Is purpose for real?

By 08/02/2018Blog

Written by Michael Hilton and Charles Wookey

When BlackRock, the largest investor in the world, starts talking about purpose there can be little doubt that it is in vogue.  In his 2018 letter to CEOs Larry Fink states that “to prosper over time every company must not only deliver financial performance but also show how it makes a positive contribution to society.”  The new UK Corporate Governance Code – currently out for consultation – strikes a very similar tone.

It’s hardly surprising that business leaders are looking for a change. The latest Edelman Trust Barometer once more makes for sorry reading. Only 43% of UK respondents said they trusted business and 60% believed that CEOs are motivated more by greed than making a positive difference in the world. Alongside this, nearly 7 in 10 respondents say that building trust is the number one job for CEOs, ahead of high-quality products and services. This is the latest in a long line of studies, fuelled by regular corporate scandals, clearly demonstrating that society wants more from businesses.

For some time now, businesses have been eagerly defining  their  social  purpose and consultants across the land are helping them do so. Simply articulating a purpose though, is not an end in itself.  Some organisations have fallen into the trap of creating a purpose ‘brand’ designed by the senior leadership team. But what happens when this brand  is not reflected in the experience of those working in or with the organisation, or indeed manifested in the corporate strategy?  Purpose then just  becomes Corporate Social Responsibility on steroids. As an example: Carillion’s stated purpose was “making tomorrow a better place” but that didn’t stop them leaving an estimated £1bn hole in their pension fund.

A big part of the problem in recent decades has been the widespread misconception that in UK law directors owe their duty directly to shareholders, and that this duty is to maximise shareholder value. In fact, as the Corporate Governance Code consultation makes clear, “the primary duty of directors is to promote the long-term success of the company”. Directors have more freedom than they think to decide what success means, and what to optimise. Larry Fink’s latest letter and the revised Code point to the need for purpose to take centre stage.  The door is open for the core businesses to be guided by a purpose that serves society, which respects the dignity of people and, in doing so, generates a fair return for responsible investors.

So what does it take to be a truly purposeful company?

A purposeful business is one which can explain clearly why it is good for the world.  It is one that puts serving society at the heart of its thinking and, above is, is prepared to confront, challenge and change in order to do it. This is not easy to achieve; if it were, then everybody would already be doing it.

In our experience, there are three key areas where change is needed if businesses are serious about serving society: integrating purpose with strategy, transforming internal culture and getting investor backing.

First, purpose becomes powerful when it guides the business.  It must be integrated into the business model, with strategy following from the purpose and everything else aligned to it.  The ambition must be to move towards complete alignment between purpose, strategy and outcomes (financial, environmental and social).

Second, purpose comes to life when it feels real to all people involved with the business.  Leaders need to find ways to allow employees, suppliers and customers to speak up when they see that the purpose isn’t being lived and then to confront these issues head on. All too often, the right things are said externally but internal policies (in recruitment, performance management, flexible working) provide incentives at odds with the business’s stated purpose and values. The good news from the 2018 Trust Barometer is that 72% of employees globally still trust their employers to do what is right. By embedding a culture of openness and empowerment, employees can play a crucial role in improving a company’s reputation.

Third, while business leaders can prompt these changes, and boards can back them,  they can only be sustained with the commitment of  investors. If Larry Fink truly believes that “without a sense of purpose, no company, either public or private, can achieve its full potential”, then it is firmly in BlackRock’s interests to use their considerable power to support CEOs in this transformation. Organisations across the whole investment chain need to remind themselves that individual savers want both a decent return on their savings, and a decent society in which to spend them. Investors have a responsibility, as stewards of those savings, to encourage CEOs to focus on long-term sustainable performance in the businesses they invest in.

Putting purpose at the heart of their businesses offers leaders and investors tremendous opportunities: to help solve many of the challenges which societies are facing and to restore credibility with the public.  But just establishing a purpose is no panacea; it must be lived out.