Purpose at a tipping point?

In August, the influential Business Roundtable (BRT) group, comprising 181 CEOs representing 30% of US market capitalisation, changed their definition of the purpose of a corporation from existing primarily to serve shareholders, to “creating value for all our stakeholders”. This means providing value to customers, investing in employees, dealing ethically with suppliers, supporting communities and the environment, and focusing more on long-term shareholder value.

Signatories include my Global Chairman at PwC, as well as leaders of the other Big 4 professional services firms; and a who’s who of the biggest, most influential corporates from JP Morgan to Apple and Amazon. But is it all just brand-focused lip service, or a genuine tipping point on how companies interact with society?

Purpose — a growing trend

Certainly, it reflects the trend of mainstream businesses talking seriously about purpose — from Larry Fink at Blackrock requiring investments to have a societal as well as a financial purpose; to changes to the UK corporate governance code requiring Boards to define their purpose and align with strategy and culture; to a high of 91% of CEOs in PwC’s CEO survey believing that their business will become more purpose-driven in the next five years.

I’ve personally seen this trend evolving amongst PwC’s clients. Organisations are grappling with declining trust from consumers and the public, lightning-fast technology disruption, and the challenge of handling a workforce keen to understand how their job impacts the world. Interest in purpose is no longer restricted to the ‘usual suspects’ of socially-focused companies or B2C companies needing to go to market ethically: PwC are also hearing these questions from investment banks, Private Equity houses, energy firms and technology companies.

Why are companies interested in purpose?

There are three main reasons why companies are interested in purpose.

Firstly, there’s growing acceptance that it’s in companies’ commercial interest — with strong evidence that purpose-driven companies perform better: one study of leading firms found that those with a more ingrained purpose tend to have significantly better 10-year Total Shareholder Return; and another found that companies with high levels of purpose, who could cascade it through the organisation, outperform the market by 5%–7% per year, grow faster and have higher profitability.

Secondly, being more purpose-driven is necessary to recruit and retain the best talent. Employees (particularly younger ones, but it’s not solely a Gen Z trend) expect employers to be more purposeful and want to work for an organisation whose values chime with their own.

Finally, there’s a recognition that regulators and governments are increasingly keen for businesses to be part of solving societal challenges — and businesses that ignore this could face reputational and regulatory challenge, damaging relationships with customers and employees alike.

The final point has a political edge — and some see the BRT’s statement as a recognition of American concerns about inequality, in the context of voices calling to constrain corporate capitalism, including Elizabeth Warren’s Accountable Capitalism Act that looks to create a ‘general public interest’ and corporations responsible to wider stakeholders. This is important context — and of course the bar for a purposeful company differs hugely across cultures: what would qualify as game-changing parental leave support in the States may be below mandated standards in parts of Europe, for example.

The response to the Business Roundtable

The BRT’s statement triggered healthy debate — from the view that the free market is the best way to develop good outcomes to stakeholders, to those who are concerned by weakening shareholders’ accountability and see governments as the sole owners of societal objectives, through to sceptical accusations of virtue signalling.

Personally, I reject negativity to the BRT’s statement from these multiple fronts.

To those that think they can leave it all to the free market, I say that this is the free market in action: businesses are responding to consumers wanting society-focused vendors, and employees wanting purposeful employers.

To those who say this should be left to governments, I say it ignores the increasing expectation from the public and government themselves that businesses must be a partner in solving societal problems. Businesses working with government obtain a democratic license to work in this space — but ignore it completely and ultimately the result is regulatory pain — as the gaming industry, much of financial services and indeed much of the professional services market can attest to.

The accusation of virtue signalling is more complicated. The response to the BRT from a group of B Corps (including Ben & Jerry’s and Patagonia) was particularly interesting, encouraging the BRT to prove their words with action — given that B Corps have been independently and transparently verified to meet high ethical standards to be a force for good.

Authenticity

The key theme of the B Corps’ challenge is one of authenticity: the CEOs have raised expectations by talking a good game on purpose, and now they will be held to account about whether they’re delivering it, and indeed will be expected to prove their credentials. This means reporting on what they’re doing differently, and the impact it’s making. It also puts heads above the parapet — so all the signatories might expect more pointed questions about their treatment of their direct and supply chain’s workforce, and companies will have pledges around building communities and delivering value to customers held up against reputationally damaging stories that inevitably take up more media attention.

The need for authenticity comes up time and again when discussing purpose with PwC’s clients. While it’s problematic when a company hasn’t considered its purpose beyond just the financial, and its place in society, it’s much worse when an organisation has a disingenuous purpose. Sooner or later, employees and customers will see through it, and be actively disengaged. The stats bear it out: while there’s evidence employees, and particularly millennials, want to work for an organisation that makes a positive impact, 68% said that their company talking purpose but not living it would have a negative impact on their work. Authenticity is everything — and the best way to address this is to ensure purpose doesn’t start and end as a marketing exercise: it must drive genuine strategic and operational change.

Are we on the cusp of authentic purpose change?

The B Corps have earned the right to set the CEOs their challenge to prove authenticity — but I would caution against the temptation of cynicism. The 181 CEOs have at the very least taken the first step on their purpose journey (and of course many have gone far beyond that). To ‘let perfect be the enemy of progress’ is not only cynical but also self-defeating.

Culture change is hard. Genuine meaningful change in how a huge organisation makes decisions doesn’t happen overnight. But where it’s successful, it’s often the combination of bottom-up, grass-roots enthusiasm and strong, top-down leadership.

The evidence case for the bottom-up enthusiasm is growing. If the tide is turning on the top-down leadership, as the BRT statement suggests, then we may just be on the cusp of seeing some truly authentic change.