “compass” – each with its advantages and disadvantages. The key? Aligning the board’s approach to corporate purpose with the objectives and means given to executive management for proper implementation.
Four approaches to corporate purpose
Our study identifies these four approaches at the level of major European company boards. A board’s chosen approach varies along two dimensions: whether the board and its associated committees refer to corporate purpose implicitly or explicitly, and whether the measures, values and behaviours associated with corporate purpose are addressed generally, abstractly or precisely.
One of the most striking conclusions concerns the crucial importance of alignment between orchestration at the board level and operational implementation by management. Companies that fail to synchronise these two levels risk dysfunction. Either they commit too many resources when their administrative mode doesn’t require it, or they commit too few resources when their administrative mode requires more.
The main challenge lies not so much in formulating corporate purpose as in its operational translation. This translation occurs at the interface between shareholder representatives – the directors – and those who act for the company’s development – the managers.
‘Motto’: agility at the price of cohesion?
The “motto” approach, implicit and abstract, is the freest and most fluid of the four approaches. In it, corporate purpose remains implicit because it’s not embedded in formalised practices. It’s invoked as a reminder during certain decisions, without formal processes within committees. Take the example of one of the companies in the study.
“Corporate purpose is an integral part of who we are and feeds into decision-making, both within the board and inside the company,” stated one chair who was interviewed.
This approach allows great agility without constraining the ability to innovate rapidly. By giving management teams the freedom to interpret corporate purpose according to their cultural and competitive context, it enables purpose to have a strong local resonance. It particularly appeals to companies operating in complex or multicultural environments.
However, this flexibility can turn into dispersion. When each subsidiary or business unit appropriates the values of the company’s corporate purpose in its own way, there’s a risk of losing overall cohesion. Common meaning frays, and with it, strategic alignment.
‘Style’: values as driver, at the risk of ambiguity?
The “style” approach corresponds to an implicit understanding of corporate purpose within the company complemented by board monitoring of certain indicators. This approach values the trust and autonomy of leaders in the strategic proposals they submit to the board. In return, the board monitors employee engagement indicators and value coherence in decisions, particularly within specific committees dealing with strategy or executive compensation.
For managers, the implicit nature of this approach allows them to rely on the strength of professional cultures. Detailed indicator monitoring provides support for implementing management practices within operational units. As with the “motto” approach, the absence of an explicit framework can generate ambiguous interpretations of corporate purpose and lead to inconsistencies. Everyone projects their own meaning, risking strategic confusion. If overly heavy monitoring mechanisms are put in place, this approach becomes trapped in a logic of execution… rather than inspiration.
‘Guide’: principles that are on display, but not infallible?
The “guide” approach makes the values of corporate purpose explicit without imposing detailed indicator monitoring by the board of directors. This orchestration mode strengthens coordination between teams and establishes a corporate culture shared by as many people as possible, which promotes employee engagement. The board can mobilise corporate purpose within committees, particularly the strategic committee regarding divestitures and acquisitions. Corporate purpose serves as an informal guide to orient management in its company development plans.
From the executive management’s perspective, this approach can prove difficult to follow in the absence of detailed criteria. The company’s strong culture can, over time, become an end in itself, even reducing corporate purpose to a symbol rather than a true strategic driver. In times of crisis, absent indicators that are precisely monitored by board committees, the “guide” can be forgotten in favour of more immediately lucrative solutions. And management might make decisions disconnected from the initial corporate purpose, sowing the seeds of future dilemmas.
‘Compass’: aligning without stifling
The “compass” model combines explicit corporate purpose with detailed monitoring of numerous indicators. In this configuration, the room for manoeuvre between the board and management is reduced: they are jointly held responsible for achieving corporate purpose.
“The budget figures seen in the board precisely and in detail reflect the factual application of corporate purpose and the long-term development of projects that support it,” stated one chair involved in the study.
Another chair emphasised that all committees (including the risk committee) explicitly refer to corporate purpose and indicators to conduct their analyses. This approach creates strong mobilisation, aligned behaviours and global coherence. This rigour comes at a price. Measuring and reporting corporate purpose can become complex, even paralysing according to some leaders. When results don’t meet high expectations, the risk is that misunderstandings, frustrations, or even disenchantment will occur within the company.
Corporate purpose must be orchestrated as much as it is managed
The future of corporate purpose in Europe isn’t just about regulatory compliance or communication strategy. Nor is it simply about a set of management practices. For the best results, it must be about properly aligning board practices with the demands and means allocated to top management for implementing corporate purpose. Four approaches exist, each with its strengths and weaknesses.
European companies have developed their approaches to purpose rooted in a different – and specific – set of circumstances. Postwar governance practices set expectations of the role of the corporation in rebuilding European society after WWII. We believe this European conception of corporate purpose, rooted in the continent’s history and turned toward the future, now goes beyond the simple question of management. It concerns the definition, role, and responsibilities of board members, and more generally corporate governance, in service of competitiveness rethought in its dimensions, rationale and temporality.
Les auteurs ne travaillent pas, ne conseillent pas, ne possèdent pas de parts, ne reçoivent pas de fonds d’une organisation qui pourrait tirer profit de cet article, et n’ont déclaré aucune autre affiliation que leur organisme de recherche.
– ref. Corporate purpose: how boards of directors monitor the mission of European companies – https://theconversation.com/corporate-purpose-how-boards-of-directors-monitor-the-mission-of-european-companies-260858
