Companies say they’re serious about corporate purpose, but investors aren’t convinced
Corporate purpose has gone mainstream. A transformation? A new world of enlightened capitalism? Not a bit of it. Even though corporate purpose statements are appearing everywhere, for most companies, it’s business as usual with some pretty tinsels on the side.
In an extensive piece of research including interviews with 49 asset managers with a total of more than $19 trillion under management, 26 asset owners, and 33 companies with average revenues of $45 billion in 15 countries, we have uncovered why anyone who sees a purpose revolution in progress needs to get their eyes tested. They need a reality check, which is exactly what this article seeks to provide. We also studied the investment chain and the purpose and governance of financial institutions themselves. These should be addressed before corporate purpose can be truly authentic.
The simple and consistent message that institutional investors conveyed is that they don’t see purpose being practiced in the companies they invest in. Investors think companies are not taking it seriously and their communications about it are shallow and flimsy, lacking substance and any mechanisms for accountability. There is a significant difference between Europe and North America in this regard, with the cynicism about U.S. companies being particularly pronounced.
There was a widespread appreciation amongst investors of the significance and potential of corporate purpose. In theory, it was seen to be important to discussions about the role of business in society, helps to attract and retain employees, improves relationships between suppliers and customers, enhances business resilience, and promotes a long-term perspective on a company. It also provides a holistic view on a company, aligns practice and strategy with intent and vision, and makes businesses relevant in a rapidly changing world.
Initiation of a company’s purpose was viewed as being driven by the executive, particularly the CEO, but oversight of it rested with the board. As one investor put it: “The board is of course responsible, but they will not do it in total isolation – they need the executives and teams to make this meaningful.” So there is general agreement amongst investors on who is responsible for initiating, implementing, and overseeing corporate purpose. And there is also agreement on the importance of its communication. Boards need to articulate it clearly. Strategy, goals, and key performance indicators (KPIs) need to be linked to it. Concrete examples of actions taken on the back of a company’s purpose need to be provided. And everything needs to be linked back to integrated reporting.
Investors are looking for corporate purpose to drive board discussions: “If a board is actually focussed on purpose as we want, then 80% of the board discussion should be about the magic triangle: purpose, long-term strategic goals and culture,” said one investor. “20% is reserved for compliance. But today, 80% is about compliance, leaving 20% for the rest.”
Incentives and executive remuneration should be tied to corporate purpose. Not surprisingly, investors are not seeing examples of how purpose is influencing behavior.
Boards of companies are regarded by investors as key to conversations about purpose, but they are also the problem. “There is a generational problem,” said one respondent. “Boards are technically the right place for purpose to start, but boards are old and still of the Friedman school and so young, more dynamic management people have to take it up to them.” In part driven by regulation, access to boards for discussions about purpose differs by country. It is harder in the U.S. than in Europe and easier in some European countries, such as the UK and the Netherlands, than in others, such as Germany.
A language barrier
But the most serious impediment to investor engagement with boards about purpose is that they are not talking the same language. The concerns of asset managers are driven by the concerns of their clients—asset owners—about environmental, social, and governance (ESG) and financial performance. Engagement on ESG has grown appreciably as the positive relationship between ESG and financial performance has become clear. But corporate purpose is not seen as being integral to this relationship.
The reason for the disconnect between companies and institutions is that they are talking to different audiences. Asset managers are part of an investment chain at the end of which sit their asset owners. Companies, on the other hand, must embrace a variety of stakeholders’ views about corporate purpose. Investors recognize that the problem does not lie exclusively at the door of the boardroom. “If investors want companies to embrace multiple stakeholders, then they need to support them when they actually make the change,” said one.
Bridging this information and credibility divide therefore requires a response from both companies and investors. Companies must talk the language of ESG to their investors. Much though they would like their investors to engage with them conceptually on corporate purpose, that conversation can only be constructive if boards convert the relevance of their purpose into ESG. How are inputs and outputs affected by purpose? What outcomes and impacts are expected, targeted, and measured in relation to purpose?
For their part, investors need to appreciate their own purpose and build this into the mandates asset owners give their asset managers. Increasingly, investors now draft their own purpose statements—“Statement of Investment Beliefs” or “Statement of Investment Values”—as a way of integrating and aligning sustainable finance practice within their institution. Investors are also coming to understand that being clear about their own purpose can promote the authenticity of corporate purposes.
Companies’ purposes are the key to their strategies and capital allocation decisions and, if done right, reflect the problems they aim to solve profitably. Understanding the different classes of problems that drive companies and the capabilities, resources, skills, and leadership required to solve those problems are the factors that asset managers of the 2020’s will have to be able to evaluate. This starts with understanding how ESG performance contributes to a company’s financial performance and ends with establishing whether a corporate purpose supports this. If companies are smart, they will do more to help with this translation and understanding.
Robert Eccles is visiting professor of management practice at the Said Business School, University of Oxford.
Colin Mayer is visiting professor at the Blavatnik School of Government and emeritus professor of management studies at the Said Business School.
Judith Stroehle is senior research fellow at the Said Business School and programme lead of the Oxford Rethinking Performance Initiative.
Never miss a story: Follow your favorite topics and authors to get a personalized email with the journalism that matters most to you.