What is the purpose of a corporation? A remarkably simple, yet contentious, question.
Shareholder value maximisation is the oft-repeated mantra in business education and practice. However, only relatively recently has the idea been introduced as the objective of business. It is now increasingly being challenged, with growing calls for the reintroduction of a corporate purpose that has at its heart value creation for a wider set of stakeholders.
But if not shareholder value maximisation, then what should the purpose of the listed corporation be when it is, after all, accountable to its shareholders who provide it capital and whose wealth is exposed to its performance? As an equity market investor, this challenge in turn asks many searching questions about my own purpose. To help put some structure around my thinking, I recently spent some time studying this by looking at the current application of purpose among listed businesses in the UK and speaking to investors and corporate peers about their own views.
I started with an assessment of prior research. While the benefits of corporate purpose have been relatively little covered in the literature, studies into a range of related concepts (ESG, for example) show advantages of improved stakeholder relations and managing externalities for corporate performance and risk adjusted returns. The studies that do look at corporate purpose and performance show similar results, with a particular focus on employees and customers as the transmission mechanisms; however, the lack of agreement even on the definition of corporate purpose and the dependent variable for performance testing makes this research difficult.
I then looked at current market practice by assessing the purpose statements that some listed companies have started publishing. Around half didn’t even offer sufficient insights to tell what the company does or gave an indication about how its purpose can direct decision making. Only three percent of the statements I read (and I think I was being generous) were clear on what the company exists to do and the value it seeks to add. Unsurprisingly, then, there was very little statistically significant information in the correlation analysis between the purpose statement’s quality and company performance; ironically, the purpose statement as it exists today does not appear to be fit for purpose.
The practitioner interviews, however, told a very different story, one that addresses the value creation choices companies make and the opportunities they pursue by placing purpose at the heart of a company’s strategy and business model. Purpose is embedded in the answers to the fundamental questions of why a company exists, who it serves and how it does so, and is therefore unique to each company and its competitive advantage. Some companies will have a more societally-impactful purpose than others, employing a variety of business models to achieve it. However, a company’s long-term success depends on the delivery of its purpose as it is intimately linked to how it is able to generate revenues and earn economic profits.
Investment returns are clearly a result of value creation for a wider set of stakeholders than just investors, and they are critical to showing how the purpose concept is fundamental to the functioning of the equity markets. Indeed, many participants expected that the pursuit of purpose should result in better performance, as it allows a company to focus on where its advantages need to be and develop an improved proposition for customers and other stakeholders that either benefit from or enable the business model. While many of today’s purpose statements are likely to be dismissed by the investment community as marketing blurb, following the CRUF’s guiding principles when reporting on purpose should help companies to create value for society with the full support of the equity markets.
Freddie Woolfe is an equities analyst at Jupiter Asset Management. Prior to this he developed and led the approach responsible investment and stewardship at Merian Global Investors and has also worked in responsible investment at Newton Investment Management and Hermes Fund Managers. He has been working in the investment industry for 12 years.
Disclaimer: The views expressed in the blog are those of the author and do not necessarily represent the views of all CRUF participants. To read more about the CRUF’s views on this and other topics, please visit the comment letters section of the CRUF website.