OCTOBER 2019 – 

This month we examine the issue of corporate governance and how it relates to Positive Impact investing


Governance and Purpose


“The Social Responsibility of Business is to Increase its Profits” was the title.

The year was 1970 and the article’s author was Milton Friedman. Friedman, an American economist, University of Chicago professor, future Noble Prize winner and advisor to Ronald Reagan and Margaret Thatcher, penned the article for The New York Times. Friedman, a fierce free-market advocate, stated unequivocally, “In a free-enterprise, private-property system, a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to their basic rules of the society, both those embodied in law and those embodied in ethical custom.”

Friedman argued that the sole focus of the CEO is to maximize the profits of the business for shareholders. The influence of his article is difficult to overstate. Friedman’s ‘shareholder primacy view’ – that corporations exist principally to serve shareholders – has dominated boardrooms and executive suites for nearly half a century.


181 CEOs Commit to A New Standard for Corporate Responsibility

“Updated Statement Moves Away from Shareholder Primacy, Includes Commitment to All Stakeholders”


On August 19, 2019, 181 members of the Business Roundtable (an association of chief executive officers of America’s leading companies), representing more than 30% of total stock market value, issued a new statement on the purpose of a corporation. The CEOs set a new standard for corporate responsibility – companies should benefit all stakeholders – customers, employees, suppliers, communities and shareholders. The new purpose statement concludes “each of our stakeholders is essential. We commit to deliver value to all of them, for the future success of our companies, our communities, and our country.” The statement, which broadens a company’s primary purpose to a multi-stakeholder focus, is a clear departure from the shareholder primacy view championed by Friedman and still practiced by most public companies. This change did not go unnoticed.

The Council of Institutional Investors expressed concern about the new statement, claiming “the statement undercuts notions of managerial accountability to shareholders” and “if ‘stakeholder governance’ and ‘sustainability’ become hiding places for poor management, or for stalling needed change, the economy more generally will lose out.”  The Editorial Board of The Wall Street Journal viewed the statement as “less substance here than meets the media spin, but it’s still notable that the CEOs for America’s biggest companies feel the need to distance themselves from their owners.”  The WSJ characterized the statement as political posturing and predicted that “executives who abandon shareholders won’t appease the socialists.”

Lisa Woll, CEO of the US Sustainable Investment Foundation (US SFI) welcomed the Business Roundtable “commitment to lead their companies for the benefit of all stakeholders – customers, employees, suppliers, communities & shareholders.” Woll added that “US SIF members have offered resolutions on environmental, social and governance (ESG) issues at companies for decades towards these very same goals.” (https://www.linkedin.com/posts/us-sif_business-roundtable-supplemental-public-comments-activity-6569961035703422976-AbIa)

John Streur, President and CEO of Calvert Research and Management, a leading responsible investor, noted that the CEOs committed to “transparency and effective engagement with shareholders” and called on companies “to report real metrics into how they are treating their employees, other stakeholders and the environment. They should set clear goals, develop and disclose their plans to meet these goals, and communicate their progress regularly – ideally every quarter, though even annually would be welcome.”



Shift to Stakeholder Capitalism Underscores Need for ESG Analysis


Widespread adoption of a multi-stakeholder or ‘stakeholder capitalism’ approach would dramatically change how boards and CEOs have operated for the past 50 years. Actions will speak louder than words, and only time will tell. But, this shift to a multi-stakeholder purpose dovetails nicely with ESG (environment, social and governance) analysis and investing. In 1975, only 17% of the value of the entire U.S. stock market was attributable to intangible assets such as intellectual capital, customer relationships, brand value, and other assets. In 2015, the number was 84%.  Conventional accounting does not treat non-financial resources – human, social and natural – as assets. ESG analysis seeks to specifically measure how companies are managing their non-financial resources, which are a greater source of risk and opportunity than ever before.

The updated purpose statement by the CEOs of 181 of America’s largest companies incorporates additional stakeholder commitments (customers, employees, suppliers, and communities) into a company’s purpose for operating. If companies are truly interested in measuring their performance and progress in achieving their stated purpose, issues such as customer welfare, customer privacy, labor practices, water management, employee health and safety, supply chain management, and business ethics increase in relevance.  These are the exact issues and topics ESG analysis targets.


What is Corporate Governance?

While corporate governance clearly falls under the governance pillar for ESG (environment, social and governance) investing, a change in purpose to serve all stakeholders will impact the environmental and social dimensions of a company as well. Corporate governance is the system of rules, practices, and processes by which a firm is directed and controlled.  Since corporate governance also provides the framework for attaining a company’s objectives, it encompasses practically every sphere of management, from action plans and internal controls to performance measurement and corporate disclosure. (1)

Governance analysis by investors and stakeholders is not new, and largely predates environmental and social considerations. Academic research is rich on best practices for governance, and ESG rating agencies, such as MSCI and Sustainalytics, view governance as a material consideration for all companies.


