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The sections below reproduce the dissertation I submitted for my MBA at Cass Business School in April 2020. For a copy of the final document in pdf or for permission to reproduce or quote it, please contact me. To navigate the document, please see the Table of Contents.

Suggested reference: Woolfe F (2020) Corporate purpose and the equity markets: can the concept of corporate purpose contribute to the identification of good quality companies for capital allocation?, unpublished, London, UK

Table of contents
List of tables
List of figures
Executive summary
Table 1
Figure 1
Figure 2
Figure 3
Table 2
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Figure 5
Table 3
Table 4
Table 5
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Figure 8
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Table 6
Table 7
Table 8
Table 9
Table 10
Table 11
Table 12
Table 13
Table 14
Table 15
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Table 16
Table 17
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Table 18
Table 19
Table 20

Corporate purpose and the equity markets

Can the concept of corporate purpose contribute to the identification of good quality companies for capital allocation?

“We cannot allow unchained capitalism to run on in the hope that it will leave behind scraps for the rest of society. The time of trickle-down economics is over. Instead, we must discover our sense of common purpose and community.  Good business demands no less.”

Lionel Barber (FT 2019)

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* Five year average

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“If you are a long-term term investor, having happy clients, having satisfied and motivated employees, having the regulator happy with you, all of these things as your broader stakeholders are critical. I don’t see any trade-off – it’s very important to the discussion on management quality.

Interview 11

"And as a result, being super focussed on purpose … is creating a fantastic lens and filter through which the board is looking at what we do. So for me, purpose is all about what are we here for, what are we trying to do and it’s distinct from ‘every commercial enterprise needs to make money’ – purpose is all about the board and the company being clear on what we are doing."

Interview 8

6 - Recommendations for future research

The research sample could be expanded to provide a more comprehensive set of data for both purpose statements and interviews. For corporates, the extensions could be by sector, geography, company size or nature of incorporation. Passive investors would also provide a different perspective as they do not form part of price discovery but are large owners of companies’ shares. Likewise, including pension funds who play a key role in the virtuous circle in the model would give an asset-owner perspective.

The precise mechanics of how purpose insights can influence valuations should be explored further. While investors broadly spoke in general terms, attaining first-hand experience of the questions they ask companies and how this influences their valuation models would provide additional valuable insights on dimensions of their interests in purpose. For corporates, attaining some more specific in-depth examples of where purpose has directly influenced a decision and how boards and management teams apply this could make for more precise recommendations. Both would assist companies and investors to understand in greater depth the opportunities provided to them in corporate purpose, and to work together to achieve it.


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Appendix A - Purpose statement analysis full methodology and findings

This section provides more detail on the methodology and findings from the purpose statement analysis described in the main body.

A.1 - Methodology

A.1.1 - Purpose statement data collection

I analysed the constituents of the FTSE 350 ex-Investment Trusts as at 14th October 2019 and downloaded their financial and attributes data on the same day. The statements were collected in September and October 2019.

In order to find these companies’ purpose statements, I first searched their latest annual reports for “purpose” and then determined whether the context was appropriate. These were easily identifiable as they tended to begin with “Our purpose is…” or under a heading such as “Statement of purpose”. If this yielded no satisfactory result, I searched the internet for the company and its purpose statement. I did not use the more common statements of “mission” or “values” as proxies given that they are not entirely synonymous with purpose. In addition, the UK Corporate Governance Code (FRC, 2018) specifically mentions a company’s purpose as a requirement for a board to set as a topic connected to, but separate from, the company’s values. 

A.1.2 - Purpose statement analysis

In line with Edmans’ (2018) descriptions of purpose’s two dimensions – who a company exists for and why it exists – I graded the purpose statements according to the extent to which they highlighted the benefits of a company’s activity to key stakeholders. These key stakeholders were adapted from those implied by The Five Principles for a Purpose Driven Business (A Blueprint for Better Business, 2014) as follows:

Table 16: Linking the Five Principles for a Purpose Driven Business to purpose statement assessment

This analysis required the statements to cover the benefits to the stakeholders, rather than simply naming the stakeholder or group of stakeholders. For example, a purpose “to serve our customers” would not be rated as referencing the benefits for customers, whereas “to improve our customers’ health” would do. In order to identify a third important dimension of purpose, as determined by The Purposeful Company (2018), - how a company creates sustainable value - the statements were also graded against whether they, in isolation, were clear on what the company does and whether they could be helpful in guiding strategic decision-making so as to understand how likely it is that they could be applied to business decisions in a meaningful way. This is important as while investors are likely to dismiss baseless claims of intentions, they do value substantive strategy presentations (Whittington et al 2015).

In order to avoid any personal biases towards certain companies or sectors in the analysis I analysed the statements alone without the names or any other attributes of the companies visible. The methodology and selected gradings were discussed with knowledgeable third parties, however the ultimate gradings are entirely my own work. To create a grade for each statement between bland and comprehensive statements, the following method was applied:

Table 3: References in purpose statements for grading

Given the focus of this research on considering an expanded range of stakeholders beyond investors, those companies that only referenced the benefits for shareholders were not graded as having referenced a stakeholder. However, if the benefits for other stakeholders are also referenced then shareholders are counted as a stakeholder reference given that the topic of research is the relevance of corporate purpose to the capital markets.

A.1.3 - Attribute data collection

In order to assess whether there is a linear relationship between certain company attributes and the quality of its purpose statement I downloaded data on the FTSE 350 ex-Investment Trusts as detailed in table 4 on 14th October 2019. These data points identify the sector the company operates in, its size, its age and its governance to assess whether any of these attributes appear to influence the quality of a company’s stated purpose. Additionally, in recognition of the increasing relevance of intangible assets such as brands, intellectual property, labour and customer relations to company value (Haskel & Westlake 2018, Lev 2001, Lev &  Gu 2016, Surroca et al 2010) and competitive differentiation (Teece 1998), as well as their particular relevance to the link between stakeholder interests and shareholder value (Hillman & Keim 2001, Jiao 2010), I included measures of the extent to which the company’s market value exceeds that of its tangible assets. 

Table 4: Company attributes

A.1.4 - Attribute data analysis

Firstly, I removed all the companies in the sample set that did not have a purpose statement, leaving 148 unique companies. The sector data was then assessed against the purpose gradings to understand the distributions of the quality of purpose and identify whether there was any discernible difference in purpose statement quality between the sectors.

I next used Pearson’s correlation coefficient to assess the extent to which there is a linear relationship between the other various company attributes and the quality of a company’s stated performance. Given the ordinal nature of the purpose gradings I also used Spearman’s rank-order correlation to understand whether the ranking of the company attributes within the sample against the sample’s purpose statement gradings might yield a linear relationship.

As bank and insurance companies’ balance sheets include their client’s assets and investments to meet future liabilities, they reflect many items, often much larger, other than investments in their own businesses for future value creation. I therefore removed banks and insurance companies from the analyses undertaken on the value in intangibles. 

A.1.5 - Performance data collection

In order to assess the linearity of the relationship between the corporate purpose gradings on company valuation and performance, I downloaded select data for the constituents of the FTSE 350 ex-Investment Trusts as detailed in table 5 on 14th October 2019. These data points look at valuation metrics, cost of funding measures, returns and economic value creation as well as ESG performance across a range of hypotheses, to see if any of the performance attributes in the literature related to companies’ relationships with stakeholders and its sustainability profile could also be replicated through the lens of purpose. I also downloaded the same data for all the constituents of a global index so as to be able to compare performance against not only the local index but also global sectors. In certain instances, outliers were removed to prevent distortion of the quality of underlying data.

Table 5: Performance metrics

A.1.6 - Performance data analysis

So as to compare company performance against index, sector, industry group and industry peers I created z-scores of the relative performance in order that standard deviations of performance across any peer group would be equal to one and the mean equal to zero. This provided a standardised relative view of performance that could then be compared across different peer groups.

For the ESG scores and controversies I used absolute performance for analysis. ESG scores from the two leading data providers are already sector-relative and so are comparable across sectors without further adjustments. Additionally, in wanting to identify any relationship between purpose statements and ESG controversies I did not want to justify the presence or lack of controversies by them being more or less common to certain sectors; it is counter-intuitive to suggest that the presence of ESG controversies is “good”, regardless of the sector.

Similar to the attribute data analysis, I used both Pearson’s correlation coefficient and Spearman’s rank-order correlation to identify the linearity of the relationships between the purpose statement gradings and the z-scores.

A.2 - Findings

A.2.1 - Statement gradings

Of the 289 members of the FTSE 350 ex-investment trusts at the time of analysis, 148 had produced identifiable purpose statements that could be assessed for this analysis. The sector split is shown in table 17.

Table 17:  Purpose statement presence by sector

More companies in consumer-oriented sectors have purpose statements than the average. This is not surprising given the focus of these sectors on a broad stakeholder group. The exception to this is companies in the consumer discretionary sector, however given that this sector includes a wide variety of sub-sectors including travel, entertainment and housebuilders this number might not be representative. Another consideration is high levels of consumer regulation. For example, of those companies in the consumer discretionary sector that are in the gaming business three out of four have purpose statements. This would also explain the higher numbers in the financials, communication services and utilities sectors.

Of the 148 companies with purpose statements, 42 were deemed to be bland (a “PR move” as per Bebchuk & Tallarita 2020) and only five were comprehensive.

Figure 6: Purpose statement quality assessment by number (n=148)

Nearly two thirds of the statements are either bland or at level 1 (91), with only three percent (5) addressing the business and the benefits for a range of stakeholders (comprehensive). If the quality of the purpose statements is a good indication of the maturity of the companies’ purposes this suggests that the concept has a significant way to develop, at least in the sample.

Figure 14: Purpose statement quality by sector

On a sector basis the quality of the purpose statements appears to be well spread. The exception is the energy industry, however there are only two companies in this sector with purpose statements meaning the sample is less likely to be representative. The financials sector is the only one with more than one comprehensive purpose statement, however given the smaller number of companies in the sample in the utilities sector the percentage of comprehensive statements in that sector is higher. Including level 3 statements as well (and excluding energy given the small sample) financials, consumer staples and real estate stand out with between 30%-33% of their sector scoring highly. This again is reflective of companies in more consumer-facing industries, although communications services does not perform as well.

Given the weighting towards consumer-facing industries in the sample, perhaps unsurprisingly the most referenced stakeholder in the purpose statements is customers. They are followed by shareholders, but at a significantly reduced number. It is particularly surprising, given the focus in the literature on the employee benefits of purpose and the ensuing positive effect on company performance and value, that this key stakeholder is only referenced five times in the sample. This could be because the benefits of a purpose for employees is its clarity (Gartenburg et al, 2018) rather than a focus on them, however given the apparent lack of “activation” (EY, 2017) of purpose this appears to be a significantly missed opportunity. This is particularly so given the observations from Gartenburg and Serafeim (2019) on the reduced strength of sense of purpose among employees at public companies and from Hemerling et al (2018) regarding the positive link between employee’s understanding of the quality of a company’s purpose and its equity market performance. It is especially at odds with the results of research by BlackSun (2019) showing that of the stakeholder groups executives feel the value creation story is most useful employees came out top with 77%, closely followed by customers at 74% and investors last at 68%.

There are only four statements in the whole sample whose purpose statement references only benefits for investors. Overall, investors were only mentioned 16 times, or in 11% of the statements. This implies that, at least as expressed in the purpose statement, the companies contained in the sample are taking a significantly broader view than SVM. It is not possible to show that those companies that don’t reference shareholder value do not see it as a fundamental principle for running their business, however that their public statements of purpose do not reference investors could imply that they are not the primary consideration.

Figure 7: Number of times stakeholders are referenced in purpose statements (n=97)

The dominance of customer focus can be seen across sectors, with the exception of utilities where only three out of the seven companies with purpose statements reference any stakeholders at all. This might well be reflective of the fact that in the UK utilities tend to operate as regulated monopolies (Stern, 2014), and so therefore issues related more to sustainability and those companies’ contributions to the future of the local environments and societies (captured by the “future generations” and “good citizen/wider society” data points) will be front of mind to secure their licence to operate with the regulators. However, given their monopoly power and the consequences of having their monopoly licences revoked for poor service it is surprising that quality of service provision is not more emphasised.

Figure 15: Stakeholder benefits referenced by sector


The financial sector places particular emphasis on being a good citizen, and much more so than other sectors, which is not surprising given the relative lack of public trust in financial services when compared with other sectors (Edelman, 2019:b).

Figure 16: Edelman Trust Barometer 2019 score by sector

Source: Edelman (2019:b)

Of all the references to investors the financial sector also comprises the most with 31% of the references, despite it only accounting for 18% of the total purpose statements. Intuitively this makes sense given the sector’s own value creation mechanisms being in many cases tied to market performance.

Only 53% (78) of the statements made any evident connection with the company’s business activities or strategy. Of these, the majority provided clarity on what the business does with only 30% (24) of them additionally offering some sense of strategic choice, accounting for only 16% of the total.

