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Economy

Saving capitalism from profit obsession

(Part 5)

We have seen some specific examples of how business enterprises that started with modest offerings of goods or services to a limited clientele eventually evolved into large corporations that have succeeded in articulating corporate purpose in an effective way for better governance and management. We saw how Ikea, the biggest furniture company in the world, transformed itself from a mail-order business that sold pencils, postcards, and similar merchandise into a multinational enterprise with a clear corporate purpose. We also observed how large Philippine conglomerates like San Miguel Corp., Ayala Corp., and the DMCI Corp. have evolved into purpose-driven businesses with the active participation of their respective boards of directors and top management.

As an addendum, we can also refer to another business case cited by Dr. Jordi Canals* which is that of British-Dutch multinational corporation Unilever that is very active in our own domestic market. Also with humble beginnings, Unilever has its roots in two Dutch companies founded by Van den Ber and Jurgens, two Dutch entrepreneurs and butter merchants who diversified into margarine, a new butter alternative; and in a British company set up by William Lever, a British entrepreneur who started to make an inexpensive household soap in the late 1880s. By the end of 2016, Unilever owned more than 400 brands in close to 200 countries, with a total revenue of 2.7 billion euros. Through the leadership of Paul Polman who became Unilever’s CEO in January 2009, the corporation adopted an ambitious approach to combining business performance with wider social impact, with its Unilever Sustainable Living Plan (USLP). This was a radical management innovation that included the firm’s social impact as a central element of its corporate strategy. This plan was also the main pillar in making Unilever a multi-stakeholder company, a concept in which Unilever was a pioneer and a leader.

Using the experiences of Ingka and Unilever, Dr. Canals provides some guidelines to boards of directors and senior managers on how to unbundle the notion of corporate purpose and its use. The first step is to identify a very specific challenge that the company aims to tackle, and the type of need or problem that it wants to solve. A good purpose needs to include both a goal that engages people along with dimensions that require a business solution. Without a challenge, a purpose may lose its drive. That challenge may not have a very high aspirational goal, but has to be related to other people’s needs. It may include special customer demands that need to be addressed, some unresolved concerns that current customers have, the aspiration to make the consumers’ efforts to buy from that company less costly (including lower prices), or the ambition to reduce the environmental impact of the firm’s operations.

The experience of companies that have been doing a good job in defining purpose suggests that the most difficult part of purpose is its translation into strategy and the business model. The real challenge is clarity in purpose and its implementation through different policies. Specifically, an answer to some key questions is very relevant: what purpose concretely means for individuals in this company; how individuals’ sense of meaning is strengthened; how the firm’s strategic goals are defined and how coherent they are with purpose; how the activities and policies that define the business model are shaped by purpose; how goals are measured; how the organization is structured; and how measurements and rewards systems are defined and influenced by corporate purpose. Monitoring goals and reporting systems are particularly important for companies that define a corporate purpose. If a company continues to measure performance with the same economic indicators as it did before the definition of purpose, or the priority continues to be short-term economic performance, the impact of purpose will be limited. If purpose helps top management redefine goals and establish indicators that can truly reflect how the company is doing regarding purpose, it will help align strategy and people’s behavior around what its purpose expresses.

As with other functions of the board of directors, working on purpose is primarily the work of the CEO and the management team. The board should help the CEO by reviewing purpose and making sure that it is a comprehensive and actionable project, connected with corporate strategy and corporate culture, and that it influences hiring and developing people. The board may add some areas of expertise and evidence, and give advice on how its principles and metrics can be shared effectively with shareholders and other stakeholders. Communication with the investor community in this regard is not only the responsibility of the CEO or the CFO. The board should take this responsibility seriously and act accordingly. Purpose offers a wider perspective of the role of boards of directors and the duties of board directors. In the end, it gives boards of directors a unifying and useful sense of long-term direction that can be shared by the whole company.

Framing a discussion around purpose would require a skillful preparation by the chairman and the CEO to put the right questions and challenges in front of the board, and prepare useful information to be studied before the board meeting. Some specific questions that may help improve the quality of the debate, and place this debate in the context of what is expected from a board of directors in this area are as follows:

• Do the board of directors understand the firm’s purpose and its implications for governance and management?

• What specific customer need is this company serving? What role do customers play in the management of the firm?

• Why would talented people want to work in this company?

• Why do investors want to invest in this firm? Which time horizon do they have?

• What is the overall impact of purpose?

The quality and strength of a company’s purpose lie not so much in their level of aspiration, but in the way that they connect with strategy, strategic plans and decisions as well as implementation. Strategy is a very important area of responsibility for the board of directors, to be shared with the CEO and top management team. A positive impact of corporate purpose is how it nurtures and improves the quality of strategy discussions. For this reason, the board should look at corporate purpose as a very important pillar for formulating and executing strategy. For example, in the case of Unilever, the CEO and the management team designed the firm’s sustainability plan in such a way that it became fully integrated with its strategy and business model, including product design, sourcing, operations, logistics, manufacturing, and distribution. Their main goal was that the Unilever Sustainable Living Plan should cover the firm’s whole supply chain and not outsource the responsibility for sustainability and environmental impact to third parties through outsourcing programs. To connect strategy with purpose, the following questions can be helpful:

• How is strategy linked with corporate purpose?

• Does the business model reflect the firm’s purpose?

• Does a strategic decision reinforce the sense of purpose?

• How does a strategic decision change the risk profile of an organization?

It is important to assess the overall impact of purpose. Measuring some indicators of purpose has become indispensable for boards of directors and CEOs in their communication with shareholders and other stakeholders. Each company needs to develop its own reporting model. It will depend on the nature of each firm and the definition of purpose that the company adopts. In many cases, corporate purpose will include the well-being of customers and employs, some environmental and social goals and some financial indicators. ESG factors may also be included, although they do not capture the entire purpose of many firms. Investors and corporate leaders increasingly understand that companies have a role to play in social challenges such as climate change or the reduction of mass poverty.

A company with a purpose and that takes culture seriously must hire professionals who have a good fit with the firm. Cultural fit is a requirement in recruitment, especially in the case of hiring managers since they are the ones who coordinate people’s work, engage people, and eventually are the ones responsible for professional development of the workforce. Professional competence is indispensable, but cultural fit is critical for companies with a clear purpose. The board has a special responsibility in the CEO appointment. If the board truly believe that purpose is a special dimension of the company, board members should also ask themselves how to assess the candidates’ capacity to absorb the firm’s purpose, renew it, and translate it into strategy, strategic decisions, and the firm’s operations, as well as how to make the firm’s business model sustainable. Finally, it is also the responsibility of the board of directors to find the best long-term shareholders for the company. The current firm’s shareholders may not be in the firm in the future. Investors may change their minds and do not have many constraints that prevent them from selling their shares. Successful companies have the support of the right type of shareholders.

*In his article “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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