VICTORIA GEDDES, Executive Director

The importance of the role of Corporate Purpose has been gaining momentum globally since 2019, sparked in Australia by the release of the 4^th edition of the ASX Corporate Governance Principles and Recommendations. In its Principle 1, ASX noted that the Board of a listed entity should be responsible under its charter for, among other things:

• defining the entity’s purpose and setting its strategic objectives; and
• satisfying itself that the entity’s remuneration policies are aligned with the entity’s purpose, values, strategic objectives and risk appetite.

In the same year, the powerful Business Roundtable (BRT) in the US famously redefined the purpose of the Corporation as one to serve all Americans – customers, employees, suppliers, communities and shareholders. The debate in both Australia and the US at the time focused on whether this represented a shift away from 50 years of orthodoxy on the primacy of the shareholder and the idea that “social capital” is as valuable as “financial capital” for the efficient functioning of free markets.

A great deal has changed regarding expected corporate behaviour in the intervening years – changing workforce demographics, issues of diversity and increasing inequality, disruptive shifts triggered by the Covid-19 pandemic, the daily awareness of the impact of climate change and Russia’s invasion of Ukraine to name just a few.  As a consequence, many companies are now taking actions they would never have even considered a few years ago. They are also being pressured by a growing number of stakeholders to become better partners to their employees, communities, suppliers, customers etc in order to succeed for all.

At the annual National Investor Relations Institute (NIRI) Conference in Boston, which I attended in June, Purpose featured as one of the key note topics. Research undertaken by the US Conference Board was cited showing that the number of companies in the S&P Global 1200 with Purpose Statements has tripled in the last five years and that those identifying as ‘purpose driven’ has grown ten fold in the same period. The Edelman Trust Barometer surveys show that employees want their employers to engage in social issues.

Defining Purpose

At the heart of many definitions that can be found on Corporate Purpose is the concept of the company’s reason for being, the ‘why’ in what an organisation does. Who does it serve and why? What makes it different or better than others?

The NIRI Think Tank on Corporate Purpose suggested that a useful starting point in developing a clear and shared definition of Corporate Purpose is to answer three questions.

1. What does corporate purpose say about the company’s reason for being and why the company will continue to exist in the future?
2. How does corporate purpose serve stakeholders beyond investors?
3. What actions will the company take to fulfill its corporate purpose?

Corporate Purpose and ESG are not the same

An article in the Harvard Business Review[1] identified that corporate purpose and ESG are two terms that are often used interchangeably. It stressed that this is a mistake in that while they are related, they are different ideas. “Purpose always comes first. Sustainability/ESG can either contribute to it or detract from it.”

ESG is better understood as one component of purpose and should be integrated into a company’s broader corporate strategy. It is in effect an enterprise risk management effort. On its own ESG doesn’t provide direction for the company.

Connecting Corporate Purpose and Stakeholder Trust

Despite the momentum behind Corporate Purpose, there remains plenty of scepticism and cynicism about the gap between the sentiment behind the carefully crafted statements and actual practice. Parallels are easily drawn with the Mission, Vision and Values statements that were popularised in the nineties, the impact of which often failed to move beyond the workshops that created them.

The absence of, or failure to effectively communicate, a clear plan with goals, strategies and milestones, outlining how a company will deliver on its purpose fuels investor scepticism and a perception that businesses are not taking their purpose seriously.

CEO of CECP (Chief Executives for Corporate Purpose), Daryl Brewster, noted that their research identified that companies that are clearly demonstrating corporate purpose with a plan “are able to help stakeholders better understand a company’s values and provides the opportunity to align different departments of the same company under its purpose. Ultimately this can also attract long term investment, address material ESG matters, and provide a roadmap to longer term value creation with relevant metrics and milestones”.

Research cited by the NIRI Think Tank demonstrated that those with a strong corporate purpose tend to outperform those without it.

High purpose companies with established and articulated purpose show 14% greater revenue growth; 8% higher operating profitability; 6% better return on capital than those companies focused only on maximising profits.

For a company to access the power of its purpose the NIRI Think Tank noted that it is critical that an “authenticity in both words and actions underpins corporate purpose. The statements must be created, executed and reported upon with good faith to have value. Actual practice must be tied to commitment”.

[1] “The Difference between Purpose and Sustainability (aka ESG)”  Eccles, Mayer and Stroehle