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Economy

Saving capitalism from profit obsession

(Part 4)

As a long-time professor in a business school, Dr. Jordi Canals made sure that the idea of corporate purpose is fleshed out in some very concrete business cases that he presents in his article.* The first case is that of Ingka, the retail business of Ikea, the largest furniture maker and retailer company in the world that will soon have a very big presence in the Philippines, starting the third or fourth quarter of 2021. Ikea is one of the most advanced companies in the world in terms of environmental impact and inclusiveness. The CEO and Deputy CEO of Ingka were proud of this, but wanted the company to do an even better job by introducing corporate purpose into the heart of the strategic decision-making of Ingka. Ikea was founded in 1943 by Ingvar Kamprad in the south of Sweden. It was a mail-order business that sold pencils, postcards, and similar merchandise. Kamprad soon entered into the furniture manufacturing market and quickly explored innovative solutions such as furniture design, self-assembly, and advertising in order to differentiate its products from competitors. In 1951, Ikea published its first furniture catalogue and in 1953 opened a showroom where customers could experience products before ordering them. In the early 1960s, Kamprad’s sense of innovation disrupted the furniture industry in Sweden and other European countries.

Kamprad had strong values and considered a sense of mission and corporate culture as key drivers of a successful organization. In 1976, he published the booklet, The Testament of a Furniture Dealer, in which he summarized Ikea’s mission: “to create a better everyday life for the many.” He highlighted certain core values that had to guide the company’s operations. These values were so enduring that they were still present in 2020 and were aimed at guiding all managerial decision making. To grow Ikea without losing the core values, he devised a unique governance and ownership structure. In 1977, he divided the ownership of Ikea into two companies: Ingka, which included the retail business and Inter Ika, which included the management of the Ikea concept, the brand, and the franchise system. He also set up two foundations as the only shareholders of the two companies: the Interco Foundation, the owner of Inter Ikea; and the Stichting Ingka Foundation, the owner of Ingka.

The mission of Ikea’s founder permeated the firm’s culture and values, helped educate managers and the employees about these values and was present in many decisions. The Deputy CEO of Ingka observed: “Kamrad’s view was a bold, big vision and aspiration, and helped inspire thousands of people at Ikea. It created an emotional link with the company. The challenge was how to continue developing the business and build a more structural connection between purpose and the whole company and its operations, in particular, once the founder had passed away. Since 2018, we had been trying to find ways to articulate purpose better and make it better integrated throughout the company’s activities. We were trying to be more specific on how being a purposeful company would be reflected in a variety of contexts and operations.”

The top management team developed a series of questions to articulate Ingka’s purpose around Kamprad’s vision and assess the strength of the firm’s purpose. The first question was: Is the notion of purpose well-articulated? The second: Does this notion of purpose inspire our people? The third: Is purpose integrated in Ingka’s strategy and operations? The fourth: Do our people and customers recognize our purpose? There was a feeling that a company with close to 200,000 employees around the world could do much more in terms of explaining the many new initiatives that were born out of a sense of purpose. The management team was also aware that having a living purpose meant involving and training people better. The year 2020 was one of culture and values at Ingka. With this goal in mind, senior managers tried to connect the company’s eight corporate values with purpose.

As an example, cost-consciousness was one of those values. A traditional understanding of this value was to improve economic performance and profitability. The new approach of connecting this value with purpose required an additional process of helping Ingka’s employees understand that being more cost efficient, beyond profitability, would also further the goal of offering lower prices and therefore improving affordability for customers. With this in mind, in 2019, Ingka managers worked to involve 23,000 employees around the world in contributing cost-reduction ideas. Some 23,000 employees around the world contributed 5,000 ideas of which 1,000 were selected and finally reduced to 25 ideas that were applied and deployed without additional management decision. It was estimated that these suggestions resulted in cost savings of 25 million euros.

Another example of connecting corporate purpose and marketing strategy was a deep reflection on corporate growth and furniture sales. Should it be the goal of Ikea to pursue constant growth by fostering unlimited consumption of furniture? This led to a reflection on new business models, including selling second-hand furniture, renting furniture, and offering furniture repair services. A key question was how far Ingka should diverge from its current focus on furniture and basic elements for homes. Was it sensible to move away from this concept? Still related to marketing, should Ingka use data to sell more to current customers? Also, while it was considered acceptable to use data to get to now customers better, was it ethical to try to offer them goods or services that might fit their profiles? These last two questions are very relevant as data analysis has become a most important tool of business in the digital world. Ingka management have been among the first to probe into the ethical dimensions of big data. Here again is an example of a concern that is not directly related to profit maximization during these times when “data is gold.”

