“Getting an audience is hard. Sustaining an audience is hard. It demands a consistency of thought, purpose, and of action over a long period of time.” Bruce Springsteen
Why do companies exist and for whom? Investors are increasingly looking at company purpose and culture to assess the health and prospects of the business.
Whilst it would be an oversimplification to suggest that those companies with a clear purpose succeed and those without fail, it is reasonable to propose that long-term business success is often supported by well-defined strategic focus, underpinned by a business’s long-term purpose.
According to Blackrock CEO, Larry Fink, “…when a company truly understands and expresses its purpose, it functions with the focus and strategic discipline that drive long-term profitability. Purpose unifies management, employees, and communities. It drives ethical behaviour and creates an essential check on actions that go against the best interests of stakeholders. Purpose guides culture, provides a framework for consistent decision-making, and, ultimately, helps sustain long-term financial returns for the shareholders of your company.”
Unquestionably it is those companies with an honest, relevant and genuine sense of purpose that retain employees. Staff who feel more engaged with the business and its direction are more likely to work proactively and productively to the benefit of the company.
Howard Schultz, of Starbucks fame, noted: “When you’re surrounded by people who share a passionate commitment around a common purpose, anything is possible.”
George Serafeim and Claudine Gartenberg, professors respectively at Harvard and Stern, found that “Purpose-Clarity organisations” (i.e. those where management makes its expectations and organisational direction clear) exhibit superior accounting and stock market performance. They noted in their 2016 study that “purpose does, in fact, matter. But it only matters if it is implemented in conjunction with clear, concise direction from top management and in such a way that the middle layer within the firm is fully bought in.”
Therefore it follows that, in a world where businesses are increasingly competing for capital, a true and indisputable sense of purpose, reinforced by strong cultural values and behaviour, which inform and contribute to the company’s strategy, should serve to amplify investor appeal and set the company apart from the crowd. Communicating and demonstrating this to shareholders therefore becomes a key element of any business’s overall investment case.
So, what does this mean in practice?
Firstly, companies should ask themselves whether they are able to clearly define their purpose and whether the cultural values of the business support this overall purpose. Secondly, does the corporate purpose inform the company strategy and underpin the business model?
Having the ability to clearly articulate purpose is the first step – this should then be reflected in an honest and consistent way in all communications with stakeholders. If a company’s purpose is truly at the heart of its actions, then it should also be central to communications and reporting. This has been highlighted in the Financial Reporting Council’s 2018 UK Corporate Governance Code, which states: “The board should establish the company’s purpose, values and strategy, and satisfy itself that these and its culture are aligned. All directors must act with integrity, lead by example and promote the desired culture.”
How can companies address purpose in the context of their reporting?
1. Articulate the company’s purpose
Companies with a purpose should consider it a central theme to all communications. Explain why the company exists and for whom in a succinct, clear and authentic way.
2. Demonstrate value and be clear about impact
If the company’s purpose is to bring value, then clearly demonstrate this value to stakeholders and the broader impact of the business on its surroundings. Consider whether you are reporting on the impact of your activities in a balanced way? Are you being transparent about both the positive and negative impacts? Show how the company considers its social and environmental impact based on its stated purpose and strategy. Be transparent and honest - is performance aligned with intention?
3. Align and link purpose to business model and strategy
Purpose defines the company’s reason for existence and should therefore sit at the heart of the business model and inform a business’s long-term strategy.
4. Show the link between purpose, culture and values
A company’s values and beliefs are critical in achieving its vision. Accurately demonstrate how the business’s purpose is reinforced by cultural behaviour and values. Without clear alignment here, it is hard to demonstrate how you are working towards your purpose.
5. Demonstrate and measure behaviour and performance
Show how your purpose and values are embedded in your business. It is not enough to merely state the corporate purpose. You should demonstrate the steps taken to ensure the way the company operates is underpinned by its culture and values, which will in turn lead to fulfillment of its purpose. How is the group structured around its purpose? What are the company’s leaders doing to foster the business’s purpose throughout the organisation? What incentivises employees to follow cultural values? Can you demonstrate that your employees believe in the company’s purpose and are working towards the common goal? Is purpose considered in all major decision-making within the business?