Figure 8: Statement reference to business activity and strategic choices (n=148)

This paints a poor picture of the likelihood that these statements can be usefully applied in making business decisions, which, as Gartenburg et al (2018) demonstrated, is important in achieving the performance benefits of purpose. It certainly appears to be reflective of the literature showing that while companies might have written purpose statements few seem to be maximising the opportunities of them by tying them into how the their business operates and setting targets (Thomson & Brimmicombe, 2019, HBR Analytic Services, 2015, EY, 2017). This is an issue that appears to apply across sectors – there is no sector that performs particularly well by this measure with only real estate and materials standing out as having the smallest percentages of statements referencing neither the business nor the strategy, but even then only 33% of the statements in the real estate sector gave insights into both.

Figure 17: Statement reference to business activity and strategic choices by sector

A.2.2 - Correlations

Turning to the linearity of the relationship between a company’s attributes and its purpose statement grade, table 18 shows the results from Pearson’s correlation coefficient and Spearman’s rank coefficient, as well as the p-values to show the likelihood that the correlation outcome is statistically significant which was set at less than or equal to 0.05.

Table 18:  Correlation data for company attributes

As can be seen from the p-values, the only information that appears to be significantly significant from the sample is the correlation between the ranked number of employees within the sample and the purpose grading, which is close to zero. In its totality therefore, this is clearly insufficient to make any significant inferences from the data.

Assessing a relationship between CEO appointments from within the organisation and purpose grading required a different approach, given that the independent variable is binary. As can be seen in table 19 surprisingly the data is split between internal and external appointments across all performance gradings other than the comprehensive level, of which there were only five observations. On the face of it, whether a CEO is an internal or an external appointment has little bearing on the quality of a company’s purpose statement.

Table 19:  Purpose gradings by nature of CEO appointment

Using the same statistical significance test on the performance data does not yield any more satisfactory results, as can be seen in table 20. On a ranked basis we can see that there is a slight statistically significant negative linear relationship between a company’s purpose grading and its free cash flow yield when compared against its sector and industry group, which implies that to a small degree investors value more purposeful companies’ free cash flows more highly. However, with r-squareds of 0.032 and 0.039 we can see that this only explains a very small amount of the variance between the two variables.

Similar observations can be made about companies’ weighted average cost of capital compared against the sector, which on both an absolute and ranked basis shows statistically significant correlations albeit only slightly positive. Intuitively, if purposeful companies should have many of the performance benefits as predicted by the literature it is surprising that the correlations here are positive, which implies that more purposeful companies are charged a higher cost of capital. Unfortunately, neither the cost of equity nor cost of debt correlations help provide any additionally statistically significant insights into the mechanics of this relationship. In any case, the r-squareds of 0.031 show that the data in the sample explains only a minimal amount of the variance between a company’s purpose grading and its weighted average cost of capital.

“The discussion around purpose… in a way it is common sense, and I think the reason we are having this discussion is that we have drifted a long way from common sense…”

Interview 2

“I would hope that purpose would help highlight some of the drive, dynamism and profit-seeking motive that is absolutely at the heart of why we invest in companies and the benefits they drive, the pensions we can deliver, the economic growth which drives tax revenues and hospitals etc.”

Interview 13

A model of corporate purpose for the equity markets
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4.2.6 - Performance expectations

Corporate and investor interviewees agreed that for purpose to be equity market-relevant it must be clearly linked to good business performance, and that good purpose can result in better performance. It was often repeated that purpose cannot be used as an excuse for poor performance, and many recognised that gaining investor support for pursuing a wider social purpose is easier in times of good performance. Indeed, as much as interviewees highlighted that companies cannot replace governments in solving some societal problems, they also emphasised that companies aren’t charities and need to make competitive profits in order to be credible in the eyes of the equity markets. As a consequence of purpose delivering better business performance, both companies and investors highlighted that it can afford businesses greater space and trust to invest, including on sustainability matters.

One corporate interviewee explained that a key test for the problems that a company should try to solve is whether they can do it in a way that helps them grow and be more profitable. Both corporate and investor participants saw effective purpose needing to be reflected in returns on capital over time, essentially returning above the cost of capital, with many expecting above average outcomes as a benchmark.

Table 10: Example perspectives on business performance

Several interviewees noted that sustainable profit itself has a social purpose by generating taxes and creating wealth for retirement funds. This is an important consideration in the wider economic impacts of corporate purpose, especially comparing it with some of the economic outcomes identified in the literature of SVM. A company’s purpose is unlikely to address how its owners subsequently allocate the returns from their investment or the way in which governments spend taxes, however by paying people fairly and contributing to societal coffers it can be seen to contribute to addressing some of the inequality issues highlighted in the literature. It can also be seen as potentially creating continued demand opportunities for a company’s own products as the tax and returns proceeds re-enter the economy.

Table 11: Example perspectives on the social value of profit

4.2.7 - Timeframes

Investor timeframes were also seen as a hindrance for corporates in implementing purpose. However this view was not shared by all, and emphasis was placed on “you get the investors you deserve”. The mechanisms for this were two-fold. First, by providing the clarity required for investors to understand long-term ambitions, in which purpose and wider value creation play a central role, a company should attract shareholders that are more supportive of the strategy. Second, by de-emphasising the importance of investor timeframes to how a business is run altogether long-term, patient shareholders will be served better by seeing through short-term noise. In both instances, some corporates mentioned that they had experienced rotations in their share registers as a result of setting out their purposes.

Some corporate participants commented that purpose likely generates more sustainable, steady performance and growth over the long-term, and that while the concept of trade-offs between investors and other stakeholders might exist in the short-term a long-term lens helps navigate these decisions as interests should converge and result in better performance. An emphasis on long-term, steadier performance was also highlighted as a way to see through the trade-offs between short-term results pressures or distributions and the need for long-term business investment.

Support for “courage of conviction” was reflected by some investor interviewees, who also acknowledged that it would be impossible to satisfy all investors all the time even if decisions were being taken solely based on criteria related to financial performance. A focus on long-term performance can therefore be seen as a way to prioritise the various investor motivations and, if supported by good business performance, should help to attract a more supportive shareholder base that is ready and willing to value a company’s purpose and long-term fundamentals.

Table 12: Example perspectives on timeframes

4.2.8 - Transparency

A level of cynicism was shared by both sides about the concept of purpose and how it can help. Investors were aware that companies might use purpose as a marketing ploy, with many highlighting that unless purpose is discussed in the context of strategy and operations it risks being ignored. This was also reflected by companies who saw most benefits of consistency, clarity and authenticity in aligning the organisation and value chain, and directing strategy and resource allocation. These attributes are also important for engaging customers and regulators. Providing the transparency required for all stakeholders therefore extends well beyond a purpose statement alone.

Investors want to hear management discussing purpose in terms of capital allocation and strategy decisions. They can also look to other sources to triangulate the messages, including by talking to employees to ascertain whether the top-level messages are embedded internally and using Glassdoor reviews to verify the employee experience. Investors also discussed how to get more insights into the customer view, as putting themselves in their shoes to understand the value proposition is so important to purpose and its link to company value. Some visit trade fairs and look at Trustpilot to help inform their assessment.

While the expected business outcomes of purpose relate to financial performance, to be convincing on the benefits additional metrics should be considered. This applies both to the risk and the opportunity aspects. On opportunities, some investors pointed to the usefulness of distribution charts showing investments in and value added to the various stakeholders while others were interested in metrics and discussion about performance in the context of the thematic drivers. There was little prescription in what this looks like, however being able to demonstrate these outputs is important to the credibility of the story.

Table 13: Example perspectives on transparency


4.2.9 - Accountability

Accountability and governance were key for both sides. Tone from the top is important in lending credibility internally and externally. Corporates saw significant benefit in involving the board in purpose given its role in holding management accountable for performance and in designing strategy. They also noted the benefits in having the board see operations first-hand and meet customers, so as to be properly informed on customer and employee experiences. This is essential in the context of decision-making where values as much as financial returns are important criteria, which include some key trade-off and investment decisions related to stakeholders that are unlikely to be able to be precisely measured. It is also helpful for big, strategic decisions where a company’s values are an important input. Additional benefits related to the board getting a better sense of the culture of the organisation.

Views were split on whether directors with specific skills sets or from specific constituencies are required to promote and embed purpose. However, there was agreement that the whole board should be responsible, and so even if specific directors or board committees have certain remits the whole board must be accountable for performance and sufficiently knowledgeable and empowered to provide the requisite challenge and guidance. Introducing purpose into constitutional documents also has the benefit of causing purpose to sit at the heart of the governance and means processes and outcomes can be challenged against it.

Incentives too proved polarising. Some thought that having specific incentives related to sustainability or the delivery of purpose was a useful way to hold management to account. Others felt that if purpose is fundamental to the way a company operates and behaves people should not be rewarded for doing something that is simply expected of them. Purpose is also hard to measure, and some cautioned that this can have unintended consequences when used to determine management pay. One investor emphasised the importance of extending the timeframes of incentive schemes to better align them with the timeframes over which purpose will be evidenced in business value.

Perhaps surprisingly given the investor advice (ICGN 2017), some investors acknowledged there could be benefits in structures that give insiders disproportionate control over the company. This gives insiders space to perform, and protects them from outside influences that might not be aligned with the culture and vision required to deliver the company’s purpose. The emphasis was on alignment of interest; some were willing to give up “one-share-one-vote” rights where they trusted management in the interests of protecting and enhancing value.

Table 14: Example perspectives on accountability

4.2.10 - Aggregate dimensions

Four dimensions emerge which help to build a model of corporate purpose in the equity markets. - Strategy and business model

With a key focus on the questions of who a company serves and how it creates value for them (generating revenues) and how it captures that value (converting revenues to profits) in a long-term, sustainable manner the locus for the concept of purpose lies within the key strategic and business model choices a company makes. It is therefore unique to each company.

While there is no clear consensus in academic literature on the definition of a business model (Amit & Zott 2015), common themes relate to the logic of value creation for customers as well as how it is captured by the firm and the activities of actors across the value chain, with “a generalised emphasis on the role of the customer” (p.34). Itami and Nishino (2010) split the concept into two: the first being the “profit model” to describe how a company achieves differentiation (either in customers’ willingness to pay due to better product quality or cost leadership leading to lower prices) from its competitors and the “business system” that describes the way in which a company is organised to deliver it. Teece (2010) sums up that it “articulates the logic and provides data and other evidence that demonstrates how a business creates and delivers value to customers. It also outlines the architecture of revenues, costs, and profits associated with the business enterprise delivering that value” (p.173).

There are several types of business model.  Variables include whether value is created by the provision of a product or a service, and the extent to which there are more than two actors involved and how the company creates value by interacting with multiple parties (Baden-Fuller et al, 2017).  They also vary in their focus on value creation for the customer and value capture for the firm, depending on the motivation of the firm and its organisational identity, which will consequently have fundamental implications on choices such as pricing and investment activity (Santos 2012).

In a further paper, Santos et al (2015) detail various “hybrid” models, whereby companies pursue “a social mission while relying on a commercial business model” (p.36). These models take on two dimensions. First, the social value “spillovers” can be delivered either directly through the provision of the product (automatic) or in an ancillary way through additional interventions (contingent). Second, the social benefits either accrue directly to the client or to a third party. Operated commercially, this describes models that start to take on more of a pie-growing approach as espoused by Edmans (2018).

These choices are therefore intimately linked with the key questions about why a company exists, who it serves and how it achieves this. A company must choose which societal needs it will seek to address (why) and within that who it will target as a customer to pay for its product. It is possible, through the choice of a hybrid business model, that other societal needs can also be addressed as a result of the provision of the product for which customers will pay. This can be a powerful aspect, particularly if it can be shown to reinforce the company’s competitive advantage or societal legitimacy. However the focus on how customers’ willingness to pay will persist and grow is fundamental to achieving purpose even if this might not be the most societally impactful aspect of the business.


Operationally, the choices around how to deliver value to customers and capture some of that value for the firm relate to how it organises itself and its value chain and the opportunities, particularly with the workforce and the engagement of suppliers, for business efficiencies and cost leadership. In the context of key stakeholders involved in the value chain, this can also be an aspect of wider value creation. It also relates to managing the societal risks that a company can expose itself to through the imposition of externalities. For these aspects to make a compelling investment story they must be linked back to how this additional value strengthens a company’s business model and creates (better) returns.

Consequentially a company can have more than one purpose, as much as it might have multiple value propositions and employ several business models. It might also have multiple purposes within one business model, particularly in cases where value is being added to parties other than the paying customer, or a company has multiple brands. - Embedding purpose

While the opportunities are clear, the literature highlights that purpose is often not well-activated. Many of the barriers and enablers are well within a company’s gift – indeed the only aspect that was discussed that is outside a company’s direct remit is the regulatory environment, although it can also be well positioned to lobby for better, more supportive regulations.

Many opportunities to embed purpose lie in its clarity and credibility, and communicating this effectively in a way that it will enable customers employees and investors alike to understand the value of it and support the company. A key focus on culture and employees is required as they can both be a significant barrier and major enabler. Involving employees in the development of a company’s purpose is essential to getting their buy in and making it credible. Strategic links provide a framework for identifying other key stakeholders and helping to ensure that purpose is being maximised, in particular with the customer who is ultimate arbiter of the value proposition.

Another important aspect is organisational commitment. “Doing a PR job”, as one interviewee described some companies’ to purpose, is clearly insufficient for extracting the real business benefits, as are management soundbites that have little impact in the organisation. Structures need to be developed to embed purpose at an irreversible level such that it can endure short-term variances in performance and management changes, including culture, remuneration, reporting and governance. There are examples of companies in the UK that have amended their constitutional documents to achieve this.

