Corporate purpose and short-termism

Abstract

The question of the purpose of the corporation is among the most enduring debates in Anglo-American corporate law. In earlier times, the corporate purpose was clear, but as the corporate entity proliferated and matured – and its power and societal effects became far-reaching – the corporate purpose morphed into a complex issue. The corporate purpose is also closely linked to the notion of short-termism. As the corporate purpose necessarily defines the ultimate ends of corporations and their activities, it may also influence and define the time frame within which such activities are expected to translate into intended results. For this reason the corporate purpose and the time horizon for corporate aims and activities are closely interconnected. This chapter examines the corporate purpose and its links to short-termism. It will discuss these issues with reference to broader ‘Anglo-American law’ albeit with a specific focus on the United Kingdom and United States. Essentially, we argue that a narrow corporate purpose tends to foster short-termist corporate activities. Following on from this, we suggest that the time has come to break away from the dominant shareholder ideology of US and UK firms and adopt a broader corporate purpose. The chapter begins by taking a brief look at the evolution of the corporate purpose before engaging in a comparative examination of the relevant frameworks. It then moves to examine the issue of short-termism and its linkage with the corporate purpose debate. Finally, the chapter looks at the way forward, suggesting a rebalanced corporate purpose and measures addressing short-termism that can complement a reformulated purpose.