Governance: The Most Researched ESG Factor

Simply stated, strong governance has delivered. A study of academic literature found that the governance factor was the single most important ESG factor, most widely researched and associated with better than market performance (2).  A meta-study, which included 2000 academic studies, found that governance was the most cited factor in studies exhibiting stronger than market corporate financial performance (3). These studies also noted that the ability to deliver market outperformance may slow as investors had already discovered this potential source of alpha.

How does strong governance benefit a company and an investor? If a bank were considering lending money to two companies in the same industry and one had stronger governance policies, cleaner accounting, an independent board, and robust disclosure and transparency, which one would pay a lower interest rate?  Studies have found a positive relationship between strong corporate governance and lower capital and funding costs (debt and equity) (2).  Lower funding costs could increase the number of projects available to a company to pursue profitably, creating a clear competitive advantage.

If you were considering investing in an industrial manufacturer that was weighing whether to increase capital spending or reinvest in employee training, would a company’s board independence influence your decision? If you found that half of the board of directors were equipment suppliers to the company, would that impact your confidence in the board making the best capital allocation decision for investors?


Governance Metrics and Ratings

Fortunately for investors and other stakeholders, governance analysis is older than environmental and social criteria analysis and related disclosure is stronger. Mandated regulatory (SEC) and exchange disclosure requirements are partly responsible. Additionally, CEOs and boards have clearer guidance on governance best practices, with recommended principles of corporate governance available from a variety of industry and investor associations (e.g. Business Roundtable, Investor Stewardship Group). https://s3.amazonaws.com/brt.org/Principles-of-Corporate-Governance-2016.pdf https://isgframework.org/corporate-governance-principles/

The ability to assess a company’s governance and to compare companies is generally stronger than similar environmental and social issue analysis. A review of the governance criteria indicators by the largest ESG rating agencies (see table below for one ratings agency criteria) reveals broad overlaps in the underlying issues or attributes tracked.


The key consideration for boards and investors is understanding how a shift from a ‘shareholder primacy focus’ approach to a ‘stakeholder capitalism’ approach would change what criteria and metrics are needed to measure company, board and CEO success and performance.  A company’s stated purpose helps inform investors and other stakeholders on defining success.


Statement of Purpose

The shift away from shareholder primacy to a commitment to all stakeholders will take time and will vary by industry, geography and ownership structure (e.g. public vs private). However, the announcement by CEOs of some of the largest companies in the U.S. to move in that direction should force most public companies to reexamine their corporate purpose. This reexamination and potential repurposing could provide significant opportunities for companies and investors.

In fact, there is already an effort underway to encourage companies to publish a “Statement of Purpose.”  The statement would “articulate the company’s purpose to profitably achieve a solution for society (and) specify within that purpose the few stakeholders most critical to long-term value creation and sustainability.” The board of directors would publish and sign the statement.



What is Corporate Purpose? 

As one disaffected manager said, “It’s fine to emphasize what we must shoot for, but we also need to know what we stand for.” (8) “Purpose is a concrete goal or objective beyond profit maximization.” (6)  The importance of purpose within an organization is not new. In 1994, an article titled “Beyond Strategy to Purpose” encouraged companies to move beyond strategy, structure, and systems to a purpose, process, and people. Purpose-not strategy- is the reason an organization exists, and top management was tasked with building a rich, engaging corporate purpose. The goal was to create an organization with which employees could identify, share a sense of pride and commit to. “If employees are to put out extraordinary efforts to realize company targets, they must be able to identify with them. It’s fine to stress what to aim for, but people also need to know what the company stands for.”  


A firm’s purpose can create value beyond social impact by developing or strengthening employees’ identity and reputation (6).  Purpose could have a positive influence by motivating employees or affecting other stakeholder groups, such as customers, through higher satisfaction and loyalty.  Purpose could mitigate the negative effects of short-termism by signaling to investors a long-range vision and attracting like-minded investors (7).  Given the increasing reliance on knowledge-based capital and the service-based orientation of the US economy, companies that ignore purpose risk alienating one of their most valuable assets – their people.



“Purpose-Clarity” Firms Thrive

“Since purpose is enacted via the set of beliefs held by employees, a natural question is which employees drive the link, if any, between purpose and performance.” A 2016 study surveyed 456,666 employees at 429 public companies over 6 years to measure employee beliefs about their employer and relate them to purpose and performance. (7)  Firms with employees who felt their work was meaningful and positively influenced other people were categorized as ‘high purpose’ firms. Interestingly, ‘high purpose’ alone did not generate financial outperformance. An additional purpose consideration was required.

Firms with ‘high purpose’ and ‘purpose-clarity’ financially outperformed low purpose and other high purpose firms.  ‘Purpose-Clarity’ indicates companies where management provides significant clarity around direction, job responsibilities and tools than can be used to achieve the desired outcomes.

An additional observation was that solely middle managers and salaried professionals drive the relation between high ‘purpose clarity’ firms and financial performance. Companies that simply market purpose and are not authentic may not enjoy potential benefits from employees and customers.