A focus on the long-term is a fundamental piece of the puzzle. It helps navigate a path through near-term market pressures and essential business investment, and provides a framework for prioritising the interests of various stakeholders. Consistent, sustainable performance should provide more space to invest in the business and garner a more supportive, trusting shareholder base. The pursuit of a commercially successful purpose requires a focus on the long-term for companies and their investors. - Business value

The consequences of embedding purpose effectively should be creating long-term business value. If it doesn’t, then it is unlikely to get mainstream investor support. While some corporate interviewees were sceptical of investors’ interest in and support for purpose, the investors themselves were mostly clear on how purpose could contribute to valuations.

The precise transmission dynamics between purpose and valuation could be another research project itself. However, from the interviews three mechanisms stood out. First, purpose can result in increased willingness to pay through better customer engagement or exposure to specific sustainability thematics. All else being equal this will increase free cashflow, earnings and returns on capital. Second, by engaging the workforce and introducing efficiencies in the value chain purpose can lead to cost advantages, which again all else being equal will increase free cashflow, earnings and returns. The combination of both effects compounds to significant benefits and business value; effective implementation of purpose can lead to above average performance.

Third, the transparency, clarity and consistency benefits mentioned by the interviewees as well as the better management of externalities are likely to reduce the perception of risk in the company and therefore lower its cost of capital. This is a function of the reduced risks in the business and a better perception of management quality and its ability to deliver on its long-term business plans. On this basis alone, all else being equal, reducing the cost of capital increases present values of cashflows. There would again be a compounded effect if the first two mechanisms, which could also result in higher cashflows, were simultaneously observed. More favourable views on a company’s prospects can lead to higher multiples being applied to its earnings resulting in higher valuations; one interviewee observed “not every pound of profit is equal.”

Table 15: Example perspectives on market consequences of purpose - Trust/licence to operate

Trust and licence to operate were recurring themes from both sides, fundamental to the internal and external support required for delivering on long-term purpose.

Interviewees recognised that trust must be earned, with good business performance being key to this. Using purpose as an excuse for poor performance, or treating it as a marketing gimmick, undermines the concept and can even damage employee motivation. It is unlikely to drive the internal performance benefits and efficiencies throughout the value chain, and risks creating confusion where senior management’s directions aren’t being implemented. On the other hand, effectively embedding purpose in the strategy, governance and operations and creating long-term value as a result buys companies time and space to allocate capital in a more purpose-driven manner. This level of trust can also help investors support a company in insulating itself from market short-termism and build a longer-term share register, which can include forgoing some standard governance protections investors usually expect such as “one-share-one-vote”.

While transparency is important internally to the company and its investors, the external imperative is also clear. To maximise the opportunity with customers companies need to be clear and authentic about what they exist to do, and operate in a responsible way that extends beyond base levels of societal expectations. This in turn provides companies with a licence to operate that can play a role in maintaining competitive advantage through stickier customers and access to specific revenue streams by serving long-term societal trends. It can also lead to more likely governmental and regulatory support, even potentially opening access to new markets as one interviewee highlighted from experience. 

4.2.11 - The model

The resultant model of purpose in the equity markets that emerges shows these dimensions are all inter-related; with any piece missing it is unlikely that the model can operate effectively, but if working properly the model is entirely compatible with the mainstream equity markets.

The model begins with the most basic question– why does a company exist? This is reflected in it actively seeking to address societal needs, and the strategic choices it makes in order to do so.

The next question is who the company serves in order to address these needs. This can be the company’s paying customers, other stakeholders who benefit as a result of the company being paid for its product or both. While serving other stakeholders can be a powerful way of delivering purpose, particularly when linked to a company’s key resources and capabilities, a company needs a strategy and business model that add value for paying customers such that it can generate recurring revenues and compete in pursuit of its purpose. Wider societal value can form a part of a company’s competitive advantage, but doesn’t pay the bills alone.

The choice of business model is key to determining how the company will add value and achieve its purpose in two ways. First, the company must arrange itself in a way that value can be delivered effectively and efficiently, including by focusing on the stakeholders key to enabling its business model and adding value to them. Purpose can also contribute by motivating employees and suppliers and by providing clarity internally around decision-making.

Second, consequently the company must make long-term profit margins. Profitability is an essential consequence, however it cannot be considered separately from, or worse at the expense of, the why, the who and the how dimensions; profits are a result of a focus on the needs of key stakeholders and by being able better to answer those questions the more likely a company is to be sustainably profitable, with fewer externalities.

The more profitable the company, the more tax it will contribute for societal spending. Post-tax profits result in profit available to investors. The model requires a company to produce long-term returns on capital that are greater than its cost (economic value) and ideally improved economic profitability, that can either be re-invested in the company or returned to owners, resulting in higher market valuations and returns for shareholders.

The combination of wages, taxes and pensions, as well as wealth created for the company’s owners, translates into societal wealth through government and personal spending and long-term savings. These in turn provide increased societal funding which is ultimately the source of a company’s revenue streams, completing a virtuous circle.

Proof points of this system working are in a company’s licence to operate - its acceptability among wider society, customers and regulators - all of whom are fundamental to running a business well and profitably. It will also show up in internal trust within the organisation, which should mobilise and motivate the value chain and create a more supportive, long-term shareholder base. Both existing consecutively is essential to the model’s success; licence to operate without good business performance won’t generate the sufficient returns for investors to commit capital, and equity market trust without licence to operate will quickly diminish as a company is unable to create the long-term advantage necessary to remain competitive. 

Figure 13: A model of corporate purpose for the equity markets

4.3 - Limitations

Figure 9 shows interviewees mainly had a positive view on the concept of purpose. This was deliberate to elicit insights from expert participants but resulted in an inherent bias in responses. Therefore, there is a risk that the negatives have been underplayed and the positives over-emphasised in the research.

Additionally, the corporate respondents’ experience was mainly concentrated in UK-listed, large, consumer-facing companies and my interview set limited to just 15 participants. While the quality of the individuals’ contributions was high, the ideal number of interviewees for a semi-structured interview process is 20-30 (Creswell & Creswell 2018). The number needs be large enough in order to be able to conclude with generalisations (Corbetta 2011), in this case seeing through the company, size, geography and sector-specific circumstances.

On both points, future research could benefit from a larger set of interview participants to provide a broader range of perspectives and experience.


5 - Conclusions and recommendations

The literature suggests a range of benefits of pursuing a wider purpose than SVM, with historical or legal impediments at least in the UK unlikely and supported by increasing social impetus. However, there remains no consensus on the definition of the concept of corporate purpose, as shown by the multitude of current interpretations. From the statement analysis today’s applications in the UK listed markets appears to be lacking; if they have been written at all many are bland an lack insights. At this level, the concept appears unlikely to have many benefits for the equity markets and risks being “cheap talk” as envisaged in some of the literature. However, the interviews and the resulting model suggest something much more useful.

Practitioner interviews show that corporate purpose is at the heart of the strategic and business model choices every company will make. It is embedded in the answers to the fundamental questions of why a company exists, who it serves and how it does so, and is therefore unique to each company and its competitive advantage. Some companies will have a more societally-impactful purpose than others, employing a variety of business models to achieve it, however a company’s long-term success depends on the delivery of its purpose as it is intimately linked to how it is able to generate revenues and earn profits. While clearly led by value creation for a wider set of stakeholders than investors, purpose is not altruistic – it is simply good business and a useful lens for long-term investment. This has several consequences.

First, corporate purpose is entirely relevant to and compatible with identifying and supporting good businesses in the mainstream equity markets. Indeed, for a long-term equity investor interested in the fundamentals of any company purpose should sit at the centre of an investment case. If they are unable to answer the why, who, and how questions of purpose it is unlikely that they have understood the key drivers of revenue and profitability today and tomorrow. For those interested investors “what value does your company add, and how is it organised to deliver it profitably in the long-term?” would be reasonable and insightful first questions to put to management to gain key insights into the strategy, the business model and capital allocation. By proactively looking to discuss these topics with investors management teams will be able better to gauge their underlying motivations through the extent to which they’re interested in and seek to understand the company’s purpose. They can then decide which investors are more likely to be constructive and supportive over the long-term and be confident in prioritising those views when seeking market support.

Second, it is not possible to address all three questions fully in one sentence or statement; while clarity was a recurring concept in the interviews attempts excessively to simplify the approach risk rendering it ineffective. The notion of a statement as published by many UK listed companies today risks undermining the concept as “purpose-washing”. Grandiose statements of purpose and social value with little or no substance behind them should be given short shrift by investors and dismissed for the marketing efforts they’re likely to be. Companies wanting to maximise the opportunity of investors understanding their purpose must ensure that the answers to the three questions run through the narrative of all aspects of how they run their businesses, from strategy to operations to culture to finance. The three questions offer a template for structuring any disclosures of purpose.


Third, in the answers to why, who, and how a range of stakeholders will be instrumental to a company’s success, unique to each company’s purpose. Some will be represented by the risks posed to the company if they aren’t properly addressed, and potential costs as companies are required to pay for their externalities. They will form part of the essential licence to operate and trust dynamics, without which a company is unlikely to thrive and the model breaks. Some, however, will relate to opportunities; it is in these opportunities where purpose is centred and should be prioritised. For every commercial enterprise this must relate to those who will pay it for its goods or services. It must also relate to those involved in the production and delivery of them. While others can also benefit, and indeed reinforce the customer proposition or even be the main beneficiaries of purpose, to understand a company’s ability to create societal value requires an understanding of why people pay it and how it makes money.


To maximise the value of purpose, companies and investors should therefore focus in every instance on the customer and employee experience, building out other priority stakeholders’ interests from those essential to enabling and benefitting from the business model(s). Investors and boards should proactively seek to put themselves in those stakeholders’ shoes to understand that experience, including by looking to meet them and finding other feedback mechanisms that can provide insights. Without this it is unlikely that either party will be sufficiently informed to fully grasp the concept in either business oversight or investment case construction.


Fourth, there should be no trade-off between purpose and long-term performance. By sitting at the centre of a company’s competitiveness an emphasis on purpose can and should result in better business performance. By focusing on the opportunities of purpose companies develop a proposition that affords them greater competitive advantage and long-term returns as a result of more engaged customers and better operations. Performance and profitability are a consequence of good answers to why and who, and are a necessary part of the how for the equity markets. Companies should explain how, in seeking to add value for their customers and other stakeholders. they strengthen their business and create better returns.


Fifth, investors must acknowledge that each company’s purpose and stakeholders’ requirements will be different. Purpose must be embedded at the core of decision-making, culture and governance and, while best practice might exist in some areas, companies need to arrange themselves according to their own circumstances; there can be no one-size-fits-all approach. This involves clarity and deep engagement with key stakeholders on the design and the delivery of purpose, with employees being a key internal enabler. It also involves making substantial commitments and investments that are likely to outlast a CEO or a strategic cycle to be credible; companies should consider inserting their purpose into their constitutional documents to support this. Investors must understand that this requires pragmatism and actively support companies in taking steps that, while unorthodox, will enable them best to deliver on their purpose and long-term performance, and protect themselves from unwarranted short-term pressures. This might include structures that could traditionally be seen as disenfranchising or deprioritising investors, such as dual-class shares, in order to recognise that investors are best served by focusing on the stakeholders key in achieving the company’s purpose. 


Sixth, this has implications for how to measure purpose. Companies and investors should start with the same measures used to understand a company’s strategic success. In addition, it likely includes the interactions with and value created for the company’s key stakeholders that are either beneficiaries of the purpose or essential to its delivery. While these metrics are likely less developed and investors didn’t have prescribed views on what they should look like, lack of clarity in those metrics implies a lack of clarity of purpose. As purpose is unique to each company, its management, long-term investors and key stakeholders should work together to identify what the most relevant measures and narrative are in answering why, who, and how; accompanied by the usual financial and strategic performance metrics these measures should help provide a complete picture of how a company is performing on its purpose.

Lastly, for purpose to be credible it must be consistent. In a listed market context this includes being realistic about profit requirements. Different messages to different key stakeholders is likely to create tensions between them and result in trade-offs, whereas the model requires an alignment of their interests in the long-term, from customers to employees to regulators to investors, to operate effectively. If this can be achieved, companies can have the courage of conviction there should be no barriers to being able to create value for society with the support of the equity markets, and get the investors they deserve.





























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“There are all sorts of infelicities in the production of (purpose statements) which as an executive one observes, which is quite distressing if you are really trying to get to what is a company trying to do.”

Interview 1

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2.3.5 - Corporate purpose and company performance

There has been less research on the impact of corporate purpose on performance, not least due to disagreements over its definition as well as how to measure it. However, many of the stakeholder relations and performance findings referenced earlier were echoed by Ebert et al (2018), who found companies’ motivations to consider a wider purpose than SVM included business legitimacy, talent attraction and motivation, improved stakeholder relationships, employee well-being and business performance.

Customer focus is an opportunity. HBR Analytic Services (2015) found that 58% of companies prioritising a broader purpose grew their revenues by more than 10% in the prior three years compared to only 42% of those companies deemed to be purpose laggards. Only 15% of the prioritisers saw flat or declining revenue growth compared with 42% of the laggards. This was also borne out in a worldwide survey by Globescan (2016) which found two thirds of consumer respondents said they try to support purposeful companies (although only 45% could name one), and that purpose is a strong driver of trust in businesses. The aspect that was most important for these consumers was related to the products and services the companies provide.

