Why do we need to ask why?

The FT estimates that 53% of large companies now have a statement of purpose. What seems like an emerging idea is in fact already a mainstream one. But like many new and fashionable ideas, there is a lot of confusion around what it means and how to apply it. Drawing hints from a day of discussions and presentations with CEOs and board members in Canada, I will attempt to shed some light on some of the basic questions. 

What is purpose?

Essentially, a purpose answers the question, why does a corporation exist. More precisely, it clarifies how a company’s aspirations and capabilities create societal value. A purpose solves two problems which face corporations. Firstly. the largest corporations are now so large and complex that its often hard to say what they do, beyond maximizing value extraction for their shareholders. An expression of a company’s common denominator potentially creates focus, coherence and identity for customers  and employees. Secondly, while markets and companies  have created transformative improvements in the lives of billions, this has been accompanies by a number of unintended side effects, like inequality, global warming, species loss and compromised privacy, which corporations are being held to account for. It’s not that corporations are entirely responsible for these problems – we all use the energy which energy companies produce and governments are supposed to regulate markets. But governments are weakened by divisive partisan politics in many parts of the world, and the latest Edelman survey shows that corporations are currently more trusted than governments, especially on the dimension of competence. So citizens naturally look to corporations to address our major shared problems. 

What does a purpose do?

Purpose creates identity and coherence as already mentioned. By signaling reciprocity with society and by creating an accountability  it can also create trust. By creating trust it can reduce the significant transaction costs associated with mistrust. It can attract millennial talent,  which is looking to work for ethical corporations. It can provide foresight, risk mitigation and resilience against social and ecological dynamics which could lead to a breakdown in a firm’s social contract and its license to operate. All these benefits of course depend on the credibility of the purpose, which can be judged its consistency with the firm’s actions. 

Why now? 

Problems like global warming have until recently been treated like problems of the long term, but they have now acquired an urgency and saliency which calls for more immediate action. Surveys suggest that majority of employees expect that their leaders will take a stance on such issues, and to attract new talent in an aging society, leaders need to extend their job descriptions. They will need to go beyond being internal controllers maximizing for dividends payouts and stock appreciation. Rather they need to become corporate statesmen, understanding and shaping the interests of a broader range of stakeholders beyond the firm and communicating and implementing their declared purpose. In addition, investors are beginning to look at performance on ESG (environmental, social and governance) issues, as a surrogate measure of good management or because their customers are demanding ethical investments. Popular sentiment shapes both democracy and markets and citizens are becoming activated around planetary challenges. 

Is purpose just old wine in new bottles?

Is purpose just a new word for trust, corporate citizenship, corporate responsibility, triple bottom line or a host of other concepts which have been around for years? Clearly the is a common focus on “non-market” issues, but purpose is different in a number of respects. It doesn’t focus on measuring a host of common variables like emissions amounts and equality ratios,  which are applied in a similarly way across companies. And it doesn’t focus mainly on compliance or risk mitigation. Rather,  it is a long term statement of how the company intends to contribute to society which is measurable against its actions. 

What about vision, mission, values, culture and strategy - aren’t they all synonyms? Not really – a purpose is a statement of why a company exists. Mission is a statement about what a company does, while vision describes where it is going. Values are about who the companies is and strategy, culture and metrics all concern how a company will achieve its aspirations. As such, purpose concerns the most fundamental question of why, upon which the other aspirations are built. 

What makes purpose effective and credible? 

A purpose needs to be simple to be broadly understood. It needs to be specific enough that we can measure it against actions taken. It needs to developed in an inclusive manner and communicated persuasively so that employees own it. It needs to be embedded in decision making so that internal and external actions are guided by it. And it needs to be a little uncomfortable, in the sense of acknowledging the gap between aspirations and current reality and reconciling short and long term interests. In other words,  what an effective propose is not, is a comfortable, non-specific celebration of the status quo designed by the corporate communications department, disconnected from daily decision making. 

Can purpose really solve our major planetary problems?

Alone, purpose, or indeed corporate efforts in their entirety cannot solve the planet’s most pressing problems. Global forums like WEF or the UN need to align governments for concerted global action. Governments need to create targets, rules and standards to create the right incentives for action. Citizen’s need to be activated and engaged in order to drive public opinion which in turn shapes markets and politics. But corporates are essential components of the solution as the major locus of economic activity and also given their relatively high level of competence in pragmatic problem. Also a company by company approach is not only potentially a lot faster and more feasible than waiting for governments to align and regulate, but it allows for each company to maximize its specific contribution and also creates a diversity of approaches which become the grist for evolutionary learning and innovation. 

In summary, purpose is a new and useful tool in the corporations armory, which if implemented correctly can both reduce risk, create value and contribute to the solution to our common problems.