The Truth About Company Purpose
Ask Google about the importance of company purpose and it will produce over two billion search results. Surprised? Perhaps only by the sheer number of zeros. We are so used to hearing about the importance of purpose in business that it has become a truism. At the same time, we have become increasingly aware of the role it plays in company performance. Over 80% of executives now recognise that companies that treat their purpose as a core driver of strategy and decision-making outperform their peers. Indeed, these so-called purpose-driven companies experience three times average topline growth; their employees are almost three times as productive; and they are almost three times as likely to be successful in transformation and innovation initiatives.
“Efforts and courage are not enough without purpose and direction.”
We have been conditioned to think of purpose in terms of upside opportunities, but if your company lacks a coherent purpose, it is correspondingly three times more likely to experience long term revenue decline. As the word purpose suggests when read literally, a deficient one brings serious vulnerabilities. Look beneath the surface symptoms of a failed merger integration, eroding profitability, collapsing market share, a talent exodus, or a start-up’s ‘pivot’: in more cases than not, you will find that the purpose is poorly defined or not implemented. Those running the company have failed to identify an enduring source of value creation fitting the organisation’s strengths (a simple way to define effective purpose), meaning their strategy is myopic. The consequences often only materialise when the status quo changes, for instance with market maturity, industry disruption, or M&A activity: a vacuum of clarity creates a crisis of confidence and cultural division, eroding productivity, driving-up costs, and so on. In the words of John F Kennedy, “Efforts and courage are not enough without purpose and direction.”
“Nine out of ten chief executives when questioned, were unable to articulate the problem their company is in business to solve.”
Given the clear business case for establishing an effective purpose, you might assume every sensibly run company has paid close attention to theirs. But in fact, fewer than 10% of company purposes are effective in driving either impact or performance. It may not be surprising to hear that most purpose statements do not relate to how the company makes money. Nor, that most are not aligned with employee motivations, with fewer than 15% of employees believing in their company’s purpose. But we should surely be concerned that nine out of ten chief executives when questioned, were unable to articulate the problem their company is in business to solve or how this relates to the company’s capabilities. Such was the finding of a survey of 2,000 chief executives in 2020, conducted by PwC.
Why do so many companies neglect their actual purpose?
“An effective board defines the company’s purpose and then sets a strategy to deliver it, underpinned by the values and behaviours that shape its culture and the way it conducts its business.”
Leadership confusion about purpose is a major barrier. In its Guidance on Board Effectiveness, the Financial Reporting Council, responsible for corporate governance in the UK, states, “An effective board defines the company’s purpose and then sets a strategy to deliver it, underpinned by the values and behaviours that shape its culture and the way it conducts its business.”
In spite of this simple principle, many boards fail to question the actual purpose of their company, instead seeing purpose in figurative terms that are not linked to the business. This stems from an assumption that the literal purpose of the company is obvious – to do whatever the company currently does. However, because what the company currently does is unlikely to remain valuable forever, this fails to satisfy the requirement of a purpose to provide enduring strategic focus.
Since the actual purpose is off limits in these companies, the literal definition of purpose has given way to euphemistic use for other applications, including sustainability, corporate social responsibility, employee engagement, leadership, and marketing. Whilst genuine misconceptions can be seen behind each misuse, their effect has been to both undermine the application in question, whilst lulling us to neglect the foundation of corporate governance and the board’s most powerful tool. So let us tackle the misconceptions.
1. Purpose is not sustainability
“Sustainability is a question of how responsibly your company does business. Purpose is a question of the value it creates.”
The goal of sustainability feels almost literally like a burning platform. But to be sure, achieving sustainability is not the purpose of your company. Sustainability is a question of how responsibly your company does business, whereas purpose is a question of the value it creates.
The word purpose has been co-opted as a catch-all for sustainability, ESG, net-zero, and even diversity and inclusion. Whilst revealing a worrying lack of clarity about these concepts, it suggests a perception that the purpose of all companies should be generic (to be sustainable). This idea is harmful to business in that it ignores the competitive context in which companies exist, and the fact that their existence relies on unique value creation. Of course, we rely on competition between companies for such essentials as economic growth, innovation, and value for money. Unless sustainability is achieved in the context of unique company value creation, it directs us to a world of homogenised companies in which we all lose.
But what about Patagonia? The clothing company whose current transformation to a charitable trust is perhaps the greatest proof-point of corporate societal alignment, concluded in 2018 that “We're in business to save our home planet.” But remember, this was not before it had become a 45-year-old, billion-dollar company creating value by revolutionising clothing for extreme conditions, making a billionaire of its founder in the process. So, ask the question, is saving the planet genuinely the value Patagonia creates, when in its own words, “Everything we make takes something from the planet we can’t give back” – or does this take for granted what its customers actually buy?