Figure 4: Reasons why a company is perceived to have a strong purpose by consumers

Source: Globescan (2016)

Operationally, the HBR research also showed the outperformance of purpose-prioritising companies over laggards in successful implementation of a range of strategic initiatives.

Hemerling et al (2018) look at stock market performance of purposeful companies. Using a survey of employee views on the robustness of a company’s purpose to determine a score showed positive correlation with total shareholder returns (TSR). In another study, EY (2016) found that purposeful companies out-performed the S&P500 by 10 times between 1996 and 2011. Burson-Marsteller and IMD (2015) found “that a strong and well communicated corporate purpose can impact financial performance by up to 17%” (p.3).

Figure 5: Performance measurement and long-term TSR

Source: Hemerling et al (2018)

2.3.6 - Implementation of corporate purpose

While there appear to be business benefits to wider corporate purpose, that it is effectively implemented is less evident. Thomson and Brimmicombe (2019) found that while 86% of the companies in the UK they surveyed on purpose had written a purpose statement only 17% have thought about its impact for the business and set clear targets. HBR Analytic Services’ survey (2015) similarly concluded that while nearly all respondents agreed with the value of purpose in driving performance only 37% agreed that their business is organised to deliver it. Similarly a global survey conducted by EY (2017) found that of those who identified as having a corporate purpose only 37% considered it to be “well-activated”. While companies might make claims to a wider purpose than SVM it is not always being implemented in practice, and therefore the value risks being lost.

Employees play a key role. Gartenburg et al (2018) researched whether corporate purpose could be measured using insights from a survey of employee views of their employers. While this measure itself did not yield positive results related to financial performance, they found that companies performing against their factor “purpose-clarity” - identifying organisations with good job clarity and direction from management - had better operating financial performance and equity returns. This was particularly driven by the views of participants in the middle-management levels and professional staff, indicating the importance of buy-in and visibility of purpose throughout the organisation rather than just at top management-level. This need for communication is reflected by Smith (2003) in the context of general mis-conceptions about the legal aspects of SVM, and the need to be clear to middle management about expectations in order to align effective decision-making throughout the organisation.


Similarly, through their consulting work Quinn and Thakor (2018) observed that using common economic logic, assuming that employees are self-interested, and creating incentive and cultural structures accordingly misses opportunities to reinvigorate organisational culture and stimulate company performance. Instead, they propose the development of an authentic, consistent purpose to which employees can be connected and mid-level managers can champion. Conversely, when employees view CSR as self-serving and insincere, they react negatively and may apply themselves less in their work (Pontefract 2016), which is likely to apply to purpose as well.

However, engaging employees in purpose is challenge in the equity markets. Gartenburg and Serafeim (2019) found that the strength of employees’ beliefs in a company’s purpose is lower in public companies, particularly among the middle and lower ranks.

2.3.7 - Measuring company performance on corporate purpose

Definitions of corporate purpose are various; concluding on its measurement and performance benefits is further confounded given the lack of agreement on the nature of the dependent variable.

For example, Madden (2005) argues that, in order to reconcile all stakeholders’ demands on the company, SVM is the only appropriate decision-making criterion as it helps companies achieve their aims in an efficient manner. Jensen (2001) argues similarly, in that to make purposeful decisions some way of determining how to manage the stakeholder trade-offs must be developed, the outcome of which can be measured by long-term firm value. Madden continues by arguing that if companies cannot earn their cost of capital public welfare is served by removing funding, and that a win-win for all stakeholders is achieved by the acknowledgement that firms must create economic value.

Meyer (2018), on the other hand, suggests that if success is achievement of a company’s corporate purpose the commonly adopted performance measures, e.g. the stock price, are necessarily inadequate as they imply the purpose of the company is SVM. Atkinson et al (1997) concur, suggesting that even if a company’s ultimate objective is financial returns it must measure its performance in a way that helps it understand the effectiveness of its processes to achieve that objective, which usually involves its interactions with key stakeholders, rather than just the outcome.

2.4 - Literature review summary

Corporate purpose is not a new concept. SVM only entered business parlance in the 20th century but is now firmly rooted as the end objective of the firm in the minds of many. However, unsurprisingly given some of the social and economic consequences of SVM there are increasing calls for alternative views and rules. In response, UK the law now requires directors to consider a range of stakeholders’ views when running companies and permits alternative purposes to SVM to be pursued.

A major challenge in practice is that there is no clear definition of corporate purpose wider than SVM, resulting in a variety of interpretations. Even if a company wants to be more purposeful, short-term market pressures can cause it to take decisions against its, and its stakeholders’, long-term interests. While there appear to be a range of business benefits of related concepts, which can lead to better shareholder returns, corporate purpose is rarely effectively implemented, and views differ on how to measure its success. From the relatively small amount of research into purpose, two key stakeholders however stand out; employees are important for effective implementation of purpose and there appear to be commercial benefits in engaging consumers as well.

These difficulties make promoting the concept widely a challenge. Through examining evolving practice at listed companies, as well as interviewing corporate and investor practitioners for more specific detail, this research seeks to add to the current literature by providing practical insights and making recommendations for companies and investors to harness the concept in the equity markets.

3 - Purpose statement analysis

To review the corporate purpose practices of listed companies in the UK today, I made a qualitative assessment of the purpose statements produced by the constituents of the FTSE 350 ex-investment trusts. I also tested whether there are correlations between the quality of a company’s purpose statement and some of its attributes, as well as its performance across a range of valuation and returns measures.

This section presents a resumé of the methodology and findings. For complete details of the methodology, additional data, results and analysis as well as limitations please refer to appendix A.

3.1 - Methodology

3.1.1 - Purpose statement data collection

In order to find the statements I first searched the companies’ latest annual reports and, if this yielded no result, I searched the internet for the company and its purpose statement in September and October 2019.

3.1.2 - Purpose statement analysis

I graded the statements according to the extent to which they highlighted the benefits of a company’s activity to key stakeholders. These stakeholders were adapted from the Five Principles for a Purpose Driven Business (A Blueprint for Better Business, 2014). The statements were required to cover the benefits to the stakeholders rather than simply naming them. The statements were also graded against whether they were clear on what the company does and whether they could be helpful in guiding strategic decision-making. This is important as while investors are likely to dismiss baseless claims of intentions, they do value substantive strategy presentations (Whittington et al 2015). To create a grade for each statement the following method was applied:

Table 3: References in purpose statements for grading

3.1.3 - Attribute and performance data collection

To assess whether there is a linear relationship between certain company attributes and the quality of its purpose statement as well as the statement quality and company performance I downloaded data as detailed in tables 4 and 5 on 14th October 2019. I also downloaded the same performance data for all the constituents of a global market capitalisation-weighted stock index to compare performance against not only the local index but also global sectors, industry groups and industries.

Table 4: Company attributes 


Table 5: Performance metrics

* Five year average

3.1.4 - Attribute and performance data analysis

I used Pearson’s correlation coefficient to assess the extent to which there is a linear relationship between the company attributes and the quality of a company’s performance statement as well as the statement and the company’s performance. Given the ordinal nature of the purpose gradings I also used Spearman’s rank-order correlation to understand whether the ranking of the company attributes and performance against the purpose statement gradings might yield a linear relationship.

To compare company performance against index, sector, industry group and industry peers I created z-scores of the relative performance. This provided a standardised relative view of performance that could then be compared across different peer groups. For the ESG scores and controversies I used absolute performance for analysis, for reasons explained in appendix A.

3.2 - Findings

3.2.1 - Statement gradings

Only 51% (148) of the sample of 289 had purpose statements. Nearly two thirds of those were either bland or level 1 (92), with only three percent (5) addressing key business questions and the benefits for a range of stakeholders.

Figure 6: Purpose statement quality assessment by number (n=148)

On a sector basis while more companies in consumer-oriented sectors have purpose statements than the average the quality of the purpose statements appears to be reasonably spread across sectors. The exception is the energy industry, however there are only two companies in this sector with purpose statements meaning the sample is less likely to be representative. The financials sector is the only one with more than one comprehensive purpose statement.

The most referenced stakeholder across all sectors, except for utilities, in the purpose statements is customers. They are followed by shareholders, but at a significantly reduced number. It is surprising, given the focus in the literature on the employee benefits of purpose and the related positive effect on company performance and value that this stakeholder is only referenced five times in the sample. This is at odds with the results of research by BlackSun (2019) showing that of the stakeholder groups for whom executives feel the value creation story is most useful employees came out top with 77%, closely followed by customers at 74% and investors last at 68%.

There are only four statements in the sample whose purpose statement references only benefits for investors. Overall, investors were only mentioned 16 times. This implies that the companies contained in the sample are taking a significantly broader view than pure SVM.

Figure 7: Number of times stakeholders are referenced in purpose statements (n = 97)

Only 53% (78) of the statements made any evident connection with the company’s business activities or strategy. Of these, the majority provided clarity on what the business does with only 30% (24) of them additionally offering some sense of strategic choice, accounting for only 16% of the total. This paints a poor picture of the likelihood that these statements can be usefully applied in making business decisions, an issue that appears to apply across sectors.

Figure 8: Statement reference to business activity and strategic choices (n=148)

3.2.2 - Correlations

Looking at the correlations between purpose statement gradings, company attributes and performance, very little information proved statistically significant and where it did the correlations were very low. Given that the literature details so many benefits of corporate purpose, it is surprising to see so little correlation between purpose statements and valuation, returns, cost of funding or ESG performance. In some instances, for example the relationship between cost of capital and purpose, the data even appears to contradict inferences from conclusions from other studies referenced the literature (e.g. Cheng et al 2014).

3.3 - Limitations

The small sample size has an impact on the representativeness of the data and statistical significance, meaning there is low likelihood that many inferences could be drawn from the dataset. This is hard to address given the relatively small number of listed companies in the UK with purpose statements now, although this is likely to improve with the UK Corporate Governance Code developments. Future research could look elsewhere, particularly to France following the introduction of La Loi PACTE.

Additionally, only a small set of data points was chosen, albeit linked back to insights from the literature. Different data points and timeframes might produce better correlations for future research. It is also important to note that the purpose gradings only had five levels, meaning that the potential for linear observations is reduced.

The purpose gradings contain subjectivity in the assessment, even with a clear methodology, meaning other researchers might grade them differently, leading to different conclusions. Another limitation is that the purpose statements themselves might not accurately reflect a company’s purpose. This concern accords with Guiso et al (2015) who conclude that advertised statements of corporate values alone show very little correlation with corporate performance possibly because these types of statement are just “cheap talk” as opposed to useful, strategic information.

3.4 - Purpose statement analysis summary

Just over half of large UK listed companies have a purpose statement, particularly consumer-facing businesses. Very few appear to answer fundamental questions about the company: what it does, how it makes strategic choices and how it serves its stakeholders. Despite the benefits of employee relations from the literature, they are notably absent in the statements. Few reference shareholders at all, which appears distinct from literature insights that SVM remains ingrained in today’s business practices. If the quality of the statements is a good indication of the implementation and impact of the companies’ purposes this analysis suggests that the concept has a significant way to develop in the UK; many currently appear to be marketing exercises.

Perhaps as an indication of this lack of impact, but also probably down to the sample size and data points used, there were no statistically significant inferences to be made about the links between a company’s attributes or its performance and the quality of its purpose statement.

4 - Interviews

As the statement analysis did not provide statistically significant results and offered little by way of insights into the implementation aspects, in order to understand the application and benefits of corporate purpose in more detail I interviewed 15 corporate and investor highly expert practitioners. This allowed for a more specific and deeper exploration of the concept in practice.

4.1 - Methodology

4.1.1 - Data collection

I considered several options for attaining insights. Interviews provide greater depth of information than surveys and a flexibility to the process that permits more wisdom to be gathered (Denscombe 2017). This allows perspectives to be better developed and the receipt of richer answers (Bryman 2001). It would have been hard to observe these individuals directly at work, so interviews were a helpful way to get depth in responses without needing to be on site (Creswell & Creswell 2018).

However, information from interviews can be filtered (Creswell & Creswell 2018) and it is hard to validate. Consistency can also be hard to achieve (Denscombe 2017). These issues were much mitigated by the extensive experience of the individuals in talking to third parties about their roles, and the acknowledgement that this research addresses a concept rather than seeks to unearth sensitive information.

In order to determine the type of interview I considered how prescriptive the questions should be. I opted for semi-structured interviews using open-ended questions, thereby allowing more elaboration of points of interest than structured interviews (Denscombe 2017, Newcomer et al 2010, Sanders et al 2016). This flexibility also allows for the evolution of questions that can be presented to later interviewees to allow the theory to develop from the data (Bryman 2001). This appeared the most appropriate approach to addressing a topic where even the definitions aren’t clear, and little prior research has been conducted.

To steer the interviews, I developed an interview guide (appendix C). To create the guide, I followed the framework provided by Kallio et al (2016), found in appendix D.

In order to identify the corporate practitioners I selected a range of companies with capital markets exposure that I knew, either through the purpose statement analysis process or prior interactions with them, had an interest in corporate purpose and had been either actively considering its applicability to business or were already applying the concept. The interviewees needed to be those having been responsible for either setting and implementing or overseeing strategy. The investors chosen were responsible for capital allocation rather than specialist ESG analysts in order to get as close to the investment process as possible. These investors too were chosen because, from prior experience, they were likely to be thoughtful about corporate purpose in the selection of their investments. All interviewees represented their own views and not those of their current or previous employers.

