3rd December 2019 0 Comments Purpose

Purpose in Governance

White pawn on chessboard facing black pawnby Elliot Wilson 

What is purpose? Research shows that people with a hard-wired sense of purpose do better in life. Jaak Panksepp, the esteemed Estonian neuroscientist, said that of the seven core instincts in the human brain, ‘seeking’ – exploring, striving for goals – is the most important. It drives us to get up every morning and face the day.

The same is true of the firms whose goods we buy and services we consume. Those who believe corporates exist only to generate profit for shareholders are living in the past, reckons David Grayson, Emeritus professor of corporate responsibility at Cranfield School of Management. “That’s an old and lazy view,” he says. “The best organisations talk about being a ‘purpose-led’ or a ‘purposeful’ business. They have a better chance of surviving and thriving, particularly in a climate-challenged world.”

‘Purpose’ as a corporate term re-entered the lexicon in Britain in July 2018, when the Financial Reporting Council published its updated UK Corporate Governance Code. It stated that from the first day of 2019, any firm with a premium listing on the London Stock Exchange had to promote a corporate culture aligned with its “purpose [and] business strategy”, with a strong emphasis on transparency, integrity and diversity. That purpose must in turn be articulated in its annual report.

To be clear: these are guidelines, not rules. ‘Purpose’ is not tacitly defined by the FRC, but left vague, and for good reason. If the term were to be defined as ‘any company that had zero impact on the environment’, well, that’s far easier for an app-maker to accomplish than, say, a miner or an automaker. Every company has its own history and idea of where it is heading, so its purpose will differ from its peers.

But the 2018 Code is designed to ensure companies properly debate the concept of purpose and what it means to them, then tell the investing public. It focuses on the application of principles. Over time, a picture should emerge, of which companies have a ‘good’ (well-crafted, ethical, dynamic) or a ‘bad’ (unethical, poorly planned, passive) sense of purpose.

In its annual report, companies must set out purpose and strategy, establish how objectives were set and met, and what outcomes were achieved. This operates on a ‘comply or explain’ basis also found in Germany and the Netherlands, that seeks to prevent firms from taking a ‘tick-box approach’ to reporting. The ultimate purpose is to let the market decide; companies with a real raison d’être should get a boost to their revenues, share price, and brand image.

It should by now be clear that we increasingly expect corporates to act and think in responsible and sustainable ways. Those that do not, who have no ‘purpose’ (or who say they do, but choose to act recklessly) will be hit where it hurts, by consumers who turn away from their brands, or by businesses refusing to work with them.

 

Model man climbing up ladder

This idea of meaning is not new. Until 2006, UK law required every listed company to insert into its constitution an ‘objects clause’ that stated its purpose and defined and delineated its range of activities. In Britain and elsewhere, purpose is back in fashion, and is being driven by institutional investors, bright young talent, and self-aware consumers, three constituent groups no company can afford to alienate.

Carum Singh Basra, a corporate governance expert at the Institute of Directors in London, points to the role played by ISS and Glass Lewis, proxy advisors that help institutional investors vote at corporate AGMs. “Purpose still doesn’t matter as much as the tenure of a chairman or having a risk committee in place,” he says. “But that is changing, and companies that cannot adequately define purpose will be hit, as pension funds and insurance companies sell shares in them.”

Writing in the Financial Times on November 15, the chief executives of two leading fund managers, Anne Richards at Fidelity International and Andreas Utermann at Allianz Global Investors, called on corporates and investors to abandon an “unsustainable” and manic obsession with growth, and embrace ideas that help the environment rather than harm it. It was a clear call to put purpose before profit.

Firms that fail to do so face an uncertain future. Talented workers and consumers of all ages want to know kind of company they work for and buy from. “Young people coming into the workplace expect more from employers,” says the IoD’s Singh Basra. “That’s why you’re seeing more companies explain their purpose in existing, and benchmarking what they do against the UN’s Sustainable Development Goals.”

Adds Cranfield School of Management’s Grayson: “Reading the market place trends, if you genuinely believe you will still be utilising single-use plastic products for years to come, I would be selling shares in you very quickly. Every company is thinking about what they do, what their purpose is.”

Inside a lightbulb

Pressure to act responsibly may start outside the corporate, but its sense of purpose has to come from within, as a result of thinking and strategy actioned by the C-Suite and overseen by a diverse and conscientiously assembled board of directors. There will always be firms that are further along this journey than others. But laggards, even those in denial about the need to change, can become leaders.

“You are looking for your board to give you a sense of mission, purpose and identity,” says Ken Peattie, professor of marketing and strategy at Cardiff Business School. Rarely does this happen overnight, and corporates that think hard about what they do, and why they do it, are often and rightly garlanded for their efforts. Consumer goods giant Unilever topped GlobeScan/SustainAbility’s Sustainable Leaders rankings in 2019, for the eighth year in a row.

Change will not happen overnight. We are not going to move overnight to a place where every corporate or institution is 100-per-cent sustainable, and has a sense of purpose that makes the world a better place. The FRC’s Code of Conduct is vague in how it defines the word ‘purpose’ for good reason: it makes little sense to force firms to become something they are not.

But companies run by executives and overseen by directors who act with integrity, lead by example, and promote a moral and principled culture – that’s an idea everyone can get behind. “Defining purpose is always going to be difficult,” says the IoD’s Singh Basra. “But it is a good ambition and it’s the right ambition.”


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