Since sustainability is a standard against which all companies will be judged, we must regard it as a table-stake. That is not to say your company does not have a specific role to play in furthering sustainability, and herein lies the key to effective purpose. In pinpointing a specific problem that is recognised at the societal level, that your company is uniquely positioned to address, it offers enduring strategic focus. Thus sustainability, an all-encompassing challenge incapable of providing focus without further qualification, is addressed effectively within a strategic company purpose. A great example is Concrete4Change, a pioneering start-up developing net-zero concrete technology, whose purpose is “Enabling the concrete industry to transition to net-zero and beyond to net-negative”.
The beauty of a clear purpose as far as sustainability goes, is that it assists successful change. The complexity and pressure of making a company sustainable alongside business-as-usual could be likened to changing the engine of a car while driving it on the motorway: sustainability often demands serious innovations, and for many companies, outright transformation, all of which must be delivered while competing commercially. This challenge simply underlines the importance of effective purpose since purpose-driven companies are almost three times more successful in innovation and transformation efforts than those without an effective purpose. Sustainability is not a parallel mission that divides focus, it is consistent with and informed by the purpose. So, while our proverbial car is being worked-on, nobody takes their eyes off the road.
2. Purpose is not a counterbalance to profit
“Accepting purpose as a euphemism for ‘giving back’ sets up a dangerous distinction between the company’s responsibility to society and its business.”
An increasing number of companies have adopted purpose to mean general societal contribution. WeWork declares its purpose is “to harness the power of community to make a positive impact on people and the environment.” Whilst few might question the good intentions behind this statement, you may wonder how effectively it captures WeWork’s unique opportunity. A Big Four accounting firm states that its corporate purpose is “To make an impact that matters”. Whilst reflecting on how much clarity this brings to the strategy of that organisation, consider that the same accounting firm recently reported the following news: “A growing number of companies are linking strategy to purpose.”
One might be tempted to ask: what were these companies doing before they linked their strategy to their purpose? Of course, the quotation illustrates that we have accepted purpose as being a euphemism: it doesn’t refer to the actual purpose of the company, but rather how the company ‘gives back’.
The most obvious problem with this misuse of purpose is that the literal purpose of the company goes unquestioned. But a deeper concern is that it divorces the word purpose from the business activity. This sets up a dangerous distinction between the company’s responsibility to society and its business: the fallacy that purpose is a counterbalance to, and a compensation to society for, how the company makes money. This has fuelled the misapprehension that purpose and profit are in conflict. Meanwhile, accepting a separation between a company’s societal responsibility and its business leaves the door open to conflict between the two.
LEGO has shown how a powerful purpose relates a very specific societal interest to unique value creation: the realisation that LEGO helps children to think systematically and creatively spurred its mission to “inspire and develop the builders of tomorrow”, catalysing its dramatic turnaround in fortunes over recent years.
3. Purpose is irrelevant to employees unless it drives the business
A divisional head at a global professional services firm recently recounted the failed attempt by senior leadership to engage employees with the corporation’s purpose: “The process began with asking our views. It concluded with them telling us the purpose. At no point was there an opportunity to discuss strategy and growth – that simply wasn’t on the agenda. In the end I was so disengaged that I cannot tell you what our purpose is.”
Companies perennially try to buoy up employee engagement and productivity with initiatives in the name of purpose that have no influence on the strategy. Usually owned by the Human Resources department (or increasingly a Chief Sustainability Officer or Chief Purpose Officer) this type of initiative rarely drives change, and frequently has the opposite of the intended effect on employee metrics, as exemplified in the account above.
“The most successful company is not the one with the most brains, but the most brains acting in concert.”
Culture is a popular and legitimate board motive for reviewing company purpose, but the effectiveness of purpose in improving culture is based on its capacity to increase clarity about the core strategic opportunity for the company, and the relationship of this to its defining attributes. Success relies on an inclusive and transparent approach. Done properly, the outcome unifies people around a valuable and inherently differentiating role for the company based on its strengths. Culture in the context of a properly developed company purpose is not a disembodied list of aspirational values (which unsurprisingly has been shown to have nil effect on behaviour): because it holds the key to shared success, it is a compelling framework for working together. As Peter Drucker once put it, “The most successful company is not the one with the most brains, but the most brains acting in concert.”
4. Purpose is not a leadership style
Often confused with company purpose, purposeful leadership (also known as leading with purpose) refers to a personal leadership style - the use of one’s personal purpose and values to inspire and motivate others. This idea is shown to be an extremely effective leadership style, associated with high levels of employee engagement, but it is not concerned with the purpose of the company itself.
“Purposeful leadership is mistakenly seen as an alternative to developing a shared and singular company purpose, at the expense of employee retention and strategic clarity.”
Of course, individual purpose and company purpose should be related. However, purposeful leadership is often mistakenly seen as an alternative to developing a shared and singular company purpose. This may be because the latter is perceived as requiring more effort (which is true), or perhaps because it is perceived as restrictive of individual purposes (which is not true, and we will return to both of these points).