A full list of participants is in appendix B. Before conducting the interviews I obtained ethics approval from City University. Each interviewee received an information sheet and signed a consent form agreeing to their participation, to be named and have their deidentified and redacted transcript published (which do not appear in this version of the paper).

4.1.2 - Data analysis

I used an inductive (Patton, 1980) approach to allow for themes and topics to emerge from the data rather than specifically looking for them in advance. For a relatively un-researched topic this is preferable to deductive analysis, in which key themes can be obscured due to analysis procedures imposed by the researchers based on pre-conceptions of the intended output (Thomas, 2006).

In order to add robustness to the inductive approach I followed the process as outlined by Gioia et al (2012). This addresses challenges about the credibility and transparency of the interpretations of data in qualitative research, and allows researchers to demonstrate a high standard of rigour to the analysis. It uses a multi-stage model, whereby a first order analysis reveals a wide range of concepts and categories based predominantly on terms directly from the interviews which can then be distilled to a smaller number for second-order analysis of the key themes that can help explain the observed phenomena.

I read through each of the transcripts twice and extracted a list of first order concepts under vague groupings to help provide some initial categories and thematic analysis. This resulted in a list of 264 concepts. As many of these appeared to be closely related, I combined many of them which reduced their number to 30. For example, many interviewees talked about the value that a company provides to its customers as a function of its purpose and what makes it distinctive to them. These could all be grouped together into the same concept.

From this several key themes emerged connected to the first order concepts that provided the basis for the second order thematic assessment. Extending the earlier example, some interviewees discussed broad value creation for customers and others more thematic opportunities for companies in providing goods and services related to sustainability themes. Many also discussed the wider context in which companies operate, giving them an opportunity in demonstrating legitimacy by adding broader value. These could all be categorised in general as revenue opportunities. While the first order concepts were grounded in exactly what was said during the interviews the second order themes add dimensions of my interpretations of that data and the groupings to explain the phenomena.

Further grouping these themes provided aggregate dimensions which formed the basis for the development of a model to describe the relationships and dynamics in the data. In some instances this required returning to additional literature as further topics emerged from the themes. For example, the business model was often inferred in the interviews. Where this was the case I discuss the additional literature in the findings below, to provide context for the resultant model that incorporates these dimensions.

4.2 - Findings

The interviewees predominantly had a positive view on the applicability of corporate purpose, with no respondents having a negative view but several expressing a range of reservations about its relevance and impact. However the greatest number had a very positive view on the importance of the concept and its applicability to both how a company is run and its investibility. A range of views were expressed as to the approach to wider stakeholder relations, but all were linked to business benefits from more of a risk-based ESG approach to a highly stakeholder-first, CSV approach.

Figure 9: Interviewees’ views on wider stakeholders and the applicability of purpose to business

The corporate and investor interviewees broadly shared the same views on the importance of various stakeholders that corporate purpose should benefit. Everyone agreed that shareholders are key, but nobody saw them as the sole important stakeholder. Employees were the next most referenced for benefits, and then customers. This is in stark contrast with the statement grading where customers dominated, employees were notable by their broad absence and investors were de-emphasised. The benefits for wider society were also more highlighted in the interviews. This suggests that a purpose statement alone (or at least in its current form) is unlikely to offer the insights required to understand the realities of a company’s approach or, unsurprisingly given their length, to satisfy the requirements of interested stakeholders.

Figure 10: Number of times stakeholders were referenced by interviewees (n=56)

Figure 11: Stakeholder benefits referenced by company and investor participants, compared with the FTSE statement analysis

4.2.1 - Data structure

The data structure resulting from the interviews can be found in Figure 12. The following pages provide more details on the findings from the interviews.

Figure 12: Interview data structure

4.2.2 - Revenue opportunities

A major theme was the customer opportunity. Particularly for investors the fundamental questions of why a company exists, how that translates into what it offers its customers and how much they value the product was key to determining the validity of a company’s purpose in the investment case. Insights into the quality of a company’s product or service were seen as intimately connected with its competitive advantage and continued generation of supernormal profits over a longer period. Specific themes around societal needs create powerful revenue opportunities themselves for companies that are specialised in being able to serve them, and even for less specialised firms the identification of social and sustainable thematics linked to the product can help build and give confidence in revenue projections for investors. This echoes insights from the literature around the product being the main lens for evaluating a company’s purpose for customers (Globescan 2016), and the resultant superior revenue growth outcomes for purposeful businesses (HBR Analytic Services 2015).

Corporate and investor participants also recognised the broader need for business legitimacy, and the opportunity for purpose to contribute to this. Interviewees recognised that wider value creation ambitions can reinforce the customer proposition, and that consumers increasingly look for brands that are associated with societal initiatives. This is particularly powerful when related to a company’s core capabilities. This was not only seen as a risk management tool to avoid externalities but also a lens for identifying opportunities in engaging customers and other key stakeholders. It can also help protect competitive advantage by building additional uniqueness to the company. One investor observed that purposeful behaviour must go above and beyond what companies are simply required to do by law in order to be credible – purposeful companies must add more value than what is a base expectation of them.

While the answer to some companies’ “why do we exist?” will have more societal impact embedded in the customer proposition, the fact that a company acquires and keeps customers implies that it must add some value for them and therefore has a purpose. In the context of the customer opportunity all revenue-seeking, competitive businesses therefore can have purpose. Societal impact can be a significant dimension of this value, however societal value without producing something customers will pay for is not a valid model for the equity markets.

The only industry that was regularly called out as being challenged was tobacco, where interviewees struggled to identify how it could credibly position itself as creating superior value for either customers or wider society.

Table 6: Example perspectives on revenue opportunities

4.2.3 - Optimising the value chain

Both sides also recognised the opportunities of purpose within the business to engage key stakeholders involved in the value creation process. This aspect is referred to as the “value chain”, which Porter (1985) describes as a representation of the “collection of activities that are performed (by a company) to design, produce, market, deliver and support its product” (p.36).

Many comments related to the opportunities with the workforce, in particular motivation and alignment of culture with desired outcomes. An increasing imperative was felt given the growing importance of the values and behaviours of their employers for new generations of talent, and opportunities were referenced in aligning the culture of the organisation. This is more in accordance with the literature (e.g. Gartenburg et al 2018, Huselid 1995 etc.) than the purpose statements, showing the significant performance benefits for companies in improved employee relations and providing clarity to them around purpose.

While investors highlighted mainly employee benefits, corporates also emphasised wider advantages across what one described as the “network of partnerships” required to create a product customers want and deliver it effectively. One interviewee highlighted the opportunities they experienced in engaging suppliers, integrating them more effectively, securing more sustainable supply and ultimately reducing costs. Many pointed to cost advantages of purpose, using opportunities for business efficiencies to identify and engage priority stakeholders in the value chain. If these efficiencies result from better practices rather than poor treatment of the value chain (for example, by working with suppliers to improve their own businesses as opposed to squeezing them on payment terms), these benefits can result in improved long-term margins or competitive advantage through being able to provide services more cheaply than competitors.

From this perspective, purpose can also be a way of coalescing the important aspects of a company’s operations around longer-term ambitions and driving efficiencies. The concept of a “north star” to align the organisation and its culture was mentioned by several participants as an opportunity, including in many aspects of decision-making, from daily work to strategic planning. This is particularly important in the context of decisions that cannot simply be made based on financial criteria alone, which as interviewees highlighted can include some of the most fundamental decisions around strategy.

Table 7: Example perspectives on optimising the value chain

4.2.4 - Barriers

Lack of clarity of purpose was a major theme in restricting a company’s ability to convince investors of its applicability and also create internal buy-in. This was also observed in the literature; many participants also expressed concerns that the concept of purpose is ill-defined, meaning that there is risk of it being misunderstood. Some investors highlighted that lack of clarity around a company’s purpose reflects poorly on its management, given that it ultimately addresses what a company exists to do.

Lack of board buy-in, which can be uncovered by asking about purpose and observing strategy and capital allocation, was seen as a major block. However, it is not just the board that needs alignment. As also observed in some of the literature (e.g. Smith 2003) middle management was highlighted as a potential barrier in that while messages from the top might be clear those responsible for implementing initiatives and managing teams might be less responsive.

Another barrier is the extent of regulatory support required. First, society can have unrealistic expectations of companies as to the problems that they can solve without public policy support and intervention. Second, a “level playing-field” is required to allow companies to operate in a purposeful way that doesn’t undermine their competitive positioning against others choosing to take a less purposeful, but more short-term profitable, approach. Similar themes have been identified in the literature. Iannou et al (2012) found that of all the national business systems indicators the quality of the political system, including measures of competition and regulation as well as an absence of corruption, has the most impact on a company’s corporate social performance.

Some highlighted the investment community itself as a barrier to implementing purpose effectively. Some mentioned income demands, where companies could find themselves hamstrung by a dividend that might either restrict their ability to invest or worse over-distribute to the detriment of the business. Additionally, some corporate interviewees were concerned that investors don’t sufficiently understand the practicalities of certain aspects of how a business is run, which can hamper discussions on the implementation of purpose and its relevance in various scenarios. An example of some of these differences could be seen in differing views on how to measure investments related to purpose, with investors broadly expecting return on investment to be a key criteria whereas corporates were more willing to balance this with what they deemed the right thing to do.

Table 8: Example perspectives on barriers

4.2.5 - Enablers

Given the revenue and cost benefits of corporate purpose many interviewees saw the link to strategy as a key enabler, as also identified in the literature. This link also helps prioritise stakeholders, as the benefits from either a revenue or a cost perspective should be translatable to long-term business value. In this context purpose also offers guidance both internally and externally as to how decisions are made and should reduce surprises, which in turn assists with some aspects of the investor understanding gap referred to earlier.

Effective internal clarity is helped when purpose originates internally and continues to be owned by employees. This was seen as an effective way to ensure that the key messages were being embedded and implemented throughout the organisation. It also means that purpose is more likely to be genuine and fully embraced by the workforce. This is particularly important for incumbent companies that are starting to develop their approach to purpose - there was cynicism among investors about large companies’ ability to suddenly “discover” purpose.

The enduring nature of purpose was also a theme; for it to be credible it needs to be able to outlast a strategic planning cycle or even a CEO. Two of the interviewees had experience of taking steps to incorporate their purpose into either their constitutional documents or agreements with their regulators. Others mentioned formalised mechanisms to consider purpose in capital allocation decisions. These types of structures help embed purpose in a way that is much less likely to be perceived as a PR exercise and has the power and authority to guide major decisions.

The importance of committing to reporting was another topic. Public reporting commitments give weight to the concept as it requires the involvement of the finance team and others in the organisation that are responsible for performance management, and is more likely to result in board oversight and involvement.

Table 9: Example perspectives on enablers


“The bigger concept here is legitimacy. More than anything else, in thinking about purpose and making it wider than just making money for shareholders it is about your legitimacy in society. What does society want from businesses? What does it want and what can we offer and what should we offer? We are not just narrowly focussed on making money.”

Interview 10

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UK Corporate Governance Code (2018)

Board leadership and company purpose


A. A successful company is led by an effective and entrepreneurial board, whose role is to promote the long-term sustainable success of the company, generating value for shareholders and contributing to wider society.

B. The board should establish the company’s purpose, values and strategy, and satisfy itself that these and its culture are aligned. All directors must act with integrity, lead by example and promote the desired culture.

C. The board should ensure that the necessary resources are in place for the company to meet its objectives and measure performance against them. The board should also establish a framework of prudent and effective controls, which enable risk to be assessed and managed.

D. In order for the company to meet its responsibilities to shareholders and stakeholders, the

board should ensure effective engagement with, and encourage participation from, these


E. The board should ensure that workforce policies and practices are consistent with the

company’s values and support its long-term sustainable success. The workforce should be

able to raise any matters of concern.

Source: FRC (2018)

“The purpose of the Company is to conduct its business and operations for the benefit of members as a whole while delivering long term value for its customers, the region and the communities it serves and seeking positive outcomes for the environment and society.”

Source: Anglian Water (2019)

S. 172 Companies Act (2006)

Duty to promote the success of the company

(1) A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to

    (a) the likely consequences of any decision in the long term,

    (b) the interests of the company's employees,

    (c) the need to foster the company's business relationships with suppliers, customers and others,

    (d) the impact of the company's operations on the community and the environment,

    (e) the desirability of the company maintaining a reputation for high standards of business conduct, and

    (f) the need to act fairly as between members of the company.

(2) Where or to the extent that the purposes of the company consist of or include purposes other than the benefit of its members, subsection (1) has effect as if the reference to promoting the success of the company for the benefit of its members were to achieving those purposes.

(3) The duty imposed by this section has effect subject to any enactment or rule of law requiring directors, in certain circumstances, to consider or act in the interests of creditors of the company.

Source: Companies Act (2006)

S. 309 Companies Act (1985)

Director to have regard to the interests of employees

(1) The matters to which the directors of a company are to have regard in the performance of their functions include the interests of the company’s employees in general, as well as the interests of its members.

(2) Accordingly, the duty imposed by this section on the directors is owed by them to the company (and the company alone) and is enforceable in the same way as any other fiduciary duty owed to a company by its directors.

