- The traditional focus on shareholder value is neither fair nor right
- Corporate purpose should be about producing solutions, not just profits
- This new report offers a programme for radical reform
Last year, the US Business Roundtable sought to define a new purpose for business – and it was not alone in doing so. In November 2019, the UK Institute of Directors (IoD) launched a Manifesto on Corporate Governance that called for the adoption of business purpose clauses, a public service corporation, a code of business conduct, mandatory training for directors, and a corporate governance commission.
Corporate purpose is rapidly becoming a global phenomenon – only no one really understands what it means. Milton Friedman’s notion that a firm's purpose is "just making money" is becoming discredited, but no succinct alternative has replaced it.
So, let me be clear about what corporate purpose should be – “to produce profitable solutions to the problems of people and planet, and not to profit from producing problems for people or planet”. It is about producing solutions, doing so profitably not just philanthropically, and measuring fair – not fake – profits.
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Why is there a demand for this clarity around purpose? Because relying on competition or regulation to enforce the rules of the game is simply inadequate. Competition is great where it works but it fails too often. Regulation and competition policy are not meeting public expectations or keeping up with fast-moving, global, tech-savvy businesses. The prospect of a combination of AI and genetic engineering in the hands of purely profit-driven corporations is a cause of justified public concern that demands a policy response.
What is needed is a clear, all-encompassing understanding of purpose and everything else will follow from that. A report published last year by the British Academy – the national academy of the humanities and social sciences – entitled Principles for Purposeful Business, is the culmination of the largest programme of research that has been undertaken on the future of the corporation. It has drawn together academics from across the humanities and social sciences and put them in dialogue with business leaders, policy-makers, civil society and experts to identify the reasons for change, why now, what it should be, and how it should be achieved.
What has emerged is the clearest and most comprehensive programme for reform that has been presented to-date. It is no longer a question of whether and why to change, but what and how to do it. At the heart of this lies a clear notion of purpose that it is neither purely descriptive of what a company does, such as making washing machines or cars, nor purely aspirational, such as seeking to save the world. It is about precise descriptions of what problems companies are solving, for whom, how, when and why they are best suited to do that.
If a corporation’s statement of purpose is credible – if it demonstrates a real, irreversible commitment to profiting from solving problems – it builds trust and authenticity, as well as loyalty in customers, employees, suppliers and communities. Companies that fulfil their purposes might be perceived as trustworthy; too often, at present, they are viewed as the opposite.
Critical to establishing this credibility are cultures and values that establish a shared identity around a common, forward-looking purpose. But there is more to it than that. There is a need to align policy and practice as well as morals and philosophy.
The British Academy’s programme sets out eight principles for reform of business around: law, regulation, ownership, governance, measurement, performance, financing and investment. At present, these are all focused on shareholder interests. By putting corporate purpose at in the place of these interests, companies will act: they will commit to purposes by law; adopt social licences where appropriate to fulfil them; seek shareholders who support them; implement inclusive governance to oversee them accountably; measure performance against them; define profits in relation to them; raise risk capital to fund them; and establish partnerships to invest in them.
We are used to business focusing on one interest group in society: shareholders. That simply cannot be right, fair or efficient. Instead, business should be structured around the question why it exists, what it is there to do, and what it aspires to become – namely its purpose – and everything should follow from that, including business practice, policy and education. For this reason, implementing these principles will be transformational.
During the last 50 years there has been unprecedented progress in human indicators – life expectancy has increased to record levels; infant- and maternal mortality has fallen; more girls are staying in school; more people have been lifted out of poverty than ever before; and inequality between nations has narrowed. The market system has served us well.
But deep fractures are beginning to show: gaping inequality within almost all countries; record environmental degradation and species loss; and the broader impacts of irreversible climate change. Our markets are unsustainable – and we need a new economic model.
To tackle these challenges,Transforming Markets is one of four focus areas at the World Economic Forum's 2019 Sustainable Development Impact summit. A range of sessions will bring stakeholders together to take action that places human and environmental health at the core of market systems and value chains. These include building sustainable markets, responsible supply chains, moving beyond disposability, circularity and scaling solutions of the Fourth Industrial Revolution, among others.
This is business’s new direction of travel. Novo Nordisk belongs to a foundation, an ownership structure which ensures oversight of its clearly defined purpose: to drive change to defeat diabetes and other serious chronic diseases. Anglian Water, a UK water company, has changed its legal status in its Articles of Association to state its purpose as the benefit of shareholders, stakeholders, the environment and wider community.
Business-as-usual is no longer adequate for the challenges of the 21st century. Purposeful, trustworthy businesses will play a key role in delivering ambitious programmes for decarbonisation, creating meaningful and fulfilling work, developing new technologies that solve entrenched problems, improving health and well-being, and achieving inclusive growth.
Policy, practice and teaching need to change to make purposeful business the norm. Last year saw strong statements of good intention from business leaders and investors. This year should be the start of their rapid realization.