January 22, 2020 What is your purpose?
What is the purpose of your organisation? It’s a simple question, but it is one which the Financial Reporting Council (FRC) believes organisations may not fully understand. Their annual review of the 2018 corporate governance code highlighted a widely differing approach in respect of purpose statements.
Principal B of the 2018 code says that “the board should establish the company’s purpose, values, and strategy, and satisfy itself that these and its culture are aligned.” The review acknowledges that in their purpose statements some companies clearly described their unique contribution to the market, their stakeholders and society at large; with the best responses considering purpose alongside culture and strategy in a way that demonstrated that the company had thought about purpose effectively. However, according to the FRC, other organisations equated purpose solely to achieving shareholder returns and profit or simply quoted what appeared to be a marketing slogan.
It may be that the lack of adequate description of purpose is partly due to the fact that early adopters of the 2018 code are still building their understanding of what is required. A Harvard Business Review report from 2015 (The business case for purpose) defined purpose as “an aspirational reason for being which inspires and provides a call to action for an organization and its partners and stakeholders and provides benefit to local and global society.”
The same report revealed that 90% of executives understood the importance of purpose in that context and yet just 37% agreed that their business model and values were well aligned with their purpose. Does that matter? Well, 58% of those organisations surveyed which had achieved alignment of purpose saw growth of 10% or more in the previous three years, compared to 42% which had yet to achieve alignment. This leads the report’s authors to conclude that ‘purpose-driven companies make more money, have more engaged employees and more loyal customers, and are even better at innovation and transformational change.’
The FRC directs those organisations which need further guidance in respect of defining purpose to their 2018 lab report, ‘Business model reporting; Risk and viability reporting – Where are we now?’ This not only highlights the support which investors give to purpose statements that ‘communicate what the company does and why it does it’ but it also includes some examples of purpose statements which had received a positive response from investors.