Ingka started the transformation around purpose with the founder’s vision still very much present in the life of the company. To be an effective tool for organizational change, purpose needs to be credible and become embedded in the firm’s strategy, corporate culture, people’s development and reward systems. The value and impact of purpose stand out as unique factors in companies’ governance and management models. This business case centered on Ingka shows that introducing corporate purpose at the heart of a company is a long-term commitment, takes strong determination, requires excellent management, and requires constant renewal. Corporate purpose can become a powerful engine in the transformation process of a company. Given the pressure that the pandemic has exerted on practically all businesses to re-examine their objectives, strategies, and policies as they face the “New Reality,” the concept of corporate purpose has come at a very opportune time.

Examining the Vision and Mission statements of some of the leading business conglomerates which are PLCs, such as San Miguel Corp., Ayala Corp., and DMCI Corp., one can already discern the seeds of corporate purpose being at the center of strategy, policies, and business model. All three companies — San Miguel, Ayala, and DMCI — started, like Ikea and Ingka, as modest business operations with objectives already beyond profit maximization. In their present forms as large business conglomerates, they have clearly embraced environmental, social and governance (ESG) goals and more. For example, the vision of San Miguel Corp. is stated as follows: “Guided by a strong sense of social, environmental and economic responsibility, our business all leads to efforts to deliver on national goals, setting the pace of progress of the Philippines.” Its mission statement is as follows: “To provide goods and vital services well within the reach of every Filipino, making everyday life a celebration.” It is no wonder that from selling consumer goods like beer and soft drinks, SMC has become one of the largest investors in power plants and public infrastructure, contributing significantly to the welfare of the traveling public with its massive investments in skyways and in the medium term through its very ambitious Bulacan-based international airport. SMC’s statements of mission and vision are extraordinarily broad and can easily be converted into a statement of corporate purpose.

The same can be said of Ayala Corp. that too had modest beginnings when its founders established it 1834. Corporate purpose is already clearly embedded in its present-day Mission and Vision statements. Its Mission: “Anchored on values of integrity, long-term vision, empowering leadership, and with a strong commitment to national development, Ayala fulfils its mission to ensure long-term profitability and value creation. Ayala creates synergy as it builds mutually beneficial partnerships and alliances with those who share its philosophies and values.” Its Vision: “We will be the most relevant, innovative and enduring Philippines-based business group, enabling shared value and prosperity for the many stakeholders we service.” The ESG dimensions in its corporate purpose are clearly manifested in its being a major investor in renewable energy in the Philippines and elsewhere. It has also demonstrated a commitment to inclusive growth by being a pioneer in embedding socialized housing into its residential real estate investments. Recent news report in the midst of the pandemic has heralded that Ayala Corp. is already positioning itself in the country’s post-pandemic recovery which its management reckons to happen by mid-2023. The business group is scaling up its involvement in increasingly relevant areas such as healthcare, logistics, and renewable energy, all sectors with very significant impact on the welfare of the Filipino people.

The third example of a PLC that has already articulated corporate purpose is DMCI, one of the largest construction and engineering companies in the Philippines. Its Vision statement is as follows: “We are the leading integrated engineering and management conglomerate in the Philippines. Through our investments, we are able to do the following: 1.) deliver exceptional shareholder value; 2.) motivate and provide employees with opportunities and just reward to achieve their full potential; 3.) cultivate progress in remote areas, unserved markets and growth industries; 4.) integrate sustainable development with superior business results through principled contracting and innovative engineering.” Its Mission statement is as follows: “To invest in engineering and construction-related businesses that bring real benefits to people and the country.” I have personal knowledge of how this business group, led by its founder, the late David M. Consunji, truly cultivated progress in some of the most remote areas of Mindanao and elsewhere through investments in agribusiness, real estate, and power generation.

As we shall discuss in the last part of this series, these three companies— among others — have already a clear statement of corporate purpose that goes beyond the traditional mission and vision statements of most businesses in the past. It would now be incumbent on their boards of directors, in tandem with the CEO and top management, to connect their respective purposes with strategy, strategic plans, and decisions as well as implementation, especially in the post-pandemic era. A positive impact of corporate purpose is how it nurtures and improves the quality of strategy discussions. Dr. Canals in his pioneering paper on “The Role of Corporate Purpose in Corporate Governance: A Framework for Boards of Directors and Senior Managers” offers some practical guidelines for this very important task of the board of directors. and top management.

To be continued.

*“The Role of Corporate Purpose in Corporate Governance: A Framework for Boards of Directors and Senior Managers”

     

Bernardo M. Villegas has a Ph.D. in Economics from Harvard, is Professor Emeritus at the University of Asia and the Pacific, and a Visiting Professor at the IESE Business School in Barcelona, Spain. He was a  member of the 1986 Constitutional Commission.

bernardo.villegas@uap.asia

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