Write down governance standards to improve them, study finds

Organisations and people are more likely to commit to a higher standard of corporate governance if their purpose is written down, according to research by Washington University in St Louis.

The paper, Personal and Organizational Higher Purpose, Corporate Governance and Shareholder Value, questioned more than 1,000 US citizens to learn about their commitment to and perceived value from personal and organisational higher purpose.

The research found that when companies have written statements of higher purpose, employees have more trust that their leaders will make decisions that are socially responsible and better for business.

This was especially true when statements emphasised society, customers, employees, and stakeholders other than shareholders.

This means that, in the eyes of employees, there is better corporate governance and leaders are trusted more when the organisation is viewed as making more socially responsible decisions.

Employees at companies with higher purpose statements were also prouder of working for their organisations than employees at firms without such statements, the research revealed. Again, the effects were stronger when the purpose statement was written down.

The findings do not necessarily imply that companies should not focus on shareholder value, as this is still a part of good governance, the report said. Instead, the higher purpose statement has to “transcend” the usual business goals.

The report adds that employees have to believe that decisions are being made at the intersection of business goals - like shareholder value - and higher purpose, which is distinct from those business goals but still an essential part of day-to-day decisions.

Why is this important?

The research found that companies with an authentic organisational higher purpose can strengthen corporate governance, culture, employee satisfaction and overall productivity if it is written down.

This means that pension funds, asset managers and other organisations that have signed up to ESG or responsible investing standards are more likely to commit to them.

There is a greater possibility that organisations that do this will stay in line with industry best practices, and improve their own standards of compliance and reporting when it comes to stewardship, governance and voting.

One such example is the Financial Reporting Council’s UK Stewardship Code, which is a part of UK company law concerning principles that institutional investors are expected to follow and dictates how asset managers hold to account the companies in which they invest.

Asset managers that sign up to this must explain how their purpose and investment beliefs have guided their stewardship, investment strategy and decision-making. They must also include an assessment of how effective they have been in serving the best interests of clients and beneficiaries.

For firms that provide services to investors, the code requires them to disclose an assessment of their effectiveness in serving clients’ best interests.