A Question of Purpose
15 Feb 2022
This post builds upon my blog, ‘Ethical Ambition and the NZX’, and includes extracts explaining the recommendations made in a joint submission to the ‘NZX Corporate Governance Code Review’.
The joint submission was made by myself, along with Jane Arnott from The Ethics Conversation, Barry Coates from Mindful Money and Professor Karin Lasthuizen, Victoria University of Wellington. Professor Chellie Spiller was also a key contributor, and we framed the opportunity for the NZX to be a Wayfinding Leader.
1.4 Recommendation: Companies should be required to define and report on a business purpose which aligns with the interests of wider society
The way a company defines its purpose is integral to how it is governed. Where purpose is defined as simply “to promote shareholder interest” (as per page 5 of the NZX Corporate Governance Code Review Initial Discussion Document) and “to protect the interests of shareholders” (as per page 3 of the Code) it is unlikely to result in best practice governance. There needs to be explicit recognition of stakeholders and commitment to making a positive difference through measuring and managing impact.
This is highlighted in ‘ESG Priorities for UK Companies’, published in January 2022 by the UK Institute of Directors (IoD). The report’s first recommendation ‘Stakeholders and business purpose’ explains:
Companies should define a ‘purpose’ for their organisation which aligns their objectives with the interests of wider society. The business purpose should not be purely concerned with the generation of financial returns. It should provide a clear statement of how the company intends to deliver a positive social and environmental impact.
Boards should primarily be concerned with generating long-term value for their organisations. This will involve paying due regard to all those stakeholders that are instrumental in contributing to sustainable success, e.g. long-term investors, employees, customers, suppliers, and wider society. In private sector companies, boards should not prioritise the short-term demands of shareholders over the longer-term interests of other key stakeholders.
The importance of this approach has been highlighted for decades. For example, in his 1984 article titled ‘The New Meaning of Corporate Social Responsibility’, leading business academic Peter Drucker stated that “only if business learns that to do well it has to do good can we hope to tackle the major social challenges facing developed societies today”. In my PhD I cited this article, and described Drucker’s belief that social responsibility extends from the goods and services created, through to the way in which these are produced, and beyond. A key challenge here is to recognise the relationship between the business and the environmental and social problems that the business could assist in addressing.
As part of my doctorate in the 1990s, I showed how it is possible for business and investors to do well while doing good, and explored how can that can be achieved. My research included profiling the then NZX40, and creating and calculating Ethical Performance Scores. The highest ranked company was Fisher & Paykel, which was clearly in first position, with a score similar to the international companies featured as my PhD’s best practice case studies.
More recently, Fisher & Paykel Healthcare was awarded winner of the Deloitte Top 200 Company of the Year and Chief Executive of the Year 2020. The company says, “driven by a strong sense of purpose, we are working to improve patient care and outcomes”. It defines its purpose as ‘improving care and outcomes through inspired, world-leading healthcare solutions’. The company also notes that “our intention is that our corporate governance practices provide the direction and controls which enable us to achieve sustainable, profitable growth and the trust of our customers, shareholders, regulators, suppliers and communities.”
The example of Fisher & Paykel Healthcare is also highlighted in ‘Codes vs Commitment – An Assessment of the Coders of Ethics of the NZX50 (The Ethics Conversation, 2021)’:
Our business purpose is to improve care and outcomes through inspired and world-leading healthcare solutions. This isn’t just a slogan that we put on the wall…
– Lewis Gradon, CEO highlights Fisher and Paykel Healthcare
Back in August 2019, the USA Business Roundtable released a new Statement on the Purpose of a Corporation. The statement was signed by 181 CEOs, indicating their commitment to leading their companies for the benefit of all stakeholders, including customers, employees, suppliers, communities and shareholders.
Larry Fink is Chairman and CEO of BlackRock, the world's largest asset manager, with US$10 trillion in assets under management. In January 2022, in his annual letter to the CEOs of the companies BlackRock is invested in, Larry called on them to “have a consistent voice, a clear purpose, a coherent strategy, and a long-term view. Your company’s purpose is its north star in this tumultuous environment… In today’s globally interconnected world, a company must create value for and be valued by its full range of stakeholders in order to deliver long-term value for its shareholders. It is through effective stakeholder capitalism that capital is efficiently allocated, companies achieve durable profitability, and value is created and sustained over the long-term…”
The discussion above offers the NZX and member companies guidance as to the relevance and increasingly widespread recognition of companies defining and reporting on a business purpose which aligns with the interests of wider society.