Engagement and Advocacy: Governance, Opioids, and Guns

As companies reexamine their purpose and broaden their stakeholder constituency, governance will play an increasingly important role for boards, executives and investors. Companies need to clearly articulate their purpose, identify stakeholder commitments and establish and disclose metrics for material ESG risks and opportunities. Bigelow’s Positive Impact Portfolios leverage the engagement and advocacy resources of larger fund management firms.

Bigelow monitors the stewardship and engagement policies and record of the fund managers. Governance, which includes issues such as executive compensation, accounting transparency, board independence, business ethics, and corporate behavior, is a perennial area for engagement and advocacy. Blackrock, the largest asset manager in the world, identified three priorities for 2019 related to governance issues.


Calvert Management and Research presented a resolution at the Depomed annual meeting of shareholders calling for the company to report on the governance measures it has taken to more effectively monitor and manage financial and reputational risks related to the opioid crisis in the United States. In a historic result, shareholders approved the proposal, with 62.3% of the shares voting in favor. The company, now called Assertio, has issued the requested report. Calvert also engaged Walmart on issues around gun violence helping influence Walmart to announce changes to policies on gun and ammunition sales.



Sustainability Goals and Standards

A successful shift to stakeholder capitalism from shareholder primacy requires improved disclosure and transparency. Current ESG, non-financial and financial metrics must evolve. Companies must identify material ESG risks and long-term value-creating opportunities and assets and proactively communicate these to investors and stakeholders. Fortunately, impact and sustainability standards, such as GRI and SASB, are evolving to support companies in disclosing and measuring their progress and impact.

The Global Reporting Initiative (GRI) provides sustainability reporting standards. The GRI standards are the first and most widely adopted global standards for sustainability. The standards are rooted in the public interest and take a multi-stakeholder user approach.

The Sustainability Accounting Standards Board (SASB) developed sustainability accounting standards for the U.S. capital markets and takes an investor user approach.  SASB’s industry-specific standards target material, decision-useful, and cost-effective disclosures.

Other tools such as the B Impact Assessment helps companies measure their impact on workers, the community, environment, and customers. The B Impact Assessment guides companies interested in certifying as a B Corporation.

Certified B Corporations are businesses that meet the highest standards of verified social and environmental performance, public transparency, and legal accountability to balance profit and purpose.


Bigelow Positive Impact Portfolios

Bigelow utilizes internal and external data and ratings information to develop portfolios with above benchmark environmental, social and governance (ESG) ratings. Ratings seek to measure how well companies assess and manage material ESG risk factors and innovate to create long-term sustainable businesses compared to their industry peers.

To learn more about Positive Impact Portfolios and ESG investing, visit https://www.bigelowadvisors.com/pi/


Local Spotlight Organization: A Purpose Driven Maine Company

ReVision Energy is a Maine based employee-owned solar company.  Their mission is to transition New England to a sustainable, renewable energy based economy and reduce carbon pollution. Revision Energy is a Certified B Corporation and was recently named by B Labs a Best for the World honoree in three categories (Overall, Workers, and Changemakers) in recognition of their relationship with their workforce and the significant positive impact they’ve created over the last year.

ReVision Energy is the only company in Maine to earn three of these prestigious honors, which puts the employee-owned company in the top 10% of all B Corps globally thanks to their worker-friendly policies, improvement during B Corp re-certification, and the overall positive impact of their business model.

Co-founder Phil Coupe states, “B Labs measures that mission with rigorous, third-party accountability and proves to our stakeholders that we are walking the talk. We’ve been grateful over our years of doing business, that our customers are attracted not just to the quality of products and services that we offer, but also to the way in which we do business, which is to create the maximum positive social and environmental impact.”

READ MORE about ReVision and B Labs



1.)  https://www.investopedia.com/terms/c/corporategovernance.asp

2.) Mark Fulton, Bruce Kahn, Camilla Sharples (2012) Sustainable Investing: Establishing Long-Term Value and Performance.


3.) Gunnar Friede, Timo Busch & Alexander Bassen (2015) ESG and financial performance: aggregated evidence from more than 2000 empirical studies, Journal of Sustainable Finance & Investment, 5:4, 210-233, DOI: 10.1080/20430795.2015.1118917


4.) Florian Berg, Julian Koelbel and Roberto Rigobon (2019) Aggregate Confusion: The Divergence of ESG Ratings


5.) https://www.forbes.com/sites/bobeccles/2019/08/23/the-statement-of-purpose-and-what-you-need-to-do/#9a09d1c23934

6.) Henderson, Rebecca, and Eric Van den Steen. 2015. “Why Do Firms Have ‘Purpose’? The Firm’s Role as a Carrier of Identity and Reputation.” American Economic Review 105 (5) (May): 326–330.


7.) Gartenberg, C. M., Prat, A., & Serafeim, G. (2016). Corporate Purpose and Financial Performance. Columbia Business School Research Paper No. 16-69, Retrieved from https://repository.upenn.edu/mgmt_papers/27

8.)  https://hbr.org/1994/11/beyond-strategy-to-purpose