Local market would benefit from companies having a formal statement of purpose

Date: October 19, 2022

First published in Business Times on 19 October 2022

Quick Read

• A company’s mission statement and corporate values are beneficial in helping employees, investors, and shareholders understand what the company is striving for.
• The maximization of shareholder value has been widely accepted as the fundamental reason why companies exist.
• In 2019, the Business Roundtable association overturned its 22-year-old policy statement that defined a corporation’s principal purpose as maximizing shareholder return.
• A statement of purpose that includes the requirement of regular shareholder engagement demonstrates clear leadership and a commitment to goals beyond profit maximization and recognizes the primacy of multi-stakeholder governance.

Shareholders hoping to learn about a listed company would invariably head to that company’s website and look under the “About Us” section. Here, most companies would include their mission statement outlining the big-picture goals they are looking to achieve – possibly, being a leader in the industry in which they operate.

Some companies may also set out their corporate values in this section – whether it be fostering innovation, encouraging employees to reach their full potential or providing excellent customer service.

Having such statements is undoubtedly beneficial in helping employees, investors and shareholders understand what the company is striving for. Yet, all these statements have, at their core, the maximisation of shareholder value, an ultimate goal that for decades has been widely accepted as the fundamental reason why companies exist.

This thinking extends back to 1970, when the economist Milton Friedman argued that a corporation’s sole responsibility is to make as much money for its stockholders as possible. He went as far as to state that company managers who spend money on social causes are spending somebody else’s cash for their own purposes.

Over time, however, there has been a shift in thinking: perhaps companies should pursue broader goals that include a role in the community as well as employee welfare. There are fewer employees or members of the public today who would whole-heartedly support a company whose stated mission is to make its shareholders rich.

A pivotal moment for this movement of stakeholder interests took place on Aug 19, 2019, when the 181 chief executives of America’s largest corporations, as members of the Business Roundtable association, overturned the association’s 22-year-old policy statement that defined a corporation’s principal purpose as maximising shareholder return.

The CEOs adopted a new Statement on the Purpose of a Corporation, declaring that companies should not only serve shareholders but also deliver value to customers, invest in employees, deal fairly with suppliers and support the communities in which they operate.

Bill McNabb, CEO of Vanguard, said at the time:

“By taking a broader, more complete view of corporate purpose, boards can focus on creating long-term value, better serving everyone – investors, employees, communities, suppliers and customers.”

Also in 2019, the British Academy carried out a major research and engagement programme examining the purpose of business and its role in society. The culmination of this in 2021 was a new definition of corporate purpose: “To profitably solve the problems of people and the planet, and not profit from creating problems”.

The Harvard Law School Forum on Corporate Governance in May 2020 summarised these developments and said the “purpose of a corporation is to conduct a lawful, ethical, profitable and sustainable business in order to create value over the long term, which requires consideration of the stakeholders that are critical to its success (shareholders, employees, customers, suppliers, creditors and communities), as determined by the corporation and the board of directors, using its business judgment and with regular engagement with shareholders, who are essential partners in supporting the corporation’s pursuit of this mission’’.

One of the prime movers to get boards to issue statements of purpose is Oxford University professor Robert G Eccles, who wrote:

“A purpose statement describes the overarching reason that a company exists, how it should conduct itself, and the impact it has on who it’s serving… It specifies within that purpose the few stakeholders most critical to long-term value creation and sustainability.”

Prof Eccles also advocated that the statement of purpose has to be signed off by the board of directors, which is not the case with mission statements. “The board of directors is the body with the ultimate authority for representing the interests of the corporation. It is responsible for taking a long-term intergenerational perspective that transcends CEO tenures and business cycles. Thus, it is the board’s responsibility to articulate the purpose of the corporation.”

Having boards articulate such a statement of purpose annually would demonstrate clear leadership from the personnel who matter, and a commitment to goals beyond profit maximisation. The importance of this cannot be understated in a business environment in which environmental, social and governance considerations are now of increasing relevance.

The more companies adopt this practice, the greater the confidence in the whole market. Boards that formulate their corporate strategies from a viewpoint of multi-stakeholder capitalism, instead of focusing only on shareholder wealth, better the community and, by extension, the market.

A statement of purpose that includes the requirement of regular shareholder engagement acknowledges not only accountability to investors, but also shared responsibility with shareholders for responsible long-term corporate stewardship.

A statement of purpose recognises the primacy of multi-stakeholder governance, and not just one based on shareholder welfare. It is time boards here recognise this and start issuing their own statements of purpose. It may even be timely for regulators to consider enshrining this requirement in the Code of Corporate Governance when it is next revamped.

• The writer is Mr David Gerald, Founder, President and CEO of the Securities Investors Association (Singapore)