Companies urged to spell out their purpose

New survey finds most respondents want corporate purpose aligned with UN sustainability goals

Investors expect companies to describe their purpose and report on its implementation, according to new research.

The findings come as issuers use the idea of corporate purpose to help steer them through the difficult decisions thrown up by the Covid-19 pandemic. 

The study, by shareholder advisory firm SquareWell Partners, finds that around three quarters of investors think companies should have defined a purpose. The same number of respondents believe purpose should be the ‘primary force’ guiding a company’s strategy.

The survey polled the views of stewardship and responsible investment teams at firms managing a collective $22.1 trillion. It was undertaken in January and February, shortly before Covid-19 was declared a pandemic.

‘Investors have turned their eyes – and allocations – toward corporate purpose,’ Wachtell Lipton Rosen & Katz partner Sabastian Niles writes in a report on the survey findings. ‘They are looking for a comprehensive approach and appreciate that corporate purpose is inclusive of investor priorities.’

In recent years, companies have increasingly adopted a corporate purpose amid the growing consensus that businesses should focus on a wider range of constituents than just shareholders.

A key moment came last year when 181 US CEOs, members of the Business Roundtable lobby group, signed a letter declaring that the ‘redefined’ purpose of corporations was to serve all stakeholders. 

The devastating impact of the Covid-19 pandemic has thrust these issues further into the spotlight, with companies under intense scrutiny over their treatment of employees and local communities. 

Just over half (52 percent) of the investors surveyed say purpose should be aligned with the UN Sustainable Development Goals. The respondents make clear that the board should set a company’s purpose, with 93 percent selecting this option. 

The research also looks at how companies should disclose and report on corporate purpose. A majority of investors (55 percent) say purpose should be formalized through a dedicated section in the annual report, while 45 percent would like to see a board statement on the matter. 

Furthermore, 86 percent of investors say they want written statements on how purpose is being fulfilled and 75 percent expect companies to develop KPIs to monitor progress.

‘The survey’s results also show that how companies define and articulate their purpose, organize the business of the board and management to achieve and monitor implementation of the purpose, and engage with investors to win their support and partnership in delivering on purpose will increasingly impact how a company and its leadership are assessed and valued,’ says Niles. 

Writing in a foreword to SquareWell’s report, Alex Edmans, professor of finance at the London Business School, says two questions will define how corporate purpose evolves over the coming years.

First, do companies need to become more targeted in their aims to be seen as truly purposeful? Focusing on all stakeholders could be viewed as too broad an approach. And second, he asks whether purpose is ultimately the same as or different from focusing on long-term shareholder value.

‘Should long-term profit considerations already inspire a company to make products that transform its customers’ lives for the better, provide employees with a healthy and enriching place to work and preserve the environment for future generations?’ he says. ‘Or is purpose more than that?’