How would “Say-on-Purpose” work?
– “Say-on-Purpose” would entail shareholders voting every three years on a specific statement from a company.
– The statement would list the principles that would apply to trade-offs the company might make between investors and stakeholders (say, it will sacrifice profits to reduce carbon emissions) or between different stakeholders (it will decarbonize even though doing so will lead to layoffs).
This WSJ article written by Alex Edmans and Tom Gosling explain how “say-on-purpose” might work – and why companies might choose to allow shareholders to vote on such a concept. Here’s an excerpt:
So should we abandon the whole idea of purpose? Not necessarily. The trick is to find a way for companies to pursue purpose while remaining accountable to investors and ensuring that statements translate into action. Our proposal is to give investors a “say on purpose” vote, similar to the two-part “say on pay” votes that investors have in Europe.
Here is how it would work. A company issues a statement, as many already do, stating its purpose beyond profits. Importantly, it would clarify the principles that would apply to trade-offs the company might make between investors and stakeholders (say, it will sacrifice profits to reduce carbon emissions) or between different stakeholders (it will decarbonize even though doing so will lead to layoffs). Every three years, investors would have a “policy vote” on this statement, to convey whether they buy into it and the trade-offs it implies. An investor would vote against it if he or she disagrees with the priorities, or if it is so vague it gives little guidance on what the company stands for.
The statement is important, but what matters most is whether it is put into practice. Therefore, every year investors also would have an “implementation vote” on whether they are satisfied with how the company is delivering on the statement. Although both votes would be advisory, meaningful opposition would show leaders that they are off course, which could precipitate investor selling or a change in management.
Power of the approach
The power of the say-on-purpose approach is immense. First, the policy vote would give clear guidance to companies on how to make decisions that involve trade-offs, but with the legitimacy provided by investor support. In a recent paper, Oliver Hart of Harvard University and Luigi Zingales of the University of Chicago noted that investors might be willing to sacrifice some value for social objectives, and suggested that companies hold a shareholder vote on each major decision.
The problem is, companies often need to make decisions on a timely basis, such as whether to continue paying furloughed staff in a pandemic. What’s more, investors might not have capacity to vote meaningfully on multiple decisions a year. Say-on-purpose achieves the same objective but in a more practical way that retains decision rights within the board.
Second, the implementation vote will enrich the dialogue between investors and management. The power isn’t just the vote itself, but the process that investors must undergo to cast it. A common complaint is that investors focus excessively on short-term profit, but they will need to deeply scrutinize a company’s long-term value and stakeholder relationships to vote meaningfully. This feeds back into the first advantage: Knowing that investors will evaluate the company based on long-term performance, executives will have the confidence to make long-term decisions.