One of the challenges of stakeholder capitalism – where companies work in the interests of all stakeholders, not just shareholders – is how to balance the needs of different groups. For example, decisions that are good for investors, such as cost-cutting or automation of factory processes, may be painful for the workforce.
But investment in stakeholder value should not be viewed as detrimental to shareholder value, argue the authors of a new report, which finds that companies with a strong corporate purpose tend to outperform on financial and valuation metrics.
The research, conducted by Chief Executives for Corporate Purpose (CECP) and Fortuna Advisors, began by dividing a selection of S&P 500 companies into ‘high-purpose’ and ‘low-purpose’ categories.
It did this using a tool developed by BERA Brand Management that assesses purpose by looking at how consumers rank businesses across a range of attributes, such as innovation, values and personal connection.
The researchers then compared the two groups across a number of areas. Companies that score highly on corporate-purpose metrics recorded 14.1 percent higher revenue growth in 2020 than companies with a low score, according to the findings.
The high-purpose group also saw better profitability, operating margin and return on capital, among other metrics. The outperformance was already evident prior to 2020 but accelerated notably during the Covid-19 crisis, say the report authors.
‘As the Covid shock developed during Q1 and early Q2 2020, many companies – both high and low purpose – faced declining revenue growth, but the impact [on] high-purpose companies was far less severe,’ notes the report.
‘As a result, high-purpose companies dramatically expanded their incremental revenue growth advantage over low-purpose companies from 2.5 percent to 14.1 percent over the course of the year.’
The research also looks at links between purpose and market value, finding that a single point increase in a company’s purpose score (measured between one and 100) is associated with a 1.2 percent higher market valuation.
‘Meaningful investment in purpose can have a measurable improvement in market value,’ notes the report. ‘For example, a 25-point increase in a company’s purpose score would predict a 35 percent improvement in a company’s market value.’
The focus on stakeholder value received a major boost in 2019 when the Business Roundtable, a US lobby group, released a statement that redefined the purpose of the corporation as working in the interests of a range of stakeholders. The statement was signed by 181 CEOs, representing many of the US’ biggest companies.
Critics argue, however, that statements about corporate purpose and shifting away from the primacy of shareholder value are often not followed through with action. The Business Roundtable statement was ‘mostly for show,’ suggests a paper by Lucian Bebchuk and Roberto Tallarita of Harvard Law School’s Program on Corporate Governance.
‘Many companies talk about purpose, but often struggle to put it into practice. We believe companies need a more reasoned approach to investing in purpose,’ Riley Whately, an adviser on strategy and applied corporate finance at Fortuna, tells IR Magazine.
‘That starts with understanding the relationship between purpose and value creation, and then developing a new approach to allocating resources and capital to where companies are most effective at building purpose with consumers.’
Whately, one of the authors of the CECP/Fortuna report, adds that shareholders are not against investment in stakeholders. ‘Shareholders are opposed to unproductive investment,’ he says.
‘Purpose is a highly efficient and highly productive investment when done well. In fact, our research shows that companies scoring highly on purpose actually invest less of their available cash than low-purpose companies. High-purpose companies can be more conservative investors of their cash because their investments are almost two times more productive at creating value with consumers.'
The research builds on a previous study released last year that looked at how high-purpose and low-purpose companies performed prior to the Covid-19 pandemic and during the initial months of the crisis.