Purpose & money
Can corporate purpose be compatible with capitalism?
Ten years ago this February, Northern Rock was nationalised by the then-Labour government, a pivotal moment in the global financial crisis. In the decade of recovery since we have been experiencing one of biggest bull runs in recent memory. But for many, the last ten years has painted a very different picture.
By Ludo Baynham-Herd | Associate Director | Corporate & Financial Communications
“Increasingly the general public are demanding companies have a clear social purpose and demonstrate leadership on key issues” – Larry Fink, CEO of BlackRock
Ten years ago this February, Northern Rock was nationalised by the then-Labour government, a pivotal moment in the global financial crisis. In the decade of recovery since we have been experiencing one of biggest bull runs in recent memory. Last year we saw global equities reach record highs, and earlier this month the Dow Jones Index topped 26,000 for the first time ever.
Those investors with the means, and enough liquid assets to do so, have reaped the benefits as financial markets recovered. And executive pay has followed suit, with the average FTSE 100 CEO now paid nearly a 100 times more than the average employee. But for many, the last ten years has painted a very different picture.
In the UK, and in many countries around the world, there has been a perfect storm of low interest rates, sluggish wage growth and an ageing population suggesting a pension time bomb looms on the horizon. A cocktail of concerns that has been aggravated by ongoing revelations of executive pay, and tax avoidance or evasion by corporates and high net worth individuals alike.
This week Carillion continues to be in the firing line, with the Work and Pensions Select Committee heavily scrutinising the construction group’s management of its various employee pension schemes; after its high profile collapse plunged 28,000 members into a chasm of uncertainty and anxious waiting.
Whether the blame for its collapse should ultimately rest with the executive board, as an example of gross corporate negligence, or with the government, who laid on billions of pounds worth of government contracts, is up for debate. Either way, it is a clear – and worrying – example of a deficit of long term thinking, compounded by new revelations that despite red flags around cash flow issues, it continued to pay huge dividends and pay packets to senior executives, including Chairman Philip Green, a man who – ironically – once advised David Cameron on corporate responsibility
Corporate boards and management across the globe face many serious challenges in 2018, with the threat of data breaches, an unpredictable Trump administration and ongoing economic headwinds from Brexit being top of mind. But one of the most daunting must also be the rise in shareholder activism, as corporations are under more scrutiny than ever before, with skillsets, remuneration and diversity of their leaders all under an intense microscope. Board of directors and management too often spend time drawing up plans in a frantic bid to meet quarterly earnings or sales targets, but entirely miss the bigger picture.
To maintain sustainable growth and lasting financial performance it is critical that businesses are able to articulate their long-term growth plan and show clearly how it reflects, engages with and contributes to the changes taking place in society around it. After all, a company is not only answerable to a vast array of internal and external stakeholders – investors, shareholders, employees, customers – but are increasingly held to account by society at large.
It’s therefore crucial that companies employ genuine corporate governance programs and treat ‘corporate purpose’ as an issue that goes beyond simple ‘lip service’ via a CSR page on its website or a passing reference in its annual report. By purpose we mean ‘why does your organization exist? And what contribution does it make to society? Without a raison d’être, any company will invariably fall short of its potential.
Indeed FleishmanHillard’s Authenticity Gap research has proven that a company’s purpose continues to be an important factor for its reputation – which in turn enhances brand value, strengthens its bottom line and drives growth. Companies that embrace an ‘activist mind-set’, adopt a best practice corporate governance program, have a clear articulation of their corporate purpose and operate with transparency, openness and authenticity typically benefit from a stronger reputation and a more sustainable growth trajectory.
Every year Larry Fink, CEO of BlackRock – the world’s largest asset manager – sends a letter to the CEOs of major companies across the globe in support of practices that drive and promote long-term growth. As a company that manages vast sums of money on behalf of their clients, many of whom are saving for long term goals such as retirement, urging long-term attitudes isn’t necessarily too surprising. This year, Mr Fink pronounced that increasingly the general public are demanding companies have a clear social purpose and demonstrate leadership on key issues – and this must played heavily on the minds of the global leaders that gathered on the snowy mountain tops at the World Economic Forum in Davos last week.
Over the coming years, society is going to be faced with growing anxiety on issues such as automation, privacy, employment rights and artificial intelligence. Failure to address “purpose” now, could cost a company dearly when an event places it odds with shareholders or the wider public at large and they may find – as in Carillion’s case – there’s no one willing to come to their defence.