Enacting Purpose – latest insights from two global research studies
Purposeful business has become a mega trend. Board directors and investors now expect organisations to have a clearly defined corporate purpose that drives not only its strategic investments and choices, but also its responsibilities to the societies from which they derive their licence to operate. Five thematic drivers sit behind this – political and social instability arising from more visible social inequality, global consensus around the need for climate action, new environmental, social, and governance (ESG) reporting requirements, the availability of innovative new funding mechanisms including green bonds, and more E, S and G data. Consumers and employees care about these issues.
Consumers are increasingly choosing purpose led brands when it comes to how they spend their money, and the best employees are choosing purpose led companies when it comes to their choices on who to work for. But the questions still remain: What is purpose? How should corporate purpose be governed? How should we measure and communicate purpose? Are beliefs, behaviours, and actions aligned so that intended impact can be delivered?
Organisations and their leadership teams, under renewed pressure from multiple stakeholders to define their wider contributions to society, are therefore re-engaging with their statements around purpose and how they are put into practice. Investors are at the forefront of this momentum, developing ESG funds and allocating capital at scale in support of purpose-led corporate strategies. But often investors and corporate boards seem to be at odds over how to conceptualise and support purpose in practice. Boards often argue that investor time frames are unrealistic and do not support the long-term investments required to make change. And investors, in turn, get frustrated with boards’ inability to show clearly how purpose strategies deliver more than public relations to the bottom line.
These discussions of course sit in the context of a wider debate about the future of capitalism – in particular how to respond to perceived inequality and a growing sense that the rewards of enterprise are being inequitably shared among the various stakeholders who help create these rewards in the first place.
It was in this context that the Enacting Purpose Initiative (EPI) was formed. The EPI sits alongside other purpose related initiatives within the University of Oxford, including the Oxford Initiative on Rethinking Performance and the Economics of Mutuality, sharing faculty and a focus on developing connected insights. Specifically, the EPI is focused on how words and commitments can be turned into actions that deliver desired outcomes.
Two reports have been produced since the initiative was formed in late 2019. The first, Enacting Purpose within the Modern Corporation: A Framework for Board Directors, published in August 2020 drew on the expertise and insights from thirty major leading European institutions and organisations. The second, Directors & Investors: Building on Common Ground to Advance Sustainable Capitalism was released in July 2021 and builds upon that foundation by setting out how directors can work with their investors to leverage corporate purpose to address societal issues and sustain long-term value creation.
Board directors and investors now expect organisations to have a clearly defined corporate purpose
The insights in this report are informed by extensive dialogue with over thirty-five board members across at least seventeen different industries and over thirty global investors and asset owners and managers representing over $13 trillion in assets under management. Leadership of the EPI has been provided by faculty at Saïd Business School, University of Oxford supported by The University of California at Berkeley’s Business in Society Institute, Federated Hermes EOS, The British Academy, and BCG BrightHouse.
The latest report is particularly powerful in that it identifies five areas where boards and investors agree.
1. Take ownership in their role in corporate purpose.
Directors should take a more active role in ensuring that the company’s purpose aligns with its strategy and values. Too often boards delegate this to the executive and in particular the CEO. Doing this will require them to 'take ownership' of their role in corporate purpose and explicitly communicate to management and investors that corporate purpose is a priority for the board. We put forward the idea that boards could do this by incorporating purpose into the charters of several board committees.
2. Ensure they are informed about the impact of the company’s operations on stakeholders
Boards should ensure that they are informed about the impact of the company’s operations on its stakeholders. That starts with ensuring that there is a diversity of backgrounds represented on the board. Boards should also construct their agendas to allow for time to be spent on the alignment of purpose, strategy, and values. Finally, boards should ensure that they are getting information from a diversity of perspectives. They can do so by asking management questions about how it is embedding purpose into its key strategic decisions as well as by periodically meeting directly with middle management and external stakeholders.
3. Connect corporate purpose to Board decision-making
Boards are doing good work reporting on how purpose-led strategies deliver valuable societal outcomes through sustainability and ESG reports. Investors, however, would like to see more evidence of how purpose-led activities deliver shareholder value alongside societal value, and how this is rewarded. For example, more board discussion on how decision-making is driven by corporate purpose, including instances of where decisions have or have not been made as a result of such linkages and how managerial incentives are tied to these decisions. Investors also would like to see more standardisation in how purposeful business translates into greater market capitalisation, ideally with common methodologies being adopted across peer group organisations when it comes to capital allocation policies and returns targets.
4. Govern purpose and distinguish it from ESG
There is strong common ground on the need to distinguish between purpose and ESG measures and between purpose and stakeholder engagement. Clarity on these elements will create positive alignment and unlock benefits for investors and companies. Put simply, purpose articulates why an organisation exists. E, S and G commitments articulate how this purpose is enacted in practice.
5. Communicate with investors on corporate purpose
There is common ground that directors should increase both the volume and quality of communication with investors on corporate purpose. Various recommendations emerge from the EPI discussions, including the option of publishing a ‘Statement of Purpose’ signed off by the board that reflects both purpose intent and how it is governed, as well as a more proactive approach to investor communication and interaction.
If we are to align board decisions with stakeholder expectations, boards need to anchor their deliberations and decisions on their stated purpose and tighten their governance focus on how these are enacted.