Strong corporate purpose correlates with improved financial results, study finds

When the Business Roundtable released its Statement on Corporate Purpose in August 2019, it was met with equal praise and skepticism.

By the strictest definition of investor relations, stakeholder capitalism and corporate purpose should be important only if investors deem them to be material, but the continued evolution of ESG engagement shows that materiality is dynamic and definitions can quickly change.

According to recent research from Chief Executives for Corporate Purpose (CECP) and Fortuna Advisors, companies that score high on corporate purpose metrics outperform their low-scoring peers on a range of metrics, including financial performance, market valuation and shareholder value creation.

The researchers used a tool from BERA Brand Management that measures corporate purpose by looking at a range of metrics – including employer brand, societal commitment and inclusivity. The researchers sorted a group of companies into two different pools: high-purpose brands and low-purpose brands.

High-purpose brands will double their market value more than four times faster than low-purpose brands, the researchers find, and will create much higher levels of total shareholder returns. This study represents an early attempt to explore the impact a cohesive, multi-stakeholder corporate purpose has on the financial performance of a company.

‘Corporate purpose and stakeholder capitalism involve companies thinking coherently in a structured fashion about their stakeholders,’ Brian Tomlinson, director of research at CECP’s CEO Investor Forum and report co-author, tells Corporate Secretary sister publication IR Magazine. ‘This is a strategic and prioritization exercise to say which stakeholders are key to success and creating value for the long term.’

The research also shows that companies that are included in both Fortune’s World’s Most Admired Companies list and The Just 100 list from Forbes delivered a median total shareholder return 41.5 percent higher than the median of the S&P 500.

CORPORATE PURPOSE AND COVID-19

The researchers wanted to understand how a crisis would affect the benefits of articulating a clear corporate purpose. To do this, they examined the performance of high-purpose and low-purpose companies before and during the Covid-19 pandemic, between mid-February and mid-April 2020.  

Looking at pre-Covid-19 performance, the researchers find that top-quartile companies for total shareholder return had higher corporate purpose scores than their bottom-quartile peers. During the first months of the Covid-19 pandemic, companies with the best purpose scores generally moved into the top quartile of total shareholder returns – raising the specter of a correlation between corporate purpose and improved financial resilience relative to peers with a less cohesive sense of purpose.

‘If suddenly in the middle of the crisis you decided you wanted to operate with good purpose, there wasn’t enough time: there were too many fires to put out,’ says Gregory Milano, managing partner, founder and CEO of Fortuna Advisors and report co-author. ‘It’s not just about changing something; it’s about having people believe that it’s authentic.’

Earlier this year, just before the Covid-19 outbreak took hold, a study from SquareWell Partners found that around three quarters of investor stewardship and responsible investment teams believe companies should have a defined corporate purpose that should be the ‘primary force’ in guiding a company’s strategy.