Purpose before Profit
Last year, the British Academy released their ‘Principles for Purposeful Business’, laying out the framework for business in the 2020s and beyond. The report was written before the COVID-19 crisis, but in the wake of the pandemic, its learnings are more pertinent than ever.
The report builds on the British Academy’s definition of corporate purpose articulated in 2018, stating that corporate purpose, “should be the reason for a corporation’s existence and its starting point”. This was published soon after the Financial Reporting Council updated its UK Corporate Governance Code, which stated that any firm with a premium listing on the London Stock Exchange had to promote a corporate culture aligned with its “purpose [and] business strategy”.
The ‘Principles for Purposeful Business’ report emphasises that purpose should be articulated and embedded into every aspect of company life and impact the way it operates. This is not to say that profit is not relevant, but that it should “be a product of a corporation’s purpose”, not “the purpose of the corporation”.
Identifying this purpose means identifying and being driven by a higher cause, and understanding how that cause impacts stakeholders. Once this has been understood, a corporate purpose should optimise its ability to assist those it touches, seeking to harness the power of business “to profitably solve the problems of people and planet, and to prevent business from profiting from harm.”
The coronavirus pandemic has demonstrated how vulnerable our social and economic systems are in the face of crisis. But if there is a silver lining to the past few months, it is seeing how effectively businesses can be utilised to serve the greater good. From perfume to hand sanitizer, cars to ventilators, companies around the world were able to swiftly repurpose their production lines and respond to pressing societal problems.
Businesses are not only well-positioned to tackle societal problems, but it is imperative for their survival to do so. If businesses do not respond to global issues, they will suffer as a result. As the report explains, climate change, for example, has inexorable social and political implications. Corporate and financial systems are susceptible to these. Responding to global change does not just deter risk but can maximise opportunity.
Another factor prompting change is a shift in companies themselves. The report observes that companies have become “increasingly intangible”: with a shift in leading companies’ assets from 83% tangible (buildings, plant, machinery) to 87% intangible (brands, patents, intellectual property).
Businesses are not only well-positioned to tackle societal problems, but it is imperative for their survival to do so.
There has also been a shift in the way businesses are perceived, as the report argues that businesses are now widely regarded as more trustworthy than governments and media.
“Trust in institutions is essential for social and economic progress,” the report states. “If we are to see business move towards solving problems and not profiting from them we need businesses that commit to their corporate purpose and create reciprocal relations of trust and mutual benefits both for the firm and its stakeholders.”
In the wake of COVID-19, Leaders on Purpose have created an open letter, calling for cross-sector collaboration between businesses and government to build a better “Purpose-First” economy. They make the case that in order to financially recover from the crisis and create an economy that can survive in face of future shocks, we need businesses to be empowered to act for the benefit of the society.
Principles for purposeful business
Moving forward from their 2018 report, the British Academy’s ‘Principles for Purposeful Business’ lays out a series of principles that businesses can adopt. Drawing from academic research across disciplines and consulting top experts in business, it offers a framework for corporate purpose.
The report lists 8 principles that lay out the structure of a purposeful business.
1. Corporate Law
In 2006, the UK Companies Act stated that a director of a company should act “to promote the success of the company for the benefit of its members as a whole”. The key word here is “members”. Stakeholders were not included in this definition; only “members”, or shareholders, were to be affected. As such, the report calls for a “reformulation of corporate law to capture the two sides of corporate purpose”, both shareholder and stakeholder interest.
Whilst the report urges against “an attempt to prescribe corporate purpose”, it states that companies should be properly regulated to ensure they are abiding by commercial, employment, environmental, human rights, and investor protection laws. This is true for companies serving a public function which “create a dependency of a segment of society on them” – utilities, banks, public service providers – but, in the face of climate change, it will also be increasingly relevant to firms that were not traditionally perceived as serving a public function. Incorporating public in corporate purposes will be vital to companies which have currently outpaced regulation, including those of technology.
As it currently stands, ownership is understood as “the rights of shareholders over the assets of a firm”, but this definition misrepresents how businesses actually exist in society. Companies are increasingly dependent on and impact people and things they do not own, workers, societies, natural assets, turning “the traditional property right view of the firm on its head”. The report argues that ownership is now less about the assets of a firm but its purpose, meaning that ownership also embodies the obligations and responsibilities that come with this.
4. Corporate governance
Corporate governance is traditionally understood in relation to shareholders, but there has been a growing consensus that this conception is inadequate. This is reflected in the revision of principles B and C of the Financial Reporting Council’s governance code in July 2018, which state that the board should establish and adopt the company’s purpose, and that they would ensure that the necessary resources are in place for objectives to be met.
“These principles provide a clear statement of what corporate governance should achieve”, the report summarises, “an alignment of company strategy and culture with its purpose and values, led from the top and embedded throughout the organisation.”
The report explains that at present, corporate measurement systems focus predominantly on financial and material assets. This is inadequate, since companies are increasingly dependent upon and impact bodies outside the firm, resulting in confusion and cost. To rectify this, the report calls for “greater consensus, data assurance and standardisation of available information”, specifying that this must occur “both within and outside the firm”.
Corporate performance is currently assessed in relation to profits, but this measurement must be reformulated to take into account corporate purpose as well.
7. Corporate financing
Focusing solely on the interests of investors has prevented companies from funding engaged and long-term investment in their purpose, resulting in “short-term hedge fund activists”, holding shares in a company for an average of two to four years. The report explains that this is partially due to the corporate tax system, which “discriminates in favour of debt over equity” and discourages shareholders from holding “concentrated blocks of shares”. It argues that businesses should have the agency to choose how to structure their ownership and governance, encouraging long-term equity finance and the fulfilment of a company’s purpose.
8. Corporate investment
Public-private partnerships are often “fraught with problems and failures”. This is largely due to the perception that the public sector is interested in public benefit, whilst businesses are only interested in profit. But this needs not be the case. According to the report, “resolution of this conflict requires private organisations to adopt the public interest in their corporate purpose”. Rather than merely focusing on maximising shareholder value, the report encourages businesses to make partnerships with private, public and not-for-profit organisations that enable the delivery of their purpose.
How to get there
The report lists four factors that will build a framework to bring about such change: legal change, leadership, feedback loops and development of skills and knowledge.
Legal reforms set by the government should set the overall framework of corporate purpose, but these alone will not be enough themselves to bring about genuine change. In order for values to be embedded and ethical cultures to be cultivated, leadership will play a critical role. This depends on business leaders making difficult decisions to manage the fulfilment of their corporate purpose. In order to assess the impact of the company’s operation, feedback loops should provide mechanisms through which companies can understand their impacts. This will require companies to identify the information and data that enables them to understand impact and performance, which should then be measured so that performance metrics can be adjusted to reward the delivery of purpose.
In order to engage stakeholders in governance, they will need to be aligned in their company’s purpose. Relationships with employees, customers, suppliers and communities will also be vital to support the delivery of this purpose.
Fundamentally, “each of the pathways relies on people to make changes and adapt”, the report concludes. “Without ideas and bold thinking, we are doomed to stand still.”