Governance needs context to define purpose

Corporate purpose is the reason a company exists. This most basic definition encompasses the financial goals of a company, the markets it serves and the social impact it seeks to achieve. The strategic goals of a corporation define its outcomes and value. To be effective, these outcomes and the ethical practices that govern them should be clearly aligned and communicated.  

However, this simplistic definition belies the reality of the complexities and societal challenges faced by corporations. There is a rapidly growing recognition that organizations are responsible for addressing the issues they contribute to, such as their impact on the environment and structural and economic inequalities. 

Abiding by regional laws and regulations is no longer sufficient to meet the expectations of responsible stakeholders

The scope of corporate purpose has evolved into a realm that extends far beyond its basic definition. Abiding by regional laws and regulations is no longer sufficient to meet the expectations of responsible stakeholders. What are the rights and responsibilities of local and global stakeholders? How should differing societal rules, norms, cultures and practices be addressed? And how does a corporation define and retain a clear purpose that encompasses each of these elements? 

In an essay published in the journal Strategy Science, Visiting Professor at Esade Ruth V. Aguilera examines these issues and argues that strong, focused governance is the glue that holds purpose in place. Regional and industrial factors will define the boundaries within which corporate purpose is pursued, she explains, but its raison d’etre must stand up to scrutiny. 

Power v planet 

Multiple institutional levels influence the boundaries within which an organization can operate. Laws governing employment, finance, competition and foreign policy dictate the parameters of operations at a national level. But these legal systems and their enforcement have a cross-border impact, and their legitimacy within wider society has a direct effect on corporate purpose.  

In coutries with strong employment protections and extensive welfare states, for example, a commitment to bestow rights on employees could be seen as redundant. However, in a country with weak legal protections for workers, such a commitment would be a legitimate goal. 

There is a trend towards longer-term corporate purpose goals that focus on environmental protections

Within these conflicting contexts, the fault line should be placed where societal help is most needed — while remaining in line with the corporation’s priorities, institutional context and ownership values. The danger here, however, lies with the potential for push-back from resistant shareholders less keen to prioritize corporate social responsibility.  

The debate surrounding the prioritization of environmental and social goals within the CSR arena has prompted a rise in what has been termed the anti-woke movement. Powerful investors and CEOs who push to prioritize profits for shareholders can be in direct opposition to legal directives that dictate the terms of environmental protections. 

Yet despite these so-called wars on woke behavior — such as the letter from 19 US state attorneys accusing BlackRock of using “hard-earned money” of citizens to divert profitable investment to environmental causes — we are seeing a trend towards longer-term corporate purpose goals that focus on environmental protections. 

There is a danger that some promises can be seen as a case of corporate washing

Firms traditionally pressured by powerful shareholders are responding to socially responsible investors. Codes of good governance are being developed in accordance with a wider selection of stakeholder demands and a more bespoke, inclusive approach. Even in the absence of legal requirements, an increasingly diverse chorus of voices is prompting a commitment to socially beneficial strategies. 

There is, of course, a danger that these promises can be seen as a simple case of corporate washing. Pledges to invest in employees, for example, are at direct odds with US corporate opposition to the right to unionize or provide basic benefits such as maternity leave. 

As well as lacking the formal frameworks necessary for delivery, the meaning of such promises differs across countries and makes their effectiveness difficult to measure. Could a Chinese, state-owned corporation maintaining full employment and avoiding social unrest qualify as delivering a corporate purpose in the same manner as a European company achieving the same goals? 

Actions speak louder than words

Corporate purpose differs little from individual purpose in that there will always be those who seek to deceive and deflect for personal gain. But there are also many global companies with corporate purposes so clear and transparent that they are instantly identifiable. 

In her essay, Aguilera highlights the case of Ikea and their commitment “to create a better everyday life for the many people”, which has transcended the design and sale of furniture to become a corporate culture that drives global operations. “We want to have a positive impact on the world — from the communities where we source our raw materials to the way our products help our customers live a more sustainable life at home,” the company states in its vision. 

The founders or owners of an organization remain the linchpins of its corporate purpose

With a global revenue of over €47 billion in 2023, Ikea has proved that it is possible to overcome challenges including climate change, pandemics, supply chain crises and geopolitical conflict. And by effectively activating corporate purpose through sound practices instead of soundbites, firms can gain trust without sacrificing financial value. 

The founders or owners of an organization remain the linchpins of its corporate purpose. They have a responsibility to ensure that their operations and values align with stakeholders and the societies in which they operate.  

Breaking ground on corporate purpose goes way beyond symbolism. It affects strategy and performance, defines a nonfinancial focus and determines long-term success. Aligning ownership and management with the concepts and measurements of performance, contract design and governance practices that support corporate purpose both locally and globally are critical.  

Corporate purpose no longer simply defines a corporation’s existence. It is the context within which the corporation operates within its social and industrial settings, and with the engagement of its stakeholders. Without this essential corporate context, a corporation cannot define its purpose.