The Purpose of the Corporation.
What is Purpose?
A succession of annual letters from Larry Fink the CEO of BlackRock asking the CEOs of all the companies he invested in to articulate what is the purpose of their company, has concentrated executive minds across the world. Since BlackRock is the largest institutional investor with US$20 trillion under management, this test was one they needed to get right. In his 2019 Letter to CEOs of the companies in which BlackRock is a lead investor he set out his view on the principles of the Purpose of the Corporation:
- “…Every company needs a framework to navigate this difficult landscape, and it must begin with a clear embodiment of your company’s purpose in your business model and corporate strategy.
- Purpose is not a mere tagline or marketing campaign; it is a company’s fundamental reason for being – what it does every day to create value for its stakeholders…” (Fink 2019).
Purpose places meaning at the heart of the company, answering the question, “why do you do what you do?” Purpose is the enduring reason for an organisation to exist. Purpose aligns with long-term financial performance, a clear rationale for daily decision-making, and the capacity to unify and motivate relevant stakeholders.
As Ann Francke the CEO of the Chartered Management Institute insists, “The bottom line is that purpose-driven, people centric, values-driven companies outperform. Not just because they do better sustainably over time, but because they avoid the risk.”
The reasons why purpose is pursued as the main objective include:
- To maintain and increase legitimacy in business
- To attract, motivate and retain talent
- To drive strong customer and stakeholder relationships
- To increase employee psychological wellbeing
- To promote innovation beyond incremental improvement towards a longer-term perspective
- To help balance change with an ethical perspective
- To encourage clarity in strategic direction
- To help manage risk from a position of strength
- To enable wider vision and bigger aims
- To increase business performance (Ebeert, Hurth and Prabho 2018).
Meanwhile the work of the British Academy on Future of the Corporation project (2018-2021) was similarly engaged in a fundamental re-conceptualizing of business purpose with the UK business community. Propelling the British Academy inquiry was an urgent sense of the impact of climate change, the urgency of delivering the UN Sustainable Development Goals, recent advances in digital technology, the increasing dominance of companies without significant tangible assets, and widespread negative perceptions of business (British Academy 2019:5).
The Future of the Corporation project sought to examine the contemporary purpose of corporations and redefine law and regulation to enable a new model of business with wider purposes and accomplishments. The British Academy inquiry commenced its research on the Future of the Corporation around main themes: history, purpose, trust, culture, technology, law, regulation and taxation, corporate governance, ownership, investment and social benefits. The new framework of the corporation the inquiry began to formulate involved a reinterpretation and integration of three principles: (i) a redefining of corporate purpose that is distinct from shareholder returns, (ii) an establishment of trustworthiness founded on norms of integrity, and (iii) the embedding of a culture in organisations that enables both (British Academy 2021:10).
Among the conclusions of the British Academy inquiry was that the purpose of business is to solve problems of people and planet profitably, and not profit from causing problems. The elements of purposeful business included a series of principles:
- “Corporate law should place purpose at the heart of the corporation and require directors to state their purposes and demonstrate commitment to them.
- Regulation should expect particularly high duties of engagement, loyalty and care on the part of directors of companies to public interests where they perform important public functions.
- Ownership should recognise obligations of shareholders and engage them in supporting corporate purposes as well as in their rights to derive financial benefit.
- Corporate governance should align managerial interests with companies’ purposes and establish accountability to a range of stakeholders through appropriate board structures. They should determine a set of values necessary to deliver purpose, embedded in their company culture.
Translating these ideals into reality will require a momentous transformation of corporate law, governance, strategy, operations, performance measures and disclosures.
Yet the British Academy initiative is part of a developing momentum of research and policy bodies internationally to achieve a blueprint for more responsible business practice.
Most importantly, the UN Sustainable Development Goals (SDGs) have galvanised governments and corporations around the world.
Both the Securities and Exchange Commission in the United States, and the European Union are currently considering proposals to encourage corporations to articulate their commitments to social and environmental responsibility.
A new era is required of purposeful corporations, conscious of their responsibilities to the economy, community and environment (Figure 1). In the purposeful corporation engagement in social and environmental responsibility will be reinforced by legal obligations and detailed in the companies’ articles of association. Investment will be by patient capital interested in sustainable returns, and rewards will be for sustainable value creation (Big Innovation Centre (2017); British Academy (2021
High performing purpose-driven companies will be the benchmark for the future, stakeholder capitalism is the zeitgeist. From an executive talent perspective, clarity of purpose can be seen as the first step in creating a positive and enduring work culture which, in turn, underpins innovation, productivity and shareholder returns.
Big Innovation Centre (2017) Why purpose is key to success in twenty-first century business (cityam.com)
Boston Consulting Group Total Societal Impact: A New Lens for Strategy (2017) Total Societal Impact: A New Lens for Strategy (bcg.com)
British Academy (2021) Future of the Corporation | The British Academy
Ebert, C., Hurth V., and Prabho, The What, the Why, and the How of Purpose, Chartered Management Institute, 2018 Guide-for-Leaders-White-Paper.pdf (managers.org.uk)
EY Beacon Institute, The State of the Debate on Purpose in Business, 2018 EY Beacon Institute
Fink, L. (2019) Letter to CEOs: Purpose and Profit, Blackrock
Author: Thomas Clarke
Thomas Clarke is a Fellow of the Royal Society of Arts, and editor of the Cambridge University Press Elements in Corporate Governance book series. Formerly he was Professor and Director at the UTS Centre for Corporate Governance