Companies with a declared purpose perform better, March 2, 2017

2nd March 2017

FTfm

Companies with a declared purpose perform better

Big takeovers stir controversy but the clash between Kraft Heinz and Unilever, the consumer goods companies, broke new ground. As soon as Unilever signalled it was prepared to fight, Kraft Heinz beat a retreat.

A battle between a representative of responsible capitalism and the red-blooded cost-cutters at Kraft Heinz was one that, in today’s climate, Kraft Heinz could not win. Society is asking harder questions regarding what constitutes good capitalism.

But if Britain celebrates such companies, it should also recognise it has too few of them. This scarcity is reflected in Britain’s consistently poor levels of investment and innovation coupled with stubbornly low productivity growth. Against the background of multiple challenges such as Brexit and the digital revolution, the economy needs more great companies that put long-term value creation at the heart of what they do.

What to do? Eighteen months ago, the purposeful company task force was convened. It includes a broad range of companies that want to think through a response. The overwhelming evidence is that companies with a declared purpose — a clear role in the world that offers them a reason for being — perform better on important metrics over time than their less-purposeful peers.

Purposes can take any number of forms. Some want to be the best, as Apple, the technology group, and BMW, the carmaker, would both claim; some to be sustainable, to challenge incumbents, or to make what is available to only a few, available to all. But all involve a notion of human betterment that goes beyond meeting short-term financial targets. They also involve building relationships of genuine respect and reciprocity with customers, employees and suppliers.

But the British financial, regulatory and ownership ecosystem is hostile to purposeful companies. The interaction between the way companies are incorporated and the short-term priorities of capital markets, made more acute by Britain’s uniquely dispersed and fragmented pattern of share ownership, is particularly biased against the delivery of purpose.

Nor are matters helped by an extraordinarily transactional asset management industry, or any of the incentives — including executive pay — throughout the system.

The UK government seems to recognise that reform is needed.

For all its apparent blandness, the recognition that purpose counts is a profound step. To deliver purpose, a company has to transition from being essentially about a web of transactional contracts to one in which purposed relationships underpin what it is doing.

Yet Britain’s business ecosystem is heavily biased towards a short-term, contractual view of capitalism. Our task force has broken new ground in its policy report, published this week, to argue that the response must be systematic. It must encompass company law and accounting, repurpose the investment industry, foster new shareholder structures, develop new sources of capital to finance purposeful companies and rethink executive pay.

Declaring purpose must be legally enshrined in companies’ articles of association. The asset management industry should declare its purpose and implement it in its investment strategies. British companies have too few block shareholders they can rally behind their purpose.

Company leaders should be rewarded for delivering purpose over the long term. Members of pension funds should have the default option of investing in purposeful companies. If set at 20 per cent per person, it could create up to £100bn by 2030 to invest in purposeful companies.

British capitalism needs a new settlement with each initiative, building cumulatively to produce the change that is needed.

The aim is the creation of an innovative, purposed capitalism populated by purposeful companies. Now is the moment to begin the journey.

Will Hutton is co-chairman, with Clare Chapman, of the Big Innovation Centre purposeful company task force

Source: FTfm

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