Either way, this reaction is corrosive to both employee retention and strategic clarity. It encourages leaders to pronounce the type of generic, unsubstantiated purpose statements that have driven public cynicism about corporate puffery, while leaving their organisations in a state of vulnerable ambiguity. I’m reminded of one of many chief executives that insisted his company exists “to make the world a better place”, a notion that left everything to the imagination and frustrated his team. Many asked, what is better? Not only is better in the eye of the beholder, but our sense of better changes with circumstances - consider how the Ukraine war has driven ESG to reevaluate the defence sector. Employee turnover at the company exceeded 40%, and the leadership is now reconsidering its purpose.
5. Purpose is not a marketing strategy
As a marketer by training, I would always uphold ‘brand purpose’ as the source of meaning in a brand idea. But contrary to the imagination of many marketers, a brand does not exist without a company committed to fulfilling its purpose. A survey by Havas in 2020 showed that the marketing trend of promoting brand purpose without credible evidence (known as purpose-washing) has eroded trust in brands on a massive scale: 71% of people now have little faith that brands will deliver on their promises, and only 34% of people now trust the companies behind brands. So branding – the critical lever with which good companies convert goodwill into increased market share and premium pricing – is being unwittingly dismantled.
“Make purpose a strategy for business management not business marketing.”
But the reputational risks from purpose-washing extend beyond financial performance. When Boohoo launched its "For the future" campaign in 2019, it was selling dresses for £4. In July 2020, when the firm was accused of malpractice at Leicester factories, shares immediately lost 46% of their value. In the two years since, Boohoo’s share price has ratcheted further and further downwards - in spite of consistently strong financial results, and investment in a new Leicester factory.
The current investigation by the UK Competition and Markets Authority (announced in July 2022) into similar behaviour by Asos and Asda will determine whether these companies are tarred with the same brush as Boohoo. In the words of CEO Today, “Make purpose a strategy for business management not business marketing”.
6. Purpose is not optional, only the quality is
“In reality, all companies are driven by their purpose. The only difference with so-called purpose-driven companies is that they have genuinely questioned theirs.”
From the moment every company is formed, it has a purpose by default, defined by the motivations of its founders. However well considered this is, and whether explicit or implicit, it is the key force that governs the path the company will try to take. The vital question is whether it defines an opportunity for enduring value creation.
Since no company exists in a vacuum, any opportunity for enduring value creation must, by definition, take account of others on whom it will rely. A unilateral purpose that extends no further than the needs of the founders is unlikely to pass this test. If on the other hand, the purpose extends to addressing a problem recognised at the societal level, it holds potential value for others concerned. Far from diminishing the role of profit, critical to continuing investment, this reinforces the business idea with a much broader base of support. Meanwhile, defining the purpose in societal terms offers a larger, more enduring source of value creation that inspires innovation and continual growth, compared with a purpose expressed in product terms, which is finite in business scope and limited by the product lifecycle.
When Mars Petcare redefined its purpose as “a better world for pets”, this propelled its diversification beyond the commoditised pet food industry, in which it annually spent a large proportion of income defending its market share from rival Nestle, into the broader and self-defined arena of pet wellbeing, with a radical shift from products to services, to become the largest and fastest-growing division of Mars Inc.
“Purpose is an important area in need of some attention.”
In reality, all companies are driven by their purpose. The only difference with so-called purpose-driven companies is that they have genuinely questioned theirs. Leaders that commit to developing a strategically-sound purpose equip their organisation with a clarity of focus that generates advantage for the company, society, and customers, ensuring a resilient firm that will shine in future. The Non-Executive Directors’ Association (NEDA) describes purpose as the foundation of good corporate governance. We would describe it as the board’s most powerful tool. As Louis Cooper, Chief Executive of NEDA, commented, “Purpose is an important area in need of some attention”.
A word on what it takes to get your company purpose right
Establishing an effective company purpose relies on recognition across the organisation. An inclusive and transparent approach to gathering the inputs is critical to winning the confidence of employees that have been conditioned to be sceptical, bearing in mind that most company purpose statements mean nothing. A flimsy purpose initiative not only negates the key strategic opportunity for the company, but it can also damage productivity, and undermine receptiveness to future purpose development.
Contrary to popular belief (think of all the purpose statements developed by advertising agencies) purpose definition is an evidence-based exercise, not a creative one. The right answer for your company lies at the intersection of three things: an opportunity that matters in society, the needs of your customers, and the unique position of your company. Omit the first and there is no enduring path to growth. Omit the second and you create a distraction to the firm’s business activities. Omit the third and the purpose is not yours, it’s everyone’s. When the purpose reflects all three, you win the conviction of your people as it is self-evidently the right path for your company.
Questions for board members and senior managers
1) Has the actual purpose of your company been expressly agreed by the board?
2) Is the purpose relevant beyond your industry?
3) Does the purpose translate readily into commercial opportunities?
4) Is evidence of the company’s claim to the purpose recognised by employees?
5) Does the purpose define the mission and strategic objectives?
Purposecraft provides advice, consulting and training in strategic company purpose development.