The following is an excerpt from our Rewiring for Resilience research report. Access to the full report and webinar recording can be found here.

 

A company that communicates how it is ‘part of the solution rather than the problem’ is a more trusted company.

Why this is important

Purpose has been on the agenda for most corporates for a while but never has it been more relevant.

Over the last 12 months, momentum has been building on a broader scale. We have seen the Business Roundtable’s statement on the purpose of a corporation in the US and the World Economic Forum’s 2020 Davos Manifesto encouraging a new social contract for the 21st century. Financial institutions led by BlackRock’s Larry Fink have also weighed in with Fink reiterating in his annual letter to CEOs that a company cannot achieve long-term profits without embracing purpose and considering the needs of a broad range of stakeholders.

There are many compelling arguments for committing to a purpose but purpose-led companies tend to find it easier to recruit and motivate employees and to engage customers.

However, purpose has to be more than a brand proposition, and companies need to be careful not to oversimplify it and equates it with being nice to everyone. It has to focus on the core of why it exists and the positive impact it seeks to have, related to the nature of the business and the core capabilities and influence it has.

If activated effectively, and the pandemic does appear to be a conduit for that, a purpose should help guide decisions and priorities and should make it easier to prioritise how to act in a crisis.

Given the benefits of a purpose, it is unsurprising that investors are becoming more interested and that purpose is one of the central elements of both the 2018 Corporate Governance Code and the Guidance on the Strategic Report. A challenge companies are increasingly responding to in ways that are slowly becoming more established.

How the FTSE 100 is reporting

Our research this year finds that purpose is moving beyond being a slogan on the inside front cover of the Annual Report. Most companies now set out their purpose (88%) and almost all of these have a purpose that goes beyond creating value for shareholders.

Discussions around purpose in the Chairman’s statement in the strategic report have increased significantly this year, with 45% providing some discussion, against 23% last year. In fact this letter is now more likely to discuss purpose than the Chief Executive’s review (36%) although discussions in this letter have also increased. This adds further to the assertion that purpose perhaps is still some way off from being activated at an operational level.

Around half of the FTSE 100 now also provide a link between strategy and purpose which represents a large increase compared to last year (22% in 2018). However, most do not go further than using it as a heading in the Chief Executive’s review, providing a brief reference to it in relation to strategy or setting out the purpose as part of a strategy spread.

A more recent trend is companies who articulate this link visually by providing a ‘clear line of sight’ between what they aim for, the way they want to achieve this and how they will measure success, with their purpose as a North Star (18%). These typically integrate purpose, strategy, KPIs or other measures, values and perhaps stakeholders. The more advanced may also include reward elements to illustrate that these measures are aligned. Considering these elements together rather than in isolation is clearly a step in the right direction but cynics would perhaps say that for some, this indicates intent rather than a true reflection of practice.

Going forward, the purpose narrative will also need to move from an all-encompassing altruistic aim to illustrate how purpose is an overarching guide for strategy and a tool to build meaningful relationships with stakeholders, e.g. what the company will not do or do less of to align with the organisation’s purpose.

Key requirements:

Evolution of approaches 2018 Corporate Governance Code:

• The Board should establish the company’s purpose, values and strategy, and satisfy itself that these and its culture are aligned.

Guidance on the Strategic Report:

• Purpose could encompass matters identified in section 172 and, in the broader social context, contributions to inclusive and sustainable growth.

Considerations for the board to address:

• 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

Rewire and resilience considerations to address:

• How does your purpose reflect the relationships that are most important for generating and preserving value
• How delivering on your 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

Key developments:

Substantial commitment

• 88% set out a purpose, up from 33% in 2015
• 83% have a purpose that goes beyond creating shareholder value (69% in 2018)
• 45% of Chairmen (strategic report) discuss purpose in their leadership statements (23% in 2018)

But often too unspecific

• 43% address a link between purpose and strategy (22% in 2018)
• 18% provide a ‘clear line of sight’ between purpose and other elements of reporting
• 36% of CEOs discuss purpose in their leadership statements (25% in 2018)

 

For further information and to request the report, please get in touch with our Senior Business Developer, Naomi Hawkins.

Black Sun is a stakeholder communications company. We help businesses to communicate authentically how they deliver value to inspire, engage and influence their important stakeholders. We believe that inspiring strategic communications can spark positive change and drive long-term, sustainable performance. We want to work with companies who want to build better businesses through better communications.