Regulators are a little disappointed. While the world is calling on companies to better define their purpose, it’s not going as well as it should.

A review of governance statements from 100 UK companies has revealed that companies have either failed to publish statements on their purpose or struggle to understand or fulfil their reporting requirement in any depth.

The Financial Reporting Council (FRC) found that while 86% of companies made purpose statements, 11% were little more than a “marketing slogan”; and 22% offered only a “vague” statement that “did not specifically articulate why the company existed, the market segment they operate in, their unique selling points and/or how they intend to achieve their purpose”.

One statement of purpose singled out by the FRC was so asinine it amounted only to: “Enabling your life.”

FRC chief executive Sir Jon Thompson says the review unearthed many good examples of reporting, but adds that “some companies are continuing to take a formulaic approach to corporate governance driven by compliance, rather than focusing on outcomes, supported by high quality and transparent evidence”.

Purpose, values and strategy

His disappointment is shared by Carum Basra, a policy adviser and governance expert at the Institute of Directors. “It’s disappointing that so few boards appear to have given proper consideration to how purpose drives business strategy and their role in overseeing it,” he says.

There were other difficulties. The FRC research also found that 62% of companies could not articulate connections between their purpose, values and strategy.

Why does this matter? For one thing the most recent iteration of the UK’s corporate governance code asks boards to “establish the company’s purpose, values and strategy and satisfy itself that these and its culture are aligned”.

Without getting to grips with purpose, boards could be said to be falling short on the job.

There is a bigger picture. In recent years the definition of company purpose has become one of the most significant factors in business today, as proponents argue that it is central to engaging with the loss of trust in business caused by the financial crisis of 2008 and confronting current concerns raised by the climate crisis and the ongoing Covid-19 pandemic.

Colin Mayer, a professor at Saïd Business School, Oxford University, has argued in two reports for the British Academy that the ability of companies to define and deliver on their purpose is how they help “rethink” capitalism.

In an interview with Board Agenda, he said purpose means seeing a business delivering on benefits beyond profits. “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.”

A purpose can also block a company from becoming, making profitable but dubious decisions from a sustainability point of view. According to Anthony Carey, head of the board practice at Mazars, a professional services firm, a substantive statement of purpose keeps companies on a true course.

“It is the compass by which the ship is steered in rough seas as well as calm waters playing to its strengths in line with its culture and strategy and, as importantly, making clear the routes it will not take when opportunism tempts.”

There is also a recognition that drafting a purpose may not be the easiest task to achieve. According to Mala Shah-Coulon, a governance expert at EY, “much time is often spent on crafting” purpose statements but it may be wasted exercise if boards cannot demonstrate how the statement has been formulated or implemented in a business.

Process for defining a purpose is important, she says, and may underly while companies fumble turning a statement into action. As an example she argues if employees are not involved defining purpose, the following actions may “not resonate” them and then it implementation becomes problematic.

Boards should also be alert, says Shah-Coulon, especially in the current environment in which strategies may be updated at much more frequent intervals. “They ought to be thinking how a refreshed strategy—or a carry forward of existing strategy—aligns to purpose. If it does not, it may be a signal that they ought to go back to the drawing board on the company’s purpose because, ultimately, strategic actions and decisions should stem from the company’s purpose and not the other way round.”

 

Stakeholder engagement

The FRC review has other criticisms. Some companies continue to see corporate governance as a box-ticking exercise with formulaic reporting, though the watchdog found better reporting on stakeholder engagement.

Here again there is room to improve, the FRC says. Many companies need to show not only that they have spoken to employees and other stakeholders but also how the conversations have influenced decision-making. Without that, it’s an empty exercise.

But “purpose” remains tricky for many companies. The FRC hopes for big improvements in the years to come. Let’s hope its expectations are fulfilled.