While many CEOs and boards are planning to create a corporate purpose, they are not aware of its unexpected risks which could be mitigated.
With the hurdles of 2020 left behind at least symbolically and the celebratory spirit of the first weeks of the year mixed with new hopes and an uplifted determination to make this one a better year than the one we just survived, many businesses look for ways to make pledges and other statements.
2021 finds businesses in a wide range of states – some had their most profitable and successful year, some are looking for ways to create novel solutions in the radically changed world we find ourselves in, some are simply trying to survive, and many did not make it into this year. No matter where on that scale of success the businesses that survived are, everyone is gazing at the year ahead in their mind’s eye and thinking of ways of making it as successful as possible.
I suspect that every new tool or a much-discussed approach may sound like a lucrative way of ensuring success. Especially, if it is future-looking, optimistic, and visionary. After all, many of us are looking for optimism and the excitement of something good being around the corner. And if it allows us to envision, in perhaps an abstract way, and without committing too much in the immediate future, it may bring us a sensation of there being a better tomorrow, and enable us to imagine being part of it and having a noble and legitimate cause.
I believe one such tool is ‘corporate purpose’.
‘Corporate purpose’ is currently one of the hottest topics in corporate governance. The appearance of it in recent discussions has partly been triggered by the impact that corporations have on the world while maximizing their profits. And suddenly corporate purpose is being promoted as a solution to the sustainability challenges and it is seen as crucial in reinventing the role of businesses in society and is believed to be of key importance for operating sustainably in the current model of capitalism.
Many prominent consultancies and business schools have offered their approaches of creating and implementing a ‘corporate purpose’ for businesses and are presenting their models as prescribed solutions (see for example the September/October 2020 issue of Harvard Business Review[1]). At the same time, using that concept is already backfiring as ‘purpose washing’ has become a term[2].
Regretfully, it is such a popular fad, with further perceived legitimacy given to it by these prominent institutions, that the dominant discussion has not taken time to stop and wonder whether a corporate purpose is a solution to the challenges it seeks to fix, and whether corporates need a purpose in the sense that it is being promoted. Or, whether there are easier and better ways to go about changing the manner we are doing business in the modern world to future-proof our businesses, societies, as well as the planet.
Some see the promotion of corporate purpose as solely a PR trick. For this discussion, we are leaving this perspective aside – which should not be seen as rejecting that perspective, nor as agreeing with it.
I strongly advise executives, boards, and founders who are considering creating a ‘corporate purpose’ / ‘purpose statement’ and implementing it, to consider a multitude of aspects that inform them of the related risks before choosing to establish one. Below I list eight of these, while there are a few additional ones that I cover in my talks, where I elaborate about all of them.
(1) Ambiguity: Even those who promote or criticize the concept of corporate purpose do not appear to hold a consistent view themselves about what exactly corporate purpose is. The variety of these understandings between proponents is even bigger. Yet, a multitude of commentators appear to believe that the particular opinion they have to offer is the right one to be used in every situation. This can confuse businesses who are supposed to implement that (or not, if they would act based on solely what is needed). Or, they might simply take the particular template approach suggested to them for granted as they are unaware about the other options.
(2) Ownership: There is similar confusion among those who promote the usage of corporate purpose about who should be creating it – whether the boards, shareholders, or executives should initiate and pen it.
(3) Arbitrariness: Purpose is declarative, largely dependent on the wording of those drafting it, and therefore also easily subject to change. At the same time, it is being promoted to be linked very visibly, both internally and externally, with what the business is doing. This is understandable, as a lot of it is all about the rhetoric. However, after extensive communication programs, linking it with KPIs and remuneration systems, as well as with reporting, changing the purpose would create extensive administrative needs, be very costly, potentially damage the reputation of the business as well as be demoralizing to employees, thereby creating even further costs.
(4) Mission: A purpose of a particular corporation, the way it is being most widely promoted, is akin to a corporate mission, and the creation of it would either replace the corporate mission or create a parallel one. That would be a bit of a glass bead game that can trigger cynicism both within the business as well as in its environment.
(5) Corporate charter: Also, corporations already tend to have a purpose – the one stated in their charters[3]. Creating a new purpose would either require replacing that in the charters, or creating yet a parallel one. That would make the glass bead game even more elaborate.
(6) Metrics: The way purpose is suggested to be measured brings up the challenges that the triple bottom line approach has had for years.
(7) Vulnerability: Purpose is a very high-level concept – it allows cherry picking anything from business processes to show that it has been followed. This, however, leaves the rest of business out of focus from that perspective and sets the business up for easily justifiable criticism about not delivering on purpose as in practice it does not require creating any changes in the operations. That makes purpose disconnected from the entirety of the business activities. This is particularly risky, as the business has drawn substantial attention to itself with the PR efforts of creating and promoting its purpose, and various stakeholders are justifiably looking for it being delivered in the way they expect it to manifest.
(8) Urgency: Last but not least, purpose is future-looking and by design does not require urgent action even if the business intends to focus on it.
These eight aspects indicate that it is hard to claim that corporate purpose is the key to a successful responsible business and that it provides the trigger for substantial changes, although these have been the exact arguments that have been used to justify that concept. It is difficult to assign causality to something that no one agrees what it is. Yet, there is one major reason, why even the currently sustainability focussed businesses are likely to overlook all of the above reasons and seek to create a corporate purpose – because they want to, as it looks modern, not old school.
Hence, while no business needs a corporate purpose to conduct their business more responsibly, many are likely to create one. Thus, it would be beneficial to implement it, if chosen to, in a way that fits the particular circumstances of that business, disregarding one solution fits all frameworks as I suggest in my approach. And, ideally, simultaneously seek to focus on the tangible responsible impact the business has in the world. However, I claim there is a different and better way that allows mitigating the above risks while providing the same benefits – that is the corporate legacy approach that I have created and will be writing about in the future.
[1]https://hbr.org/archive-toc/BR2005
[2] Findlay, S. and Moran, M. (2019), “Purpose-washing of impact investing funds: motivations, occurrence and prevention”, Social Responsibility Journal, Vol. 15 No. 7, pp. 853-873. https://doi.org/10.1108/SRJ-11-2017-0260https://www.emerald.com/insight/content/doi/10.1108/SRJ-11-2017-0260/full/html (Accessed 31. October 2020)
[3] Fisch, J.E. & Davidoff, S.S. (August 3, 2020). Should Corporations have a Purpose? U of Penn, Inst for Law & Econ Research Paper No. 20-22, European Corporate Governance Institute – Law Working Paper No. 510/2020, Available atSSRN: https://ssrn.com/abstract=3561164 or http://dx.doi.org/10.2139/ssrn.3561164
This post was originally published in Substack on 17. February, 2021 as 8 unexpected risks of corporate purpose.
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