6 min read 20 Oct 20
Summary: “What are we in business to achieve?”, company management might ask at a board meeting, usually rhetorically. Rewind the clock 20 or 30 years and the most common answer to this question might well have been to deliver value to a company’s shareholders.
Today, the answer they would receive – and the one many shareholders would expect – has probably changed. Not only do we recognise that there can be more to a company’s purpose than simply focusing on profits, but that there should be.
This is not just necessarily for the benefit of society, but also for investors. If a company is to thrive in the long term, it needs a clear purpose. Importantly, it also needs to achieve it.
In the same way that earning money often isn’t motivation enough for us to thrive in our careers, the pursuit of profit alone is unlikely to lead to sustainable success for any company.
Purpose can come in many forms. While some companies may seek to transform lives around the world, others may have more humble aspirations. For instance, one company might be committed to finding a cure for cancer, while another might be developing longer-lasting batteries or delivering financial services to its customers.
Whatever a company’s purpose, to quote academic Alex Edmans of London Business School, it should answer the following question: “How is the world a better place by your company being here?”
A clearly defined purpose can be a motivating force for staff to propel the company forward to success. It should also be a point of focus for leadership in establishing and pursuing business objectives. It makes sense for the profits generated by this success to be primarily used to support the pursuit of that purpose.
For workers and management to share a common sense of mission, they need to believe in it. A company’s purpose must therefore be in its DNA, enshrined as part of its raison d'être. The growing cohort of “Certified B Corporations” take this one step further and embed their responsibilities to stakeholders in their companies’ constitutions.
There is growing recognition of this in the broader corporate sphere. In August 2019, chief executives from 181 of the largest US companies signed up to a new ‘Statement on the Purpose of the Corporation’. It acknowledged that companies share a fundamental commitment to all their stakeholders – including customers, employees, suppliers – and supporting communities and the environment, as they look to create long-term value for their own shareholders.
Bold pledges are nice to see, but it is healthy to approach claims of corporate purpose with scepticism. Indeed, in the year since this Statement was made, there has been little concrete action – even during a period where the crisis offered those companies an opportunity (and arguably a duty) to demonstrate much-needed support for their stakeholders.
It is encouraging that more and more companies are embracing non-financial targets to convey a sense of social purpose, but these commitments need to be more than just a box-ticking exercise.
We will no doubt see many proclaiming how much they have reduced their environmental impact during 2020, for instance. Yet which ones will have realised this change intentionally, rather than by circumstance? How many are committed to continuing to make improvements once lockdown restrictions ease?
As investors looking to sieve through the bold pledges to find companies that are genuinely delivering on their purpose, we need to look for indicators of authenticity. Clearly defined non-financial goals – integrated into the articulation of the company’s core strategy – are a good start. To weigh up how well companies are delivering against these non-financial goals, we need to measure their longer-term progress against relevant metrics.
By way of example, a global logistics company may state that its purpose is to move goods more sustainably. We might reasonably expect this company to demonstrate how well they are doing against this goal by publishing indicators of sustainable practices, like savings in carbon emissions and trees through reusable pallets.
The more transparent a company is about its targets and performance against them, the more likely it is that they are committed to their purpose. Just as important is how ambitious and relevant the targets are in the first place. Comparing goals with those of peers can be a helpful way to evaluate how serious a company is about realising change.
When investing for positive impact, colleagues and I look for a clear and authentic corporate purpose – articulated by a mission and vision statement that is both ambitious and achievable, and designed to inspire the company’s workforce.
The key is to identify the actions that back up the words. Are management incentives aligned with delivery of the purpose? Does senior management refer to the purpose clearly and regularly? Does it genuinely influence the company’s strategy? There is a movement towards companies issuing a constitutional ‘statement of purpose’, signed off by the board and communicated widely to the company’s stakeholders: an idea we back strongly.
Prioritising the interests of stakeholders like employees and communities is not just about having a moral compass. There is a growing body of evidence to show it is good business.
Academic research has shown how being purposeful can be a determinant, or at least contributor to, long-term success. A study by Alex Edmans found that companies with high levels of employee satisfaction delivered investor returns that were greater than peers by 2.3% to 3.8% a year over almost three decades.
A separate study by academics at Columbia, Harvard and Wharton business schools used workers’ perceptions about their employers to paint a picture of those companies’ purpose. They found that companies with a high sense of purpose – and, importantly, clarity of purpose too – systematically delivered better financial and investment performance than those that did not.
This also translates into commercial success as consumers shift towards products that reflect their own personal values. As a concrete example of this, consumer goods group Unilever’s “Sustainable Living Brands” – those taking action to support positive change for people and the planet – grew 69% faster than the rest of the company in 2018.
So, there is evidence to suggest that companies that serve a purpose greater than profit tend to outperform over the long term. Looking ahead, I see no reason why this trend would change.
Society’s expectations of companies have risen over the past decade. Companies are expected to be responsible participants in the global economy, and to bring harm to neither the planet nor people, including the workers and communities in which they operate.
Companies that ignore this may find their social license to operate eventually revoked. Investors that ignore the value of corporate purpose not only risk losses, but could miss on the long-term performance that purposeful businesses can deliver.
To quote Alex Edmans, therefore, “to reach the land of profit, follow the road of purpose”.
Past performance is not a guide to future performance.
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