Covid-19 has presented business with its biggest challenge since the financial crisis of 2008. Perhaps one of the most pressing questions is whether the development of “purposeful” businesses will continue amidst a crisis that presents an existential threat to so many companies.
“Purpose” has become a byword for the future of business among corporate leaders everywhere, as companies and their boards came to terms with the loss of public trust after the financial crisis and started playing their part in defeating global warming.
However, the way some companies have reacted to the Covid-19 pandemic has thrown a spotlight on the challenge big corporates face if they want to remain true to “purposeful” values.
Mayer wrote: “…corporate purpose identifies how the company assists people, organisations, societies and nations to address the challenges they face, while at the same time avoiding or minimising problems companies might cause and making them more resilient in the process.” The paper lists eight key principles for achieving this.
But could Covid-19 and its impact on the global economy knock this project off course? Board Agenda spoke to Professor Mayer about the nature of purposeful business, its progress so far and its importance during the pandemic.
Gavin Hinks (GH): Could you briefly explain what a purposeful business is?
Prof Colin Mayer (CM): A purposeful business is a business that has a clear sense of why it’s created, why it exists, and what it’s there to do.
The conventional view of business is that it’s there to make money for its owners and for those who run it. But what’s increasingly emerging is a notion that purpose is more than that.
And the way in which I look at the purpose of a business is that it is to produce solutions, to produce solutions to problems that you and I face, that society faces that the natural world faces; not in philanthropic sense, but in a hard-nosed business sense of doing it profitably.
Now there’s a second part to it which is equally important. And that is that business does not, and should not, profit from producing problems for people or planet. And that is particularly important in circumstances such as the ones that we face. So, what is currently going on, I think, really brings into focus this notion of the purpose of business being there to solve problems and to solve them in a profitable sense, where that profit is not earned at the expense of others.
GH: Why is it important that corporations move to being purposeful businesses?
CM: It’s important for business to move towards being purposeful, because that is the way in which business creates a successful commercial activity. It’s also the basis for producing an absolutely key element and that is trust: trust in business.
Trust is one of the most important, and yet largely unrecognised, assets that companies have. By building up that trust business is able to move into a sphere where it has more loyal customers, more engaged employees, more reliable suppliers, more supportive shareholders and society.
And it’s then the basis on which a purposeful business is able to become a more commercially successful business, because then it’s associated with higher revenues, lower costs—in terms of employment costs and costs of supply, and lower costs of financing. And it’s also the basis on which business can avoid being tied up with regulation that is imposed when it loses the trust of society.
GH: How would you describe the progress of purposeful business?
CM: Dramatic change over a period of just a year, during 2019 and the early phase of 2020. Purpose has moved to the mainstream from the slipstream in numerous respects.
First of all, in relation to the views of the investment community, and statements by, for example, the CEO and president of BlackRock, Larry Fink, about every business needing a purpose; not a strapline or a marketing campaign but a statement of its fundamental reason for being. It was reflected in the statement by the Business Roundtable of dispensing with its 1997 statement that the purpose of business was to promote shareholder interest—what’s termed shareholder primacy—in favour of a much broader notion of the purpose of business.
It was reflected in the Financial Times‘s new agenda of “Capitalism: time for a reset”, where Lionel Barber, then editor of the FT, said that the health of free enterprise capitalism depends on business producing profits with purpose.
And it was reflected in the agenda of the World Economic Forum meeting where they talked about the Universal Purpose of a Company in the fourth industrial revolution. So, it suddenly became very much a focus of business, of business leaders, of investors and society at large, as to what business should be doing. The effect of the pandemic has only been to intensify that significance, and relevance of corporate purpose.
GH: Will corporations find it harder to be purposeful during this crisis?
CM: The answer is that those who are going to succeed are the ones that have the most clearly defined purpose.
In the short term, business is faced with existential threats: they don’t have customers—restaurants and bars and cafes close, theatres and cinemas don’t have any audiences, and airlines don’t have any passengers.
So, you might say, well, surely the only purpose of a business in these circumstances, is to cut costs, and to focus on profit? The answer is, this is exactly the sort of circumstance in which a clearly defined purpose is of particular significance because associated with that purpose is a notion of values and principles that underlie that purpose.
And those values help businesses make the really hard trade-offs that are required between the choice of supporting customers or employees, societies, or investors; those choices are ones that should be guided by the values of the business, which reflect its overall direction of travel, its purpose.
