At the heart of the Financial Reporting Council’s (FRC) 2018 UK Corporate Governance Code is the principle of corporate purpose; a principle intended to shift corporate behaviour away from shareholder primacy and corporate greed, towards a greater good for all. But what is it, why do companies need one and how is it established?
What is a corporate purpose?
According to the FRC’s Guidance on the Strategic Report 2018, corporate purpose is defined as ’why an entity exists’. Although historically this has centred around profit, modern thinking is that companies exist to meet a specific need or solve a problem; profit is merely a by-product of how well the company does that.
Why do companies need a corporate purpose?
In the current climate of maximum scrutiny, heightened social and environmental awareness and increasing consumer and investor activism, a company without an authentic purpose runs the risk of losing its licence to operate. Or put another way, the potential reputational damage of not having one is high.
An authentic and insightful purpose can unify a workforce by setting a common goal and creates a framework for informing every business decision. It will motivate customers and partners. It’s a clear statement of intent which will influence how a business is perceived and will ultimately influence whether stakeholders are willing to engage with the business or not.
There is a growing body of evidence to show that purpose-led businesses perform better. Unilever announced in June that its purpose-led Sustainable Living Brands (those with a strong environmental or social purpose) are growing 69% faster than the rest of the business and delivering 75% of the company’s overall growth. A recent study by Grant Thornton, Getting smart about governance found that companies with strong corporate governance practices delivered twice the level of shareholder returns, were 15% more solvent, 25% more liquid, 29% more efficient at generating profits and twice as likely to remain in the FTSE 350.
How does a company establish its purpose?
Companies founded with a powerful social or environmental meaning such as The Body Shop or Patagonia usually have charismatic and campaigning leaders at the helm who lead by example. As their businesses grow they are able to hang on to their founding beliefs. However, for businesses that have grown through acquisition or merger involving distinct cultures and outlooks, and where leadership changes frequently, establishing purpose can be more challenging.
Although there are many different approaches to establishing a corporate purpose, there are four key ingredients critical to success:
- Get the board, executive and senior management team engaged and involved in the process. It will be impossible to embed the resulting purpose, including the associated values and culture, without champions of it at the top.
- Do research. Obtain views from key internal and external stakeholder groups to understand their views of the company and what they expect from it. Ensure your corporate purpose is unique by reviewing it against the purpose of peer companies
- Take time and get impartial, external advice. Do not underestimate the value of an objective eye cast over the evidence gathered. Good word-smithing will also be important
- Embed, embed, embed! A purpose will only be truly authentic if the entire workforce lives and breathes it.
Soon we will be spoilt for choice as listed companies report their purpose for the first time in their annual report. However, reporting is just one part of the process. Delivering on purpose will be the real challenge, and this is what needs to be monitored. Will UK business leaders rise to the challenge in the same way as their US Business Roundtable counterparts have committed to? Will companies use the opportunity to refresh their thinking and reorientate what drives them? Only time will tell.
About the author
Mei Ashelford is director of reporting intelligence at Gather
