Recent years have seen a growing focus on the “purpose” of companies. Businesses are asked to show how they add value to society – beyond shareholders’ dividends or bosses’ bonuses. This pressure is coming from an unlikely alliance of consumers, employees, campaigners, academics, regulators and even investors.
But not everyone is impressed. Corporate purpose statements have been criticised for being meaningless, hyperbolic, platitudinous, overly simplistic and, in short, “bullshit”. A new term has entered the vernacular – “purpose washing”; campaigners are quick to point out any hypocrisy, and highlight dissonance between a company’s claimed purpose and the actions it takes and decisions it makes.
We have long-worked with companies grappling with their role in society and we’ve seen the recent increased focus on this subject lead to a spike in companies asking for help articulating their purpose. But purpose can be a double-edged sword for businesses and there’s a risk that companies are simply jumping on a bandwagon. So what are the pitfalls of purpose, and how can companies avoid them?
A new paradigm
It’s nearly fifty years since the New York Times published a 3,000-word opinion piece by the economist Milton Freidman which set out the guiding doctrine of free-market economics for the decades that followed. The core of Mr. Friedman’s argument was simple: “The social responsibility of business is to increase its profits,” he wrote. And business should pursue that purpose “so long as it stays within the rules of the game.”
Six years later Mr. Friedman won the Nobel Prize, and his theory informed how US companies were governed and legislated, and how business leaders were incentivised and evaluated. Today however, an increasingly vocal and broad-based chorus is objecting to such a narrowing of corporate purpose, and championing the creation of social value alongside financial value as an essential part of a company’s raison d’etre.
Since Mr. Friedman’s article was published, the global average temperature has increased by roughly 0.3ºF per decade and the rate of warming has almost doubled, according to NASA’s earth observatory. Over that same stretch, CEO compensation in the US has grown by more than 940 percent while the average worker’s wages increased by only twelve percent, according to the Economic Policy Institute. A string of corporate missteps and scandals reinforced a belief that business profits come at the expense of people and planet.
Increasingly business is seen as part of the problem, not part of the solution, to the world’s most pressing challenges.
In another piece, the Financial Times described how broad-based this shift is to “a new model”:
“A new worldview [is emerging], shared by leading executives and investors and shaped by an unlikely alliance of consumers, employees, campaigners, academics and regulators. Together, they could break a consensus that has governed business for two generations and offer a new model for capitalism based on the watchwords of purpose, inclusion and sustainability.”
Indeed, there is plenty of evidence of this “unlikely alliance”. In recent years, BlackRock, State Street and Vanguard—who have a combined $14.6 trillion in assets under management—have pressed companies to articulate their social purpose. The idea has found its way into curricula at leading business schools—one Harvard Business School course is called “Reimagining Capitalism: Business and Big Problems.” Leading news outlets have dedicated newsletters and journalists covering the intersection of business and society—the FT’s Moral Money; Bloomberg’s Good Business. Consumers are even prioritizing brands they believe have a purpose.
The pressure is also coming from within companies themselves. A LinkedIn survey of 26,000 workers across 40 countries found that three in four wanted to find work that delivers “a sense of purpose,” and employees at large companies have publicly protested their company’s stance on everything from gun violence to political affiliations.
In September this year, more than 180 CEOs from the U.S. Business Roundtable signed a new “Statement on the Purpose of a Corporation,” signalling that their companies—which collectively represent $7 trillion in annual revenue—would now work for “the benefit of all stakeholders,” not just shareholders. The Business Roundtable’s statement stands as perhaps the most forceful and formal recognition that a new paradigm is upon us: shareholder value, the sole corporate north star for generations, is now part of a much larger constellation.
A purpose stampede
Companies are coming to terms with this new paradigm. Many are hurrying to create “purpose statements”—a practice so widespread that a Forbes article termed it “a purpose stampede.” They are eager to position themselves are “part of the solution”, and are keen to avoid being seen as “part of the problem”.
However, companies may be disappointed when their shiny new purpose statements are greeted with scepticism by internal and external audiences. The sudden enthusiasm to play a positive role in society can be greeted with a collective “you must be joking”.
“Purpose is not a mere tagline or marketing campaign,” BlackRock CEO Larry Fink wrote in his 2019 letter to fellow CEOs, nodding to the prevailing distrust. “It is a company’s fundamental reason for being, what it does every day to create value for its stakeholders.”
Too often, corporate purpose is treated as a marketing or HR project, and fails to connect to the core of the business. In our experience, there are a number of risks that face companies thinking seriously about their purpose. In particular, “purpose statements” encounter the following pitfalls:
They sound meaningless. Purpose statements have been criticised for being hyperbolic, platitudinous, overly simplistic or plain “bullshit”. They tend to blend vagueness with grandiosity, full of statements such as “to empower every person”, “to unlock potential”, “to enable progress” or “to live life to the full”. In short, they are bland and fail to provide any real direction.
They lack differentiation. Usually the reason a company exists is also why its sector exists; Mining companies, for example, talk about “human progress”, “a better future”, “improving lives”, or “society’s changing needs”. Health companies tell us about “helping people lead longer, healthier, happier lives”. These are all noble aspirations, but they feel generic, and often dissonant with people’s experience of these companies. People want to know, “what do you stand for?”
They’re disconnected from corporate strategy. A global survey of executives by EY found that most leaders believed a strong sense of purpose is important for a company’s success—and yet less than half said their company had a sense of purpose or was trying to develop one. Too often, people think of “higher purpose” or “social purpose”—something peripheral to the core of the business itself. Purpose must be rooted in the activities of the business – it’s products and services, it’s processes and practice – or it will be seen as an insubstantial marketing exercise.
They’re disingenuous (purpose-washing). The Nation, a US weekly magazine, labelled the new wave of purpose statements as “empty promises and self-serving slogans.” It’s a sentiment shared even by business leaders. Alan Jope, the CEO of Unilever, This suggests companies going a step beyond simple disconnect to misleading marketing; touting a purpose the company does not mean and cannot fulfil in order to look good.
They highlight dissonance. At the heart of any critical reputational crisis is a dissonance between what a company says and what it does. For example, talking about helping people live better lives while your products make them less healthy will ultimately result in a threat to your license to operate. A purpose statement must resonate with the real impacts that a company has on the world around it, or it will simply draw attention to areas of societal concern.
Getting it right
Real commercial benefits can flow from successfully navigating these pitfalls. A compelling corporate purpose statement is a meaningful articulation of a company’s role in the world. It must capture not just why a company exists, but also what it does – it’s products and services – as well as how it operates.
Defining a purpose statement that people can really get behind requires working across the business, at all levels – from the boardroom to the shop floor. It also requires a realistic assessment of the role that the company plays in the big issues that are relevant to it. In our experience, articulating a company’s purpose requires a blend of qualitative and quantitative inputs, top-down and bottom-up, outside-in and inside out.
What does a good purpose look like?
Defining your purpose is only the beginning. It must be embedded with internal audiences in a way that shapes behaviours and gives them a sense of ownership, shared direction and even inspiration. And it must be promoted externally so that wider audiences and stakeholders feel that the company has a sincere ambition to have a positive, tangible impact on the world around it. In short, act like you mean it: if purpose isn’t properly activated internally and externally, it will ring hollow.
The world is asking business to think critically about its purpose, and to engage constructively in the challenges we are all facing. Getting this right is important for the legitimacy of individual businesses as well as business writ large. In an article titled “Capitalism’s watershed moment,” the Financial Times summarized the prevailing sentiment in late August this year – namely, that “business as usual just won’t cut it anymore.”