Pitfalls of Purpose

Milton Friedman’s article in The New York Times, on the other hand, is credited with helping launch the doctrine of shareholder primacy that would become the guiding theory of the American marketplace. The beliefs outlined by Mr. Friedman, who would win the Nobel Prize six years later, informed how US companies were governed and legislated, and until recently, how business leaders were incentivized and evaluated. For all of its academic and intellectual underpinnings, the core of 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.”

That Friedman’s article was controversial enough to merit being published reveals that even in 1970 there was debate about such a narrowing of corporate purpose. Today, that debate has escalated and intensified, as an increasingly vocal and broad-based chorus objects to such a narrowing of corporate purpose, and believes that the creation of social value alongside financial value is an essential part of a company’s raison d’être.

In an article titled “Capitalism’s watershed moment,” the Financial Times summarized the prevailing sentiment in late August this year, namely that corporate profits were being purchased with increasingly unjustifiable and unsustainable costs to the environment and modern societies—“business as usual just won’t cut it anymore.”

Since Mr. Friedman’s article first came out, the global average temperature has increased by roughly 0.3°F 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 grew by more than 940 percent while the average worker’s wages increased by only 12 percent, according to the Economic Policy Institute. A string of corporate missteps and scandals reinforced a belief that businesses both cause and profit from societal problems, and aren’t incentivized (and therefore not interested) in solving them—think of private data being sold and shared; foods and medicines being misleadingly marketed; bankers asking for bailouts while receiving bonuses.

In recent years, BlackRock, State Street and Vanguard—who have a combined $14.95 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—and consumers are even starting to prioritize 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.

Companies have responded by trying to demonstrate that they are aware of these problems—in 2018, 86 percent of Fortune 500 companies published reports on the environmental and social impacts of their businesses, compared to 2011, when just under 20 percent did—and that they can be part of the solution. Last year, more than 180 CEOs signed a new “Statement on the Purpose of a Corporation,” signaling that their companies—which collectively represent $7 trillion in annual revenue—would now work for “the benefit of all stakeholders,” not just shareholders. That statement from the US Business Roundtable 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 as 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 skepticism 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’s Larry Fink wrote in a 2019 letter to fellow CEOs. “It is a company’s fundamental reason for being, what it does every day to create value for its stakeholders.” However, depending on how it is approached, a company’s purpose can fail to connect to the core of the business. In our experience, it can miss the mark and fall into Five Common Pitfalls:

1. They sound meaningless. Purpose statements have been criticized for being hyperbolic, platitudinous, simplistic or simply, as one anonymous investor put it, “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 fullest.” In short, they are bland and fail to provide any real direction.

2. 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 this company stands for.

3. They’re disconnected from corporate strategy. A global survey of executives by EY found most leaders believed a strong sense of purpose is important for a company’s success—and yet less than half said their company had or was trying to develop a sense of purpose. Too often, people think of purpose as something peripheral to the core of the business—or even talk about it as a “higher purpose,” as if it were floating above the business itself. Purpose must be rooted in the activities of the business—its products and services, its processes and practice—or it will be seen as an insubstantial marketing exercise.

4. They’re disingenuous (purpose washing). The Nation, a US weekly magazine, labeled the new wave of purpose statements as “empty promises and self-serving slogans.” Alan Jope, the CEO of Unilever, wrote in 2019 that “green washing, purpose washing, cause washing, woke washing” were “beginning to infect our industry.” This suggests companies are deliberately overstating the case; touting a purpose the company does not mean, and cannot fulfill, in order to look good.

5. 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 recognize the real impacts a company has on the world, or it risks leading to reputational damage.

GETTING IT RIGHT

Real commercial benefits can flow from successfully navigating these pitfalls. A compelling 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—its products and services—and how it operates.

Arriving at a meaningful purpose statement requires working across the business, at all levels, from the boardroom to the shop floor. It also calls for a realistic assessment of the role 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, top-down and bottom-up, outside-in and inside-out.

Defining a purpose statement is only the beginning. It must be embedded with internal audiences in a way that gives them a sense of ownership and even inspiration. External campaigns must convince those audiences that the company has a sincere ambition to have a positive impact on the world. In short, act like you mean it: If purpose isn’t properly activated internally and externally, it will ring hollow.

The challenge facing most businesses isn’t in the poetry or brevity of their purpose statement, it’s that the statement they have isn’t believed or is deemed insufficient. That means the most important step is to ask tough questions to clarify what your company stands for, and what you’re willing to do to demonstrate it.

Nearly 40 years after his victory, the fireman who won the first New York City Marathon was asked how the race had changed. “For the good of New York City, for the good of running, and for the good of the marathon,” he answered. It seems most every stakeholder group is asking different versions of that same question to businesses today: How have you changed? Businesses have an opportunity to deliver a similarly compelling answer—they’ll just need more than a well-worded purpose statement to do it.

Jon Miller and Meaghan Ramsey are Partners in Brunswick’s Business & Society practice, and based in London.

Illustrations: Francesco Bongiorni