Regulators and investors – a changing landscape
The regulatory climate in the UK is increasingly favourable to the development of purpose-led business. Prior to 2018, regulators tended to emphasise the duty of company directors to protect and enhance shareholder value, and there was no requirement to establish a purpose. The 2018 Corporate Governance Code for listed companies changed this, and it has been followed up by the stewardship code for investors which has for the first time emphasised the importance of purpose for investors as well.
The UK Corporate Governance Code 2018:
The Code requires Boards to “establish the company’s purpose, values and strategy and satisfy itself that these and its culture are aligned.”
Principle A of the Code states that “A successful company is led by an effective and entrepreneurial board, whose role is to promote the long term sustainable success of the company, generating value for shareholders and contributing to wider society.”
There is also growing pressure from investors on companies to be clear about their purpose. In his annual letter to CEOs in 2018, BlackRock CEO Larry Fink said:
To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate. Without a sense of purpose, no company, either public or private, can achieve its full potential.
This and the position Larry Fink has taken in subsequent letters, in particular on climate change, demonstrates that the conversation has shifted.
Investors are showing a growing interest in a ESG and a range of ESG factors are increasingly being brought into investment decision taking. As discussed in this HBR podcast with Prof. Robert Eccles, according to his research:
Investors want business leaders to focus on ESG, or environmental, social and governance metrics. That means progress on ESG isn’t just a nice-to-have anymore. It’s something shareholders will demand, because they believe it’s going to drive everything else they care about. Growth, market share, profitability. So, for any company keen to attract capital, sustainability has to become a focus.
You can listen to the podcast and read the transcript via HBR: Why It’s Time to Finally Worry about ESG (paywall)
Diversity and Inclusion is another factor investors and regulators are looking at. In the UK, the Financial Conduct Authority (FCA) is proposing to change listing rules for businesses, which will require companies to meet diversity targets, and publish diversity data on their boards and executive management. For more see: ICAEW, Diversity and inclusion is a key metric for investors
This shift is not restricted to large listed companies. For private companies, the Wates principles for large private companies were drawn up in December 2018, and have similar requirements to the corporate governance code, placing the establishment of corporate purpose as the first and fundamental duty of the Board.
An increasing number of start-ups are seeking to set themselves up as purpose led from the start and to embed their purpose into their articles for example Purposely (getpurpose.ly) and growing numbers of companies are seeking to become BCorps to demonstrate their commitment to having a positive impact.