Source: Companies Act (1985)

Table 1.png

“You could look at it another way, which is if you eradicated that company what would society be losing? And the way we feel that an economy develops is … to improve the quality for its members, because otherwise why would we participate in this collective effort if we were better off not participating?”

Interview 7

“The proof of the pudding will be that it is a … company that can demonstrate revenue growth by delivering new products and taking market share because it is clearly doing something right for the customers via its employees, generating good returns and able to re-invest and reward shareholders.”

Interview 4

“Part of it (is) also what makes you unique and special… can you get down to the things that really define what you’re about and enable you to express the way in which your business has something special and unique to offer?”

Interview 15

“If you focus on why you are here, you will do well... to optimise shareholder return you have to put your other stakeholders first.”

Interview 12

"We genuinely believe that doing the right things in a purposeful manner it will create as good as, if not better, returns over the long-term for investors."

Interview 9



Presented by:

Freddie Woolfe


Presented to:

Professor Jean-Pascal Gond

Professor for Corporate Social Responsibility

Faculty of Management

Cass Business School

City, University of London


This is a redacted version of the dissertation I submitted for my MBA at Cass Business School in April 2020. The main amendments are the removal of the transcripts of the interviews that were conducted in the interests of participant confidentiality. Some other, very minor changes have been made to the main text, but with no amendments to the data, analysis or the conclusions. I would be very pleased to discuss any aspects of this research; I can be reached at the email address above. 



I am immensely indebted to many people for their help, advice and support throughout this research project.

My employer has been extraordinarily supportive throughout my MBA, without which I would have struggled to balance the time commitments of a job and a demanding academic endeavour. I very much hope that the company will benefit from my learning as much as I have done personally.

I am most grateful to my supervisor, Professor Jean-Pascal Gond, for his interest in the topic of this research and his guidance throughout the process.

Fifteen people very kindly gave up significant amounts of their time to be interviewed, without which this research would not have been possible. I cannot thank them enough. They are Ben Peters, Carla Antunes da Silva, Contributor A (you know who you are!), Liv Garfield, Mark Mills, Martin Todd, Omar Cordes, Paul Polman, Peter Michaelis, Richard Buxton, Rob Stewart, Sarah Bates, Stephen Billingham, Stuart Dunbar and Victoria Whyte.

I am also extremely grateful to many others for having offered me expert insights and sound advice, as well as helping me expand my network of experts to speak to on the topic. They include Alessandro Giudici, Bess Joffe, Charles Wookey, Clare Chapman, Colin Melvin, Gianandrea Giochetta, Jillian de Menezes, Paul Lee and Richard Howitt. There are many others whose views and insights have been invaluable; I am indebted to them all.


Lastly, but by no means least, Greame Bruce and Nathan Griffiths – Cass Business School alumni – have been amazing sources of advice, moral support and humour as well as shoulders to lean on throughout the MBA. As have many of my cohort, in particular the other members of Team Weihenmayer – Katheryn Needham, Lisa Delaney, Martin Gallegillo, Michael Keane and Rossella Nicolin. The “Revision” group too has been a constant source of much needed comedy and distraction. These are friendships that I hope will endure well beyond the MBA, founded on a shared experience that will undoubtedly shape all our futures.

Table of contents

Table of contents
List of tables
List of figures
Executive summary
1 - Introduction
2 - Literature Review
  2.1 - The historical context of corporate purpose

    2.1.1 - The prior 4,000 years of corporate purpose
    2.1.2 - The evolution to SVM
    2.1.3 - Approaches to considering other stakeholder’s interests
    2.1.4 - Current definitions of corporate purpose
  2.2 - The legal aspects of corporate purpose

    2.2.1 - The UK Companies Act
    2.2.2 - The UK Corporate Governance Code
    2.2.3 - The future
  2.3 - The economic and performance aspects of corporate purpose

    2.3.1 - Economic implications
    2.3.2 - Market short-termism
    2.3.3 - Stakeholder relations and company performance
    2.3.4 - ESG and company performance
    2.3.5 - Corporate purpose and company performance
    2.3.6 - Implementation of corporate purpose
    2.3.7 - Measuring company performance on corporate purpose
  2.4 - Literature review summary
3 - Purpose statement analysis
  3.1 - Methodology
    3.1.1 - Purpose statement data collection
    3.1.2 - Purpose statement analysis
    3.1.3 - Attribute and performance data collection
    3.1.4 - Attribute and performance data analysis
  3.2 - Findings
    3.2.1 - Statement gradings
    3.2.2 - Correlations
  3.3 - Limitations
  3.4 - Purpose statement analysis summary
4 - Interviews
  4.1 - Methodology
    4.1.1 - Data collection
    4.1.2 - Data analysis
  4.2 - Findings
    4.2.1 - Data structure
    4.2.2 - Revenue opportunities
    4.2.3 - Optimising the value chain
    4.2.4 - Barriers
    4.2.5 - Enablers
    4.2.6 - Performance expectations
    4.2.7 - Timeframes
    4.2.8 - Transparency
    4.2.9 - Accountability
    4.2.10 - Aggregate dimensions - Strategy and business model - Embedding purpose - Business value - Trust/licence to operate
    4.2.11 - The model
  4.3 - Limitations
5 - Conclusion and recommendations
6 - Recommendations for future research    76
Bibliography    77
Appendix A - Purpose statement analysis full methodology and findings    93
  A.1 - Methodology    93
    A.1.1 - Purpose statement data collection    93
    A.1.2 - Purpose statement analysis    93
    A.1.3 - Attribute data collection    95
    A.1.4 - Attribute data analysis    96
    A.1.5 - Performance data collection    97
    A.1.6 - Performance data analysis    99
  A.2 - Findings    99
    A.2.1 - Statement gradings    99
    A.2.2 - Correlations    106
  A.3 - Limitations    109
Appendix B - Interview participants    112
Appendix C - Interview questions    113
Appendix D - Interview questions methodology    114

List of tables

1 - A selection of definitions of corporate purpose

2 - Select performance research into following the Five Principles of a Purpose Driven Business

3 - References in purpose statements for grading

4 - Company attributes

5 - Performance metrics

6 - Example perspectives on revenue opportunities

7 - Example perspectives on optimising the value chain

8 - Example perspectives on barriers

9 - Example perspectives on enablers

10 - Example perspectives on business performance

11 - Example perspectives on the social value of profit

12 - Example perspectives on timeframes

13 - Example perspectives on transparency

14 - Example perspectives on accountability

15 - Example perspectives on market consequences of purpose

16 - Linking The Five Principles for a Purpose Driven Business to purpose statement assessment

17 - Purpose statement presence by sector

18 - Correlation data for company attributes

19 - Purpose gradings by nature of CEO appointment

20 - Correlation data for company performance

List of figures

1 - NYSE and FTSE average holding periods

2 - Likelihood of companies taking various actions if quarterly earnings might be missed

3 - Number of public companies in the UK, 1980-2014

4 - Reasons why a company is perceived to have a strong purpose by consumers

5 - Purpose measurement and long-term TSR

6 - Purpose statement quality assessment by number

7 - Number of times stakeholders are referenced in purpose statements

8 - Statement reference to business activity and strategic choices

9 - Interviewees’ views on wider stakeholders and the applicability of purpose to business

10 - Number of times stakeholders were referenced by interviewees

11 - Stakeholder benefits referenced by company and investor participants, compared with the FTSE statement analysis

12 - Interview data structure

13 - A model of corporate purpose for the equity markets

14 - Purpose statement quality by sector

15 - Stakeholder benefits referenced by sector

16 - Edelman Trust Barometer 2019 score by sector

17 - Statement reference to business activity and strategic choices by sector


CLR: Company Law Review

CSR: Corporate social responsibility

CSV: Creating shared value

ESG: Environmental, social and governance

ESV: Enlightened shareholder value

FCF: Free cash flow

FRC: Financial Reporting Council

P/E: Price/earnings

PRI: Principles for Responsible Investment

ROIC: Return on invested capital

SVM: Shareholder value maximisation

WACC: Weighted average cost of capital

Executive summary

What is the purpose of a corporation? A remarkably simple, yet contentious question.

Shareholder value maximisation is the oft-repeated refrain in business education and practice.  However, only relatively recently has the idea been introduced as the objective of business. It is also increasingly being challenged by academics, companies, investors, regulators and society, with growing calls for reintroduction of a corporate purpose that has at its heart value creation for a wider set of stakeholders.

At least in a UK context there appear to be few, if any, legal impediments to directors and companies pursuing a wider purpose; directors are permitted to do so by the Companies Act (2006) and, for listed companies, further encouraged by the 2018 UK Corporate Governance Code. While the benefits of corporate purpose have been relatively little covered in prior literature, studies into a range of related concepts show many advantages of improved stakeholder relations and managing externalities for corporate performance and stock market value. The studies that look at the link between corporate purpose and performance show similar results, however the lack of agreement even on the definition of corporate purpose and the dependent variable for performance testing make this research difficult. This in turn makes promoting the widespread adoption of the concept challenging, particularly for listed businesses whose equity value is so prominent.

With a view to progressing the discussion on how corporate purpose can benefit companies and investors, this paper develops a model for how corporate purpose can work in the equity markets and makes recommendations for companies and investors interested in progressing the concept. It does so by looking at the public disclosures of corporate purpose at listed companies in the UK today and adding to this further with interviews of corporate and investor expert practitioners for more specific insights.

In looking at current market practice, if judged only by the purpose statements that some listed companies have started publishing the concept has some way to develop. Just under half don’t even offer sufficient insights to tell what the company does or give an indication about how its purpose can direct decision-making. Only three percent of the statements are clear on what a company exists to do and the value it seeks to add. Investor interests are notably absent. If the statements are a reflection of the state of development of corporate purpose in the UK they generally leave much to be desired and suggest that the concept is being treated more as a marketing initiative than a rethink of business’ relationship with society.

The practitioner interviews however paint a very different picture, one that addresses the value creation choices companies make and the opportunities they pursue by sitting at the heart of a company’s strategy and its business model. Purpose is embedded in the answers to the fundamental questions of why a company exists, who its serves and how it does so, and is therefore unique to each company and its competitive advantage. Some companies will have a more societally-impactful purpose than others, employing a variety of business models to achieve it, however a company’s long-term success depends on the delivery of its purpose as it is intimately linked to how it is able to generate revenues and earn profits. While clearly led by value creation for a wider set of stakeholders than just investors, purpose is not altruistic – it is simply good business and a useful lens for long-term investment.

For companies and investors looking to take advantage of these opportunities, I make several key observations and recommendations.

First, corporate purpose is entirely relevant to and compatible with identifying and supporting good businesses in the mainstream equity markets. Answering the why, who, and how of purpose is essential to understanding a company’s prospects, and management teams can identify long-term, supportive investors by seeking those interested in discussing those questions.

Second, purpose statements as they exist today are insufficient for the task at hand. To answer the three questions requires a common thread through discussions on many aspects of the business. Why, who, and how is a useful template for structuring disclosures.

Third, purpose is about opportunities. In identifying these opportunities stakeholders can be prioritised. For every company this will include its customers and its employees, and other priority stakeholders can be determined by those that enable and benefit from the business model. Investors and boards should actively seek to understand these stakeholders’ experiences and the value they receive.  

Fourth, purpose should result in better performance. Discussions of purpose between companies and investors should be founded on how it strengthens the business. Economic value creation must be a consequence of purpose to be viable in the equity markets.

Fifth, embedding purpose effectively requires a company-specific approach as it is unique to each company. For companies the opportunity is in ingraining purpose in most aspects of the business and decision-making, and making long-term commitments that can outlast a strategy cycle or even a CEO. Investors must be pragmatic and accept that this could involve structures that would not be seen as traditionally “shareholder friendly”.

Sixth, the measurement of a company’s purpose is likely to be unique as well. Companies, investors and other key stakeholders should work together to determine the most relevant measures of success against why, who and how.  Sitting alongside the usual financial and strategic performance metrics and disclosures this should help give a more complete picture of how a company is performing against its purpose.

Lastly, for purpose to be credible, the message must be consistent across all stakeholders. If this can be achieved, there should be no barriers to being able to create value for society with the support of the equity markets.

1 - Introduction

Since Milton Friedman’s pronouncements in the 1970s that the responsibility of a firm is to increase its profits it has been widely assumed that the purpose of a company and the duty of its directors is to maximise shareholder value. This mantra has been promulgated by a mis-interpretation (Financial Times 2009) of a speech made in 1981 by the then CEO of General Electric Jack Welch (“manager of the century” as recognised by Fortune [1999]) and subsequent business school education (Stout 2012, Smith & Ronnegard 2016, Mayer 2019). In 1997 the influential Business Roundtable in the US proclaimed “the paramount duty of management and of boards of directors is to the corporation’s stockholders” (Business Roundtable 1997).

However, this view is coming under increasing societal challenge. Simon Sinek (2019) describes today’s business environment as “capitalism abuse”. In its latest Trust Barometer, Edelman (2020) found 56% of people globally “believe that capitalism as it exists today does more harm than good in the world”. Sinek calls for more “infinite” thinking to increase the value of business to countries and economies and determines “the responsibility of a business is to use its will and resources to advance a greater cause than itself, protect the people and places in which it operates and generate more resources so that it can continue doing all those things for as long as possible” (p.88). He is not alone in his criticism of the economic, social and corporate implications of a singular focus on shareholder value maximisation (SVM). 

