Director Engagement with Corporate Purpose: The Contribution and Potential of Institutional Investors

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The British University in Dubai (BUiD)
This thesis develops an improved conceptual understanding of when and how directors, as key corporate governance actors, engage with corporate purpose as a company’s raison d’être, and how institutional investors contribute to their engagement. There is a gap in the corporate governance academic literature as to how corporations and investors can enable director engagement, as a condition for corporations to create value for society as well as for investors. The thesis examines how institutional investors, through the exercise of their stewardship duties via the integration of environmental, social and governance (ESG) factors in investment decisions and a form of activism known as ‘engagement’, contribute to the way directors engage with purpose. I argue that director engagement is an initial, important step in enabling corporations to create value for society as well as for investors, and for directors to make a difference to their companies. Based on a unified definition of director engagement, and applying strategic cognition as an organising framework to study its dynamics, director engagement can be seen as the extent to which directors commit their affective, cognitive and behavioural resources to corporate purpose. The initial components of the director engagement with corporate purpose model are identified and presented as predicated along a continuum, rather than an engaged/ disengaged dichotomy. Engagement is understood as affected by a set of contingencies at governance, organisational and directorial level. Using a case study approach, I collected data through a combination of 38 semi‐structured interviews with directors, investors and other participants, two participant observations, and documentary sources. The main findings are: 1. Corporate purpose emerges as sustainable value creation, entailing financial, social and environmental dimensions. Purpose is neither about the social role of corporations, nor about moral obligations, but rather is strategic in nature. 2. Director engagement emerges as an affective-cognitive-behavioural mechanism predicated along a continuum where engagement moves between two ends, conformity and compliance, and corporate development. The continuum sees directors at and moving between both sides. The greatest benefit to corporations, society and investors is derived from directors moving towards the furthest end of the continuum (corporate development), however the transitory nature of engagement means that it is neither a linear progression nor is ever ‘done’, ‘complete’ or ‘achieved’, with important consequences for decision-making at directorial and board level. 3. Institutional investors shape director engagement through the exercise of their stewardship duties via behavioural integrity, in-depth knowledge of the investee companies, strategic relationships with directors (chairs in particular), and an investment time horizon aligned with corporate purpose. Investor and investment size do not appear to play a role, as small investors are also able to demand director attention if the above conditions are met. Proxy advisors support director engagement as conformity and compliance, and are not conducive to the movement towards engagement as corporate development. 4. Director engagement towards the corporate development side of the continuum is viewed as possible both in public and private ownership, as long as the chair leads strategic relationships with investors to ensure alignment about purpose and the trade-offs it entails. 5. Perspectives defining ESG factors as ‘non-financial’, the lack of globally accepted ESG standards, and the debate on integrated reporting emerge as potentially detrimental to engagement beyond conformity and compliance, as ESG factors should be viewed as strategic in nature, may impact the bottom line and ability to create value, and are financially relevant and important. I offer an original contribution to knowledge in the area of strategic cognition and corporate governance by presenting an initial model of director engagement as a strategic cognition process of knowing and understanding corporate purpose. I also offer a set of recommendations for policy-makers and governance practitioners as to how to enable director engagement, as an initial step for corporations to add value to society as well as to investors, and for directors to make a difference to their companies.
corporate governance, corporate purpose, directors, engagement, Environmental, Social and Governance (ESG)ESG, institutional investors, stewardship, shareholder activism