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On purpose and governance
by Professor John Almandoz
Companies are still trying to make sense of the Larry Fink’s letter to CEOs in January 2019: “Society is demanding that companies serve a social purpose. To prosper every company must not only deliver financial performance, but also show how it makes a positive contribution to society.” Fink is the CEO of BlackRock, asset manager of a significant portion ($6.5 trillion) of the entire economy. Social purpose? How does purpose matter for a corporation’s prosperity? And how does one infuse corporations with a greater purpose?
Companies are indeed talking more about purpose, in part because societies’ expectations on them are rising. Investors and CEOs are increasingly worried about their reputation and are wearied of voters and activists imposing new societal purposes on them. The emphasis on purpose is good, but is all that talk just impression management or is there a genuine business case for purpose? Some scholars think there is, but purpose should come from within (specifically from the very top) not be externally imposed from activist shareholders or governments—otherwise, it will be a box to be ticked, a game on the side, or plain window-dressing.
How we contribute to society, the purpose of the organization, is central to its identity: who we are and why we exist. It gives coherence to the company’s core values and culture. To be effective, it should be tightly coupled with the company’s daily business operations, rather than be relegated to the corporate social responsibility, or to the public relations department. When it is genuine and pervasive, purpose can have a powerful motivational impact on those working for the organization: they do something that matters, with people they respect, and for people they care about. A purpose can be the glue unifying otherwise disconnected siloes within the organization, who come to share the same mission differently. A purpose can also drive the commitment of existing and new customers, and enhance the company’s social reputation.
If purpose is missing, the only forces keeping an organization together will be roles, policies, shared incentives, and other formal mechanisms without a soul. When that happens, organizations rely on alignment structures that diminish intrinsic and transcendent motivations and, not surprisingly, ethical lapses follow.
For all those reasons, boards of directors should not just monitor how management addresses the issue of purpose. Purpose is too essential and permanent to be left in the hands of a passing CEO. The board must work together with management so that the purpose is clear, consistent, and engaging, and so that it is broadly understood and lived, reflecting the mind and heart of the owners, and the daily operations of the company.
Professor John Almandoz
Professor of Managing People in Organizations
IESE Center for Corporate Governance
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