Regulation is also starting to pull in a different direction. In the UK in 2006 the Companies Act introduced a range of other stakeholders whose interests should be considered in a director’s duty. The Financial Reporting Council (FRC) in 2018 updated the UK Corporate Governance Code which now requires listed companies’ boards to “establish the company’s purpose, values and strategy, and satisfy (themselves) that these and the company’s culture are aligned” (FRC 2018:4). Investors have similar expectations placed on them by the 2020 UK Stewardship Code (FRC 2019). In 2019 France introduced the Loi PACTE which specifically allows companies to add their “raison d’être” - described as “the long-term plan incorporating the social purpose of the enterprise” - into their constitutional documents (Ministère des Finances, 2019).

And companies are getting on board. Welch subsequently pronounced that “on the face of it, shareholder value is the dumbest idea in the world” in an interview with the Financial Times (2009). Recently a group of 181 influential CEOs of US companies, including of major listed businesses such as Exxon Mobil, General Motors and Goldman Sachs, signed an updated document from the Business Roundtable (2019) entitled ‘Statement on the Purpose of a Corporation’, committing to “lead their companies for the benefit of all stakeholders – customers, employees, suppliers, communities and shareholders”. Investors, too, are waking up to the idea; in 2018 the world’s largest asset manager, Blackrock’s, CEO wrote to other CEOs encouraging them to instil a sense of social purpose in their businesses, without which “no company, either public or private, can achieve its full potential” (Fink 2018). The most recent Edelman Investor Trust Barometer (2019:a), with respondents collectively managing US$9 trillion, found 84% of respondents agreed that SVM cannot continue to be the main objective of the corporation and that executives must strike a wider balance. COVID-19 is a major test for many companies in how they balance actions to satisfy short-term market pressures with the interests of those stakeholders required for them thrive in the future; “the way large companies respond to this crisis is a defining moment that will be remembered for decades.” (Kramer 2020).

So if not SVM, what should the purpose of the listed corporation be which is, after all, accountable to its shareholders who provide it capital and whose wealth is exposed to its performance? This paper develops a model of how a wider purpose (herein corporate purpose) can function in the mainstream equity markets and makes recommendations for companies and investors in progressing the concept together.

The research is split into four parts. First, I conduct a literature review to explore the history of corporate purpose, the legal debates of a purpose wider than SVM and related economic, market and company performance aspects. Second, to take a snapshot of the current market interpretation of the concept and examine its potential use for investors I review the purpose statements issued by the constituents of the FTSE 350 ex-Investment Trusts. Third, informed by the insights from the literature review and current applications I undertake in-depth interviews with leading investors and executives about the concept and how it has benefitted them in running businesses and identifying investment opportunities. Consequently, I develop a model for corporate purpose in the equity markets and lastly make recommendations on key actions for companies and investors to take it forward.

2 - Literature review

This section provides an overview of the literature related to corporate purpose and its development, with a specific focus on the historical, legal, economic and financial aspects.

2.1 - The historical context of corporate purpose

In order to discuss corporate purpose today it is first important to understand the evolution of the concept. Already the subject of sections of entire books, this part covers only the key milestones.

2.1.1 - The prior 4,000 years of corporate purpose

Over its 4,000 years in existence the business enterprise has had a strong sense of social purpose (The British Academy 2019a) based on the idea that legal personhood was bestowed upon the corporation in exchange for societal contribution. Its foundations lie in the provision of public services and administration, academia and religion. This evolved over time into business activities, taking on the capital raising attributes of partnerships to fund trading companies, with the first joint stock company in England being established in 1553. This evolution resulted in organisations that were effectively public bodies with social purposes adopting funding structures originally intended for small exploration and trade projects that did not need to be concerned with their position in society – a conflict that persists today (Mayer 2018).

The direct connection between social purpose and the corporation was formally broken in the 19th century by general incorporation laws which limited companies’ liabilities and allowed them to incorporate without permission from Parliament (Davoudi et al 2018). Many companies at the time retained social purposes voluntarily; however at the beginning of the 20th century, as public funding markets grew, “we find the corporation progressively losing its public sense of purpose as its investment tail increasingly wags the administrative dog” (Mayer 2018:82). 

2.1.2 - The evolution to SVM

At the beginning of the 20th century academic interest in the differences between large, complicated corporations and small, owner-managed businesses that dominated increased (Palladino 2019). In 1932 Berle and Means published ‘The Modern Corporation and Private Property’ where they detailed the problem of the separation of ownership and control and argued managers should be required to create value for shareholders while “balancing a variety of claims by various groups in the community and assigning to each a portion of the income stream on the basis of public policy rather than private cupidity” (p.312). There followed debate between Berle and Dodd in which Dodd (1932) argued managers are trustees of a company not its shareholders, and must operate in the interests of multiple stakeholders, including customers and the public.  The modern legal aspects are considered later in this paper.

As the significance of manager-run-but-not-owned corporations grew in the 1950s and ‘60s, decisions taken by managers were counterbalanced by labour unions, and while shareholders took dividends they had little influence over how or why the corporation was run (Palladino 2019). During the 1960s however the shareholder focus argument from the ‘30s was taken forward with a twist, this time as economic efficiency. In the interests of finding a measure of efficiency, Henry Manne concluded shareholder primacy must result in profit maximisation, which in turn is incompatible with other stakeholders’ interests (Sneirson 2019).

The “Chicago School”, connected to Milton Friedman, believed that solving social problems must be government’s responsibility, otherwise managers allocate assets to causes outside of their expertise, with this inefficient use of wealth ultimately being to society’s detriment (Pfarrer 2010). In 1970 Friedman published ‘The social responsibility of the business is to increase its profits’, explaining that an executive’s responsibility to the company’s shareholders, who he equates with its owners, “is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to their basic rules of the society, both those embodied in law and those embodied in ethical custom” (Friedman 1970:122). While the social rules and customs aspects are often missed from this quote, this marked the beginning of a mainstream discussion of SVM as the purpose of the corporation.

As business schools adopted a more theoretical approach to research (Fourcade & Khurana 2011) agency theory ensued in the mid-‘70s from the idea that humans are self-interested, and so when a manager (the agent) is entrusted with running some else’s (the principal) assets they must be incentivised to pursue their interests. In the case of the public corporation this equated to maximising shareholder value, with any other result leading to a reduction in social wealth through the imposition of “agency costs” (Jensen & Meckling 1976). Agency theory has led to the board and management incentive structures widely seen today at listed businesses (Pfarrer 2010).

Extending this debate, Hart and Zingales (2017) argue that if shareholders themselves are socially-minded then shareholder value is not equivalent to market value, and that managers should operate according to the social preferences of their investors. While theoretically neat, practically this is complicated, particularly for a listed business, as shareholders are not a homogenous group and are likely to have different and possibly conflicting priorities themselves (Stout 2012, The British Academy 2019a). Maximising market value has therefore continued to be the easiest shorthand for promoting shareholders’ interests.

In the 1980s the SVM mantra moved into the business world. This was partly due to increased distribution of profits causing a greater reliance on the capital markets (Sneirson 2019), increased M&A activity and the growth in equity incentives for executives stemming from agency theory (Stout 2012, Fourcade & Khurana 2011). Welch’s 1981 speech about how he intended to reinvigorate GE cemented SVM into management thinking, although he subsequently decried the interpretations of his comments as false denouncing SVM as “the dumbest idea in the world” (Financial Times 2009). According to Gordon (2007), “by the end of the 1990s, the triumph of shareholder value was nearly complete” (p.1,530).

2.1.3 - Approaches to considering other stakeholders' interests

While SVM remains the “de facto expression of corporate purpose and guide for decision making for most publicly owned firms” (Salter 2019:2), that business has no other stakeholder responsibilities is anything but accepted by all. Corporate social responsibility (CSR) has been in corporate parlance for a long time. While it has many interpretations, it’s often-recognised origin (Acquier et al 2011) is from Bowen (1953) who described it as “the obligations of business to pursue those policies, to make those decisions or to follow those lines of action which are desirable in terms of the objectives and values of our society” (p.6). The concept has evolved; Moon (2014) describes many of the definitions as incorporating business’s responsibilities to and for society, as well as its behaviour towards it. While CSR’s foundations are economic, i.e. being profitable, other aspects relate to legal, ethical and philanthropic responsibilities (Carroll 2016) with a thread of ethics throughout. Pursuing those other activities towards stakeholders that extend beyond minimum legal requirements is clearly contrary to Friedman’s view (Smith et al 2016); unsurprisingly, he dismissed CSR as a “fundamentally subversive doctrine” (1970:126).

Environmental, Social and Governance (ESG) is another broadly promulgated concept that relates to a company’s interactions with its stakeholders. In investment the UN-backed Principles for Responsible Investment (PRI) - an independent body that promotes responsible investment with 2,372 signatories managing over US$86tr (PRI 2019) - defines ESG integration as “the analysis of all material factors in investment analysis and investment decisions, including environmental, social and governance… factors” (PRI 2018). It therefore takes a less discretionary and more business-relevant approach than CSR by focussing only on issues that are pertinent to the company’s success.

This can be equated with the concept of enlightened shareholder value (ESV), whereby the interests of other stakeholders are considered with the end objective of long-term shareholder value (Millon 2010). This is also seen in the views of Alfred Rappaport who, while often quoted as the father of the shareholder value movement, determined that “a value-creating company benefits not only its shareholders but the value of all other stakeholder claims… enlightened self-interest dictates that shareholders and other stakeholders actively engage in a partnership of value creation” (1998:29). Bebchuk and Tallarita (2020) argue that this in fact is compatible with SVM: “Friedman would not have a problem with any choices made under enlightened shareholder value, as they would also be choices required by shareholder value” (p.12).

ESG as a lens for strategy is not clear, however. Porter et al (2019) found that many constituents of Fortune Magazine’s Change the World list, comprising companies that “have had a positive social impact through activities that are part of their core business strategy”, did not score top ESG ratings in their industries but outperformed a global stock index by on average 3.9% in the following year. The authors find a siloed approach to ESG, which tends to be focussed in the main on risk management (CFA Institute 2019) and managing the costs of business borne by society (externalities), misses the strategic aspects in seeing purpose as core to a company’s competitiveness. While others acknowledge that ESG can present opportunities (PRI 2018), these usually arise as a corollary of a company’s strategy rather than guiding it – only 2.3% of the US$30.7 trillion of global sustainable assets under management self-report as adopting sustainability themed or impact/community approaches (GSIA 2019).

In 2011 Porter and Kramer introduced their concept of creating shared value (CSV), acknowledging that social needs define markets. Importantly, shared value doesn’t see business and society in a struggle of trade-offs but instead is “about expanding the total pool of economic and social value” (p.5) from which many can benefit. Opportunities include reconceiving products and markets and redefining productivity in the value chain. Unique to each company, CSV is therefore integral to competitive advantage and profitability by leveraging “the unique resources and expertise of the company to create economic value by creating social value” (p.16). CSV sees creating societal value as a way of generating economic value.

Edmans (2018) creates the distinction between companies with a “pie-splitting”, i.e. a fixed amount of value with a tussle between society and investors to capture it, and a “pie-growing” mentality whereby companies create value for investors by adding value to wider society. He describes a company’s purpose as the value it creates for society, with the two key dimensions being who a company exists for and why it exists. The Purposeful Company, on whose Steering Group Edmans sits, adds another dimension of how a company operates to achieve long-term, sustainable value and notes that “investors and boards should recognise that making competitive returns for shareholders is essential to a company’s success” (2018:1).

Extending beyond this concept comes what is sometimes incorrectly referred to as stakeholder capitalism. The assumption is that stakeholder priorities are put above those of investors, or even that investor interests are disregarded. In reality this approach tends to be more akin to CSV, with the father of the theory of stakeholder management - R. Edward Freeman - clarifying that “shareholders are stakeholders, and the whole point is that stakeholder interests have to move in the same general direction over time” (2004:231). Theories that disregard investors are more applicable to public services rather than equity markets and so have not been a focus of this research.

From this a spectrum of approaches emerges. It begins with pure SVM. It then moves to CSR, discretionary initiatives that benefit society but with little or no strategic logic, to ESG and ESV where social and environmental issues are considered in the interests of the company but mostly focussed on risk exposure as a consequence of a company’s strategy. This moves to CSV, that addresses a company’s relationship with society as a strategic question and recognises the opportunity in creating value more widely in order to create shareholder returns, and finally a sole strategic focus on stakeholders with investor interests secondary or absent altogether.

2.1.4 - Current definitions of corporate purpose

An increasing number of regulators, CEOs, stakeholder groups and investors are calling for a different kind of corporate aim, one which sees companies as having a social purpose. These tend to be centred around a CSV approach, with varying emphasis on shareholders. Some worry that statements of purpose risk being “empty rhetoric” (Winston 2019) and “a PR move rather than a harbinger of change” due to the lack of detail around how to balance stakeholder and shareholder interests (Bebchuck et al 2020) and the breadth of definitions. However, regulations too are shifting in favour of requiring companies to take other stakeholders’ interests into consideration, which are further explored later in this paper. A selection of current approaches to and definitions of corporate purpose are included in table 1.