And once companies have clarified that, then the notion of what really matters in circumstances and crises like this becomes much more transparent.
So it’s critical, in the short term. But it’s also critical to the medium term in terms of beginning to pull out of the pandemic crisis and identifying what’s going to come next.
One of the elements of this crisis is the attitudes and factors that people hold really important are changing. And that’s reflected in the changing preferences of customers and employees, going forward, as to what they value.
What business needs to do is to identify how those changes then reflect on the contribution that businesses can make. And that then comes down to, again, a notion of what the business is there to do, what is it established to contribute?
And that then helps it to define its value proposition. The businesses that are really most at risk, at the moment, are the ones that leveraged themselves up, that paid out high dividends, that bought back their shares, that remunerated their executives excessively and find themselves now saddled with debt.
What business really needs, currently, is not just more debt, but also to be able to tap into equity markets and raise equity finance, that shares the risk with investors. And to do that, they need to be able to cut their dividends, to raise new equity issues. And to do that, they need to have a clear value proposition, not only how they contribute to solving problems, but also how they can do so in a way that is, at least in the medium and long term, a profitable activity.
And that [brings us to] the long term. What purpose is about is defining that north star, that direction of travel, within which it then formulates its shorter-term strategies over the next few years.
The [companies] that are really doing well at the moment, are those that recognise how the current crisis allows them to respond in such a way as to help address the crisis. Through, for example, those car manufacturers that are able to switch to producing ventilators, to fast food producers that are able to shift towards producing nutritional food that’s going to address the food shortages that will be increasingly felt around the world. Those are the businesses that not only know how to react, but they have an instinctive sense as to how they should react because it’s hardwired into that underlying purpose; and those are the ones that are really going to thrive, both in the short, and the long term.
GH: Are there current examples of purposeful business?
CM: There are numerous examples of companies that are responding in precisely the ways that are required. And in particular, businesses that are prioritising, first of all, the significance of their employees, and the need to really support their employees during current circumstances.
For example, Amazon, in its statements around what it’s doing in terms of trying to ramp up its business: that’s great. But its response in terms of saying it’s not going to support its employees who get ill, and it’s not looking to provide them with health coverage, is clearly not good.
One element that’s associated with businesses that really recognise what’s needed is the extent to which they are willing to support their employees, and to stand by them; by recognising that they have to make sacrifices to be able to deliver for their employees, willing to give up their dividends, willing to slash the pay of their senior executives.
The notion of leadership is one of not just extolling what needs to be done, but making sacrifices that demonstrate a real authenticity around what they’re doing.
GH: Are there lessons to be learned from this crisis?
CM: Business is going to fundamentally change as a result of this. The response to the financial crisis was to bring about a very substantial change in terms of the nature of our financial system. What’s happening now is that the rest of the corporate sector is going through a similar existential crisis, which will need it to reconsider its fundamental reason for being, namely its purpose.
So, business is going to recognise the significance of having a much greater degree of resilience in the future. As I mentioned, the companies that are really most exposed at the moment are the ones that paid out the most to their shareholders in terms of short-term financial returns.
The ones that have the greatest resilience are essentially equivalent to those banks that established the greater resilience, namely the greatest provisions, the greatest capital that they retain within the business, not pay out.
One of the things that this is pointing to is the importance of the equivalent of capital adequacy requirements that are now commonplace across the banking sector. Those are critical to thinking about resilience of business, in terms of the equity coverage of businesses, but also the amount of liquidity.
Basically, companies need to have enough liquid assets to be able to see them through the types of crises that are happening at the moment. This will certainly last for six months, it may last for a year, and that’s the sort of period that companies need a degree of liquid coverage and equity, to be able to see them through.
GH: So the future could look very different for business?
CM: This is a way of thinking about what is the type of purpose that’s going to be most relevant to business over the coming year. A recognition that what society is going to need is the ability to offer solutions.
This is the first of many crises that we’re going to confront. The thing that really motivated the purpose agenda was the existential threat from climate and issues around CO2 emissions.
What is coming out of this crisis is that it’s not just climate change which is an existential threat. There are societal existential threats. And what we’re increasingly going to recognise is that although climate problems have been very temporarily deferred, they haven’t gone away, and it’s going to be as much of an issue over the coming years, which business will have to help to solve. Government is going to be looking to business to help to resolve those types of systemic risks that we will increasingly confront.