'A company that communicates how it is ‘part of the solution rather than the problem’ is a more trusted company.'
WHY REPORT ON PURPOSE?
Corporates are increasingly expected to have a societal purpose beyond just profit, specifically a purpose that enables them to be part of the solution to some of the world’s problems rather than part of the inherent problem. In doing so, companies build trust with important stakeholders.
In order to succeed in this time of transition and disruption, companies may find that a purpose can serve as razor sharp vision that cuts though the noise and focuses it on what is important. Companies should ideally think about purpose as an opportunity. They should consider how their purpose can help the company to grow and open commercial opportunities for long-term success, allowing the company to move forward in a world where ‘business as usual’ is no longer enough to become a trusted company.
Investors agree with this premise; in his 2019 letter to CEOs titled “Purpose & Profit”1, Larry Fink, the CEO of BlackRock, the world’s largest asset manager, writes that “profits are in no way inconsistent with purpose – in fact, profits and purpose are inextricably linked”. In other words, purpose and profits are not at odds with each other; in fact, becoming a purposeful company will be crucial for creating sustainable profit over the long term.
It is therefore unsurprising that corporate purpose is one of the central elements in both the 2018 Corporate Governance Code and Guidance on the Strategic Report. The focus here is on aligning purpose, strategy and values with the aim of providing an overview of ‘why and how’ the company aims to generate and preserve value. Ideally this should be reflected in its objectives and key performance indicators.
Companies are increasingly responding to this challenge but many are perhaps still at a stage where it is not clear or easy to evidence how strategic outcomes flow from their purpose.
HOW THE FTSE 100 REPORTED IN 2018
Our research this year finds that the vast majority of the FTSE 100 is prepared for the upcoming reporting requirements when it comes to purpose with 72% now setting out their purpose compared to 66% last year. The vast majority of purposes continue to go beyond creating shareholder value by also focusing on the value created for other stakeholders or society at large, taking the total number of companies who do so to 69% compared to 60% last year.
This focus on purpose also extends somewhat to leadership statements where around a quarter of Chairs and CEOs discuss their purpose. While this may seem like a small amount, it is a slight increase compared to last year. Also, when accounting for the 11 companies who discuss purpose in both statements, it actually represents 37 individual companies that discuss purpose in one of their leadership statements.
When it comes to the nature of the narrative around purpose, just under half of these companies take the opportunity to provide further detail around what their purpose means in practice. The leaders in this regard are those who are able to provide tangible examples of how their capabilities or even products support them in fulfilling their purpose. Just under a quarter of all FTSE 100 companies specifically provide a link between strategy and purpose. This link is typically discussed in the setup to the strategy section to provide strategic context and is sometimes accompanied by an illustration of the relationship. Again, some companies are more successful than others in ensuring this is authentic.
Overall this year has provided fewer of the big thematic displays of purpose used by some of the early adopters, in favour of a more measured approach. Cynics would perhaps say that purpose discussions sometimes feel a little retro-fitted onto existing thinking and that the discussion rarely extends to what success looks like or how it will be measured. Authenticity will be the yardstick for any form of improvement in these cases.
“Is the statement of purpose truly specific to the nature, culture, history and direction of the company, and is it aligned with how purpose is discussed internally?”
ROLE OF THE BOARD
Consider reporting on how the board has addressed the following:
- How it has discharged oversight and ultimate responsibility for the company’s purpose
- How it has satisfied itself that there is alignment between company purpose, values, strategy and the business model to ensure that sustainable value is created
- How the purpose is future fit to ensure licence to operate over the long term
- How the purpose reflects the relationships that are most important for generating and preserving value
- How delivering on the purpose will contribute to the company’s long-term success
- How the strategy provides the means for fulfilling purpose and how strategic outcomes flow from the purpose
- How purpose, strategy and the business model together explain what the company does as well as how and why it does it
To find out how we may help you in your next Annual Report and communicate effectively, get in touch.