Table 1 - A selection of definitions of corporate purpose

2.2 - The legal aspects of corporate purpose

With the evolving definitions of corporate purpose, an important question relates to whether there are legal obligations requiring companies and directors to pursue SVM.

This is pertinent given that in no known law do shareholders own corporations; by treating corporations as legal persons they cannot be owned by anyone else and have their own rights to property and to contract with others (Veldman et al 2016). Kay (1996) highlights the different rights of ownership attributable to a share in a company and an object; shares are contracts that offer limited rights to owners that don’t include proprietary rights to a company’s assets (as Stout [2012] highlights, an Apple shareholder cannot walk in and help themselves from an Apple Store). The UK’s House of Lords confirmed that “shareholders are not, in the eye of the law, part owners of the undertaking” (House of Lords, 2003). Veldman et al (2016) determine that “claims to shareholder primacy - and associated claims to corporate control and to corporate value for shareholders - are unfounded in terms of their theoretical underpinning in law” (p.22)

2.2.1 - The UK Companies Act

The most recent developments to UK Company law regarding directors’ duties stem from the Company Law Review (CLR) launched in 1998 (DTI 1998). This involved consideration of directors’ duties, which at the time had been laid out as fiduciary to the company, exercising due care and skill. The Companies Act (1985) also made specific requirements to consider the interests of the company’s employees.

A key question for CLR was “in whose interests should a company’s affairs be conducted?” (Collinson et al, 2012). In particular, the review noted “A wider issue … is whether directors’ duty to act in the interests of their company should be interpreted as meaning simply that they should act in the interests of the shareholders, or whether they should also take account of other interests, such as those of employees, creditors, customers, the environment, and the wider community.” (DTI 1998)

CLR considered two different approaches to the future scope of UK corporate law: an ESV model and a “pluralist” approach (CLR 1999). The pluralist approach extended accountabilities of companies and directors from shareholders to a wider set of stakeholders, implying that companies have a duty to pursue a wider set of policy aims over and above their own objectives (Millon, 2010). Ultimately CLR concluded that the pluralist view required accountability to groups who had no ownership interest in the company, and shareholder accountability already existed (Tsagas, 2017). The result was a continued focus on shareholders, with the explicit mention of a range of other factors relevant for consideration in promoting the success of the company.

S.172(1) is not without its critics. While it provides further guidance regarding directors’ duties under an ESV approach, the legislation doesn’t define “have regard to” and doesn’t deal with how to prioritise the additional interests (Davies, 2007). This opacity offers significant leeway in interpretation and application. Tsagas (2017) considers that in 1985 form the Companies Act did not preclude taking other stakeholders’ interests into account and, given the subjectivity afforded by Section 172(1), the 2006 version is unlikely to change behaviours from SVM absent some additional enforcement powers for non-shareholder members (Keay 2007, Lynch 2012, Tsagas 2017). The wording in S.172(1) was described as “a fudge” by some CLR participants (Collinson et al 2012).

While sub-section 1 therefore is open to a range of interpretations, it is also important to consider sub-section 2. This allows for companies to put an alternative purpose at the centre of their directors’ duties (The British Academy 2019b) and legal documents. For example, Anglian Water amended its articles of association to include its purpose in order to “formally enshrine public interest within the constitutional make-up of the business”:

This requires agreement of the shareholders than an alternative purpose may be pursued, which Marin (2013) concludes effectively perpetuates SVM as they would likely only agree to alternative purposes that will positively impact their wealth. However, as demonstrated by Anglian Water, this can also formalise the intentions of the company towards the other stakeholders and is significantly more binding on the company, addressing some of the concerns about the lack of prescription in S.172(1) and adopting more of a CSV approach.

Indeed, several alternative profit-seeking corporate forms exist formalising corporate purpose, collectively known as Public Benefit Corporations (Levillain et al 2019). These generally share three common features: in addition to profit seeking they commit to a social or environmental legally enforceable purpose, their directors are obliged to pursue that purpose, exempting them from pursuing profits alone, and they commit to report against it and be held accountable for its delivery. While several of these concepts have originated in the USA (Serafeim et al 2017), Section 172(2) would appear to support them in a UK context, and indeed Community Interest Companies - for-profit companies which operate to benefit society and have certain operating restrictions (BEIS 2016) - have existed since 2016.

Businesses can also be externally certified as ‘B Corps’ by “updating their articles of incorporation, reincorporating as benefit companies, or making other structural changes” (B Corporation 2020:a) to show that they use “profits and growth as a means to a greater end: positive impact for their employees, communities and the environment” (B Corporation 2020:b). There are 3,243 B Corps globally in 71 countries across 150 industries, many of which are subsidiaries of public companies (including AB-Inbev, Coca-Cola, Danone, OppenheimerFunds, P&G, The Gap and Unliever [Lift Economy 2019]) and some are publicly traded themselves, such as Natura (B Corporation 2020:c).

2.2.2 - The UK Corporate Governance Code

While the Companies Act places duties on directors, the 2018 UK Corporate Governance Code (FRC, 2018) is the latest iteration of governance best practice that companies with a Premium Listing in the UK market must report against. Previous iterations of the Code had a shareholder-focussed orientation (Meyer 2018), however the most recent version places more emphasis on wider stakeholders and purpose.

This represents a shift in UK soft law to support an ESV and beyond approach, and provides more clarity on the consideration of a wider set of interests. Principle B provides the foundation requirement for the purpose statements which are assessed as part of this research. While it is early to see how much influence these new Principles will have, historical compliance with the UK Corporate Governance Code has been high, with around 70% of large companies adhering to all the provisions (FRC 2020).

2.2.3 - The future

Following the historical context of the UK’s shareholder-oriented company law regime and its socio-political climate Moore (2018) concludes that SVM remains contingent on social acceptance, which is not a foregone conclusion. Indeed, the 2018 Code requirement of disclosure on how directors have had regard to S.172 should shine additional light on how directors have considered the interests of wider stakeholders in reaching major decisions (EY, 2019). The legal basis in the future is therefore not fixed in stone, suggesting if the “fudge” continues to prove unsatisfactory the requirements may yet evolve.

Some expect the focus on de-emphasising shareholder primacy and on enhancing the visibility of ESG to be two key trends for the ongoing development of governance practices as well (e.g. O’Kelley et al 2018), with increasing calls for alternative governance structures to allow for corporate purpose to be more easily and readily practiced and accounted for (e.g. Levillain & Segrestin 2019, Levillain et al 2019, Mayer 2018). In some cases these recommendations contradict the agency models widely entrenched in today’s corporate governance structures. For example, Veldman et al (2016) conclude that to enable companies to protect their purpose they should adopt dual-class share structures. However this tends to be frowned upon by investors; the International Corporate Governance Network’s Global Governance Principles state “divergence from a ‘one-share,-one-vote’ standard, which gives certain shareholders power or control disproportionate to their economic interests should be avoided” (ICGN, 2019:29). That being said, Stout (2012) highlights that investors still buy equity in companies with dual-class stock, suggesting that they can be content with giving up these rights – the advisory firm Stout (unknown) finds that non-voting stock only trades at a discount of between 3-5% to account for the lack of voting rights. The market might therefore be more willing to accept these structures, if a sound rationale can be provided, than it often admits.

2.3 - The economic and performance aspects of corporate purpose

Given the evolving theoretical and legal approaches beyond SVM, it is necessary to consider the economic and company performance implications.

2.3.1 - Economic implications

The benefits to the economy of SVM divide opinion. Centuries of economic and financial theory suggest that social welfare is maximised when firms maximise their value, absent externalities or monopoly power (Jensen 2001). These are large caveats.

Morck (2014) argues social welfare maximisation can only be achieved when capital is allocated to projects that maximise shareholder value subject to achieving acceptable success of societal purposes, which extends beyond internalising costs borne by society. This view is reflected by Salter (2019), who argues for moral and economic principles and the concept of reciprocal justice as the foundation for corporate purpose to address business’s social disengagement. Veldman et al (2016) point to several negative economic consequences of SVM, including lower capacity for companies to play a positive societal role.

The most common economic criticism of SVM lies in inequality. While agency theory might make for sound theory, it is based on assumptions such as perfectly efficient labour markets which aren’t observed in reality and result in a misunderstanding of the extent of the risks borne by principals and agents (Ghoshal 2005). Veldman et al (2016) highlight the consequences of this in the reallocation of risk and rewards across the value chain as a result of SVM, transferring the share of value from those involved in labour to owners. Lazonick (2014) points to the widening gap in the US between productivity growth and wages since the mid-70s, implying labour is taking an ever decreasing share of the spoils, and shows how dividends and share buybacks account for an increasing amount of the proceeds of profits meaning less money left over for productive re-investment and job creation. Montier (2014) highlights the counter-productive implication of this redistribution of wealth given top earners’ lower propensity to spend. Elsewhere describing inequality as a result of SVM, Collinson et al (2011) detail the significant improvements to life expectancy, mental health, crime and other major social welfare measures if levels of income inequality in the UK and the USA were more aligned with that of “social market countries” such as Japan and the Nordics.

While mindful of the argumentum ad ignorantiam fallacy, the paucity of research results in support of “the economic benefits of shareholder primacy” and “the economic benefits of shareholder value maximisation” and the plenitude highlighting the contrary is notable.

2.3.2 - Market short-termism

While a whole topic for research itself, market short-termism is another criticism of SVM. Much has been covered by Alex Edmans, who in 2009 wrote “Many academics and practitioners believe that myopia is a first-order problem faced by the modern firm” and has subsequently covered many structural issues in depth. In 2011 a UK government report into the activity of equity markets and its impact on UK business concluded that “short-termism is a problem in UK equity markets, and that the principal causes are the decline of trust and the misalignment of incentives throughout the equity investment chain” (Kay 2012:9), and made wide-ranging recommendations for regulatory, behavioural and cultural change to restore trust in the equity investment chain. This can be observed in the significant shortening of average holding periods since the time of the introduction of SVM in the 70s, which implies that investors are taking a shorter-term view on the market (Heugh & Fox 2018).

Figure 1: NYSE (left) and FTSE (right) average holding periods

Source: UK Investor Magazine (2018)

Research by Barton et al (2016) found 65% of board members and executives agreed that pressure to deliver short-term results had increased. From interviews with more than 400 executives, Graham et al (2006) found strikingly that a significant majority would sacrifice long-term corporate value, including by deferring NPV positive projects and cutting R&D expenditure, in order to hit market expectations or smooth results. While Thakkor et al (2013) note that “principals who pursue higher purpose invest more capital” (p.3), Ayres (2017) shows over the previous decade an increase in profits accompanied by a decrease in investment.

Rappaport (2011) argues that this behaviour is contrary to creating shareholder value, which entails the investment of resources to maximise the present value of future cash flows and includes maintaining strong relationships with key stakeholders. Some (e.g. Roe 2013) suggest the cause is matters internal to the firm (including executive pay structures, themselves a product of SVM). If this were the case, they would be within an executive’s grasp to solve if desired. However, Black Sun (2019) that found 71% of executives would like to take a longer-term view, with 82% believing this would improve the organisation’s ability to create long-term value. The benefits of a longer-term approach were explored by Barton et al (2016). In a study looking at the impacts of different decision-making timeframes they found that of the 37% of executives reporting long-termism to be effectively implemented in their corporate cultures, 88% agreed that it “has a positive effect on financial performance” (p.7). The behavioural differences in responses to short-term earnings pressure at these companies is striking.

Figure 2: Likelihood of companies taking various actions if quarterly earnings might be missed

Source: Adapted from Barton et al (2016)

In response to undesired short-termist pressures from the market several executives have called for removal of quarterly earnings guidance, including in 2018 the CEO of JP Morgan and Warren Buffett, CEO of Berkshire Hathaway and renowned value investor (WSJ 2018). On his first day as CEO of Unilever in 2009, Paul Polman scrapped it (HBR 2012).

Others appear to have left the public markets altogether; the number of listed companies in the UK decreased by over 30% between 1980 and 2014 (World Bank 2019). Asker et al (2014) compared the investment behaviour of publicly listed companies and private peers in the US with the hypothesis that the latter would be subject to fewer short-term pressures. Their research found that public companies invest significantly less and take advantage of investment opportunities less than their private peers.

Figure 3: Number of public companies in the UK, 1980-2014

Source: World Bank (2019)

However, others disagree that short-termism is a problem at all. Kaplan (2017) argues that while criticisms of short-termism are oft-repeated, the negative impacts in the US of short-termism have not been shown in corporate profits or valuations. Bonnet (2018) finds also that investment is increasing at some US companies, particularly those with the highest valuations. Roe (2013) points to highly valued stocks comprising barely a business, suggesting markets can also be excessively long-term and cause bubbles. This appears to be at odds with the executive experience described previously.

2.3.3 - Stakeholder relations and company performance

Much research has been undertaken showing how relationships with stakeholders positively impacts performance, which is too large a subject to be covered in detail here. A review by A Blueprint for Better Business (2015) finds many advantages of following its Five Principles of a Purpose Driven Business for a company. These include better relationships with staff and higher employee performance, improved customer and supplier loyalty and advocacy, better reputation and a more secure licence to operate. Overall, the authors find many studies that show correlation between stakeholder relations and financial performance. An overview of some of that research is included in table 2.

Table 2: Select performance research into following the Five Principles of a Purpose Driven Business