A well understood and expressed corporate purpose drives long term value. This is why purpose, as a driver of profitability, was a central theme of the 2019 letter from Larry Fink, CEO of Blackrock, the world’s largest investment manager, to the Board’s and senior managers of companies Blackrock has holdings in. It has also been the subject of previous First Advisers blog posts Doing it on purpose and ASX to make purpose key to good governance.
Mr. Fink is not alone. Cyrus Taraporevala, the President and CEO of State Street Global Advisors, in his ‘2019 Proxy letter’ to investees highlights the importance of companies having alignment between their corporate culture and long-term strategy. A clearly articulated and understood corporate purpose is the bridge that links culture and strategy; ethical behaviour and stakeholder interests; companies and communities.
“Purpose guides culture, provides a framework for consistent decision-making, and, ultimately, helps sustain long-term financial returns”. Larry Fink, CEO Blackrock.
When two of the world’s biggest investment managers, Blackrock manages approximately $5.98 trillion in assets on behalf of investors worldwide and State Street manages approximately $2.51 trillion, are focusing on purpose it has clearly emerged as an area that Boards and management should be addressing. It is also likely to continue to grow in importance as the influence of passive investment and index funds grows. These are other areas where Blackrock and State Street are two of the biggest players.
Unlike their active peers, passive investment managers do not have the option to sell out of a holding if they don’t agree with a company’s strategy for long term value creation. As long as the company is in the index they reference, a passive investment manager is obliged to maintain a holding. As a consequence, investment managers such as Blackrock and State Street have increasingly active ‘Asset Stewardship Practices’ that exist to engage with investee companies to ensure there is alignment between long term value creation, corporate purpose and corporate culture.
“We engage as long-term investors through our asset stewardship practice on those issues that impact long-term value.” Cyrus Taraporevala, CEO of State Street Global Advisors
Corporate purpose extends beyond reassuring big institutional investors that a company has a focus on long term value creation. It is increasingly important to the millennial generation who now represent 35% of the global workforce. A recent Deloitte survey of millennial workers revealed they value a business’ ability to improve society more highly than its ability to generate profits.
Corporate purpose, however is not incompatible with profitability. If anything corporate purpose and profitability exist in a virtuous cycle, which, at its most basic, can be expressed as a corporate purpose guides a company to do well; which drives profitability; which sustains the company so it continues to do well.
Similarly, there is virtuous cycle linking purpose to talent management. A company that clearly demonstrates how its purpose supports its social license to operate will be better place to attract and retain the best talent, which will be a key determinate of the company’s ability to create long term value.
Purpose also informs a company of when and where it should be engaging with broader societal conversations. The combination of ageing populations, stagnate wage growth and technological disruption to the job market is creating anxieties around how to fund retirement. The same pressures are stretching Governments resources and limiting their ability to provide solutions and creating a societal expectation that company’s should do more. A clear corporate purpose helps a company understand how to play to its strengths and effectively engage with social and economic issues where it can have the greatest impact.
Purpose should not be seen as a panacea to all corporate woes, however, when embraced and respected corporate purpose guides ethical behaviours and decision making, that align corporate culture with strategy, to optimise value creation. Unleashing the power of a company’s purpose involves clearly defining it, embedding it within a business and fully expressing it both internally and externally. The fresh perspective of an external agency, such as FIRST Advisers, will help to deliver the full benefits of a purpose strategy. A corporate purpose is an intangible asset but it is one that underpins a company’s right to exist; defines it social license to operate and drives sustainable long-term success. It is no wonder it is increasing in importance to global powerhouse investors, such as Blackrock and State Street. It is time it was at the forefront of how every business thinks and operates.
Corporate Communications and Media Advisor