Deloitte-what-is-the-purpose-company

Expectations of business change over time. The tax and regulatory environment shift with the political cycle. Society’s expectations change too, and in recent years they have risen.

Business has taken note. In the US the Business Roundtable recently published a ‘statement of purpose’ saying that businesses should be run for the benefit of all stakeholders, customers, employees, suppliers, communities and shareholders. Signed by 181 CEOs the statement of purpose represented a radical break with the Roundtable’s previous policy that firms should primarily serve shareholders.

In a supportive leading article the Financial Times summed up what seems to be an emerging consensus: “when business takes a broad perspective, it can leave everyone more prosperous, including shareholders. Rejecting the dogma of shareholder primacy is not a question of bleeding hearts, it is a matter of enlightened self-interest.”

Yet the concept of ‘purpose’ is, as the FT also observed, nebulous. Agreement about aspirations, such as a better environment or a more inclusive workplace, leaves open the question of definition, measurement and accountability. Gauging profits is not always straightforward; but it is relatively simple compared to assessing, and prioritising, non-financial objectives.

It should not, however, be insurmountable. Government has always regulated the behaviour of the corporate sector in a swathe of areas, from working conditions to environmental standards.

The growing availability of environmental, social and corporate governance (ESG) metrics over the past decade has provided new sources of data.

Now a range of initiatives, including the Task Force on Climate-related Financial Disclosures and the Global Reporting Initiative, are setting new standards for business. In the UK the Financial Reporting Council’s new stewardship code sets a new benchmark for institutional investors designed to ensure, “sustainable benefits for the economy, the environment and society”.

The current debate about the role of business is sometimes simplified as ‘profits vs purpose’. In reality the pursuit of profit has never been the only game in town.

Since the earliest days of industrial capitalism businesses have played a wider role in society. In the nineteenth century Cadburys, Lever Brothers or Rowntrees were active in the provision of housing, healthcare and benefits to support their people. Corporate giving has long been a major source of funding for charities and the arts in the US.

The structure of business, and of the economy, is complex. Only 10% or so of the UK workforce works in what might be called ‘big businesses’ – private or quoted businesses employing more than 250 people. Around 90% work in SMEs, are self-employed or work in the public sector.

There are numerous models of business too: self-employment, co-operatives and mutual, employee partnerships, trusts and foundations, private businesses, family businesses, quoted companies.

The list is not fixed and the ESG movement has already spurred the creation of at least one alternative. Maryland was the first US state, in 2010, to pass legislation allowing for the creation of benefit corporations – businesses with a legal duty to benefit all stakeholders, not only shareholders. Thirty-four US states and Washington DC have followed Maryland’s lead.

The focus on corporate purpose is part of a far wider shift. Government is, itself, making greater demands of business. International organisations like the OECD are devising frameworks to increase the taxation of multinationals. In a sign of the times the UK prime minister, Boris Johnson, last week announced the government was cancelling a planned reduction in UK corporation tax and had earmarked the savings for the NHS. Elizabeth Warren in the US and Jeremy Corbyn in the UK propose a radical change in the way in which business is taxed, owned, regulated and managed.

Firms face a more challenging environment. Non-financial factors will increasingly need to be incorporated into core business strategies. This will involve new measurement frameworks, greater scrutiny, and careful consideration of the balance between profits and purpose.

Ultimately, of course, without profits businesses cease to exist. The consensus today is that purpose and profits march hand in hand. As Larry Fink, CEO of Blackrock, one of the world’s largest asset management companies, put it: “Purpose is not the sole pursuit of profits but the animating force for achieving them”. That theory will be tested in the next downturn, when profits are less plentiful.