Why purpose-driven businesses are few and far between

Article published by Management Today on 18 May 2016

Written by Jack Torrance

Featuring: Big Innovation Centre releases a report, revealing that the total value of Britain’s businesses could increase by £130bn if they were more effectively ‘organised around clear corporate purposes that unite all stakeholders’.

What is the purpose of a business? The obvious answer is to make money for shareholders. A company’s owners appoint its board, which appoints its executive team, which hires and fires the rest of the people that make up the organisation. Therefore, in theory, all should be focused on maximising shareholder returns.

But that’s not a very exciting story to tell customers or potential new hires. And nor will it inspire under-pressure executives to succeed and to build a business with longevity – even if they do stand to be handsomely rewarded. A sense of higher purpose is clearly a desirable thing, as a couple of research reports have highlighted this week.

The total value of Britain’s businesses could increase by £130bn if they were more effectively ‘organised around clear corporate purposes that unite all stakeholders’, according to a report by the Big Innovation Centre (BIC). It’s a largely symbolic figure but you get the gist. A more sceptical take on the matter from PR firm Claremont Comms expresses concern that in some cases ‘purpose’ is becoming a shallow add-on in the same vein as a million useless CSR programmes, but nonetheless acknowledges that having a purpose can add real value.

From Apple’s obsession with design to Ikea’s ‘democratisation’ of furniture, a clear purpose can be a valuable component of a company’s reputation. It’s particularly useful for recruitment, as so-called millennials are said to be motivated by purpose more than money. It’s also a handy benchmark for bosses to measure their performance and decisions against.

Pursuing a purpose isn’t too difficult if you’re in the process of starting your own business. But if you’re drafted in to turn around an ailing FTSE giant – say Vodafone or Tesco – you’re going to have a challenge convincing hundreds of thousands of staff, and millions of other stakeholders, that your company now has a higher reason for existing than keeping the cash coming in. ‘Drastic’ Dave Lewis seems to have patched up his company’s finances, but now his challenge is to make people give a toss about Tesco. That won’t be easy.

It’s partly a fundamental problem with the plc model. In a private owner-managed company, the person (or people) with all the power lives and breathes the business. They’re uniquely positioned to inject a sense of purpose into it. Even private equity bods, not known for their sentimentality or long-term outlook, are at least intimately familiar with the goings on of their investment.

Most of the equity stakes in plcs, on the other hand, are looked after by distant asset managers on behalf of even more distant shareholders. They’re especially distant in Britain, where big ‘blockholders’ with a large stake in a listed company are relatively rare compared with mainland Europe and the US. The BIC report describes blockholders as ‘important promoters of corporate purpose’ who take the time to understand why management teams are taking certain risks and investing in intangible assets with long-term importance. That contrasts with small shareholders who are likely to be more preoccupied with a company’s value as a short-term investment, taking a much greater interest in the next quarter’s earnings than in a leader’s vision for the future.

That’s not to say it’s impossible for big plcs to adopt a renewed sense of purpose. Unilever is perhaps the obvious example from the FTSE 100. Its chief exec Paul Polman arrived with grand plans to make the company substantially more focused on sustainability. It seems to have worked, at least on the face of things – Unilever’s brand is now synonymous with social responsibility. And there are plenty of privately-owned companies, from BHS to Russia’s oligarchs, that have prioritised short-term money making over long-term, responsible brand building.

Unilever is a special case though. It required somebody with a near-evangelical obsession with making business more sustainable. And Polman also had the benefit of Unilever’s purpose-driven past, which allowed him to pitch his plans as a return to the company’s roots, rather than a programme of change brought in by an outsider.

Claremont’s report lists some practical steps management can take to give their company a greater sense of purpose. Communicating its purpose to stakeholders, embedding it in the company with training and KPIs and recruiting ‘purpose-oriented workers,’ for instance.

But for those on the board, there is always going to be a tension between the company’s stated ‘purpose’ and their fiduciary duty, under which they are legally bound to act in the interest of shareholders. If they want to pursue loftier aims, the leaders of UK Plc need to get investor buy-in. Otherwise ‘purpose’ will never be more than a nice-to-have sideshow to the business of making money.

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