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May 25, 2018

What is your leitmotif, Mr Chairman? IR must focus on mission statement

Dust off your purpose, mission and values statements: Investors are going to start asking some awkward questions

Mission, vision, purpose, values: these slippery concepts are sometimes perceived as a waste of time and energy, a bit of PR frippery that is a necessary chore for any organization wanting to get on with the real business of growth and shareholder returns.

Crafting the words that define these concepts has kept consultants very well paid for many years. It is true that some vision and mission statements are suitably weighty and memorable, but the reality is that the majority are empty concoctions that grow old and gather dust in a far-flung corner of the website and annual report.

That may be about to change, as a new movement to measure and value companies on their non-financial activities gathers pace. UK regulator the Financial Reporting Council is conducting a major consultation and examination into best-practice governance and reporting standards for listed companies. In France, government ministries have started to ask companies to state their raison d’etre as part of their normal reporting obligations. And around the world, regulators have been scrutinizing – and passing judgment on – the culture of banks in an effort to prevent another financial crisis.

In the latest, and possibly most significant, development, 10 asset managers with a combined $8 tn in assets under management have partnered with UK charity the Blueprint Trust to come up with a common set of questions to ask boards and senior managers at their invested companies. These range from the general – what does success look like, and how do you measure and review it? – to the specific: what positive and negative impacts does your company have on society? How are you maintaining your license to operate?

These questions, the money managers believe, will help them encourage companies to become more responsible and more aware of their social impact, and to consider a wider risk landscape.

In part, this call for more scrutiny derives from the now well-established investor movement to ensure invested companies bring a real sense of CSR to their business. Heads of stewardship, responsibility or corporate governance now hold senior roles at the largest institutions, with talented teams and a powerful voice in investment committees.

An alliance is forming between regulators, investors, academia, consultants and analysts that demands companies define their societal purpose, then build their future business strategies around that.

The business benefits and a Gulf focus

There is a growing body of evidence to suggest there are real business benefits to be derived from all this. The payoffs to purpose are increasingly measurable, reflected in superior share price performance, improved accounting and operational performance, more valuable innovation and lower cost of capital. They are also associated with, among other things, improved recruitment, retention and motivation of employees, less adversarial industrial relations, greater scale and decentralization, smaller regulatory fines and greater resilience in the face of external shocks.

This movement is particularly relevant to the Arabian Gulf region, those countries that make up the Gulf Cooperation Council (GCC), where the largest companies are often monopolies or quasi-monopolies, whose status is under threat from interventionist and market-liberating policy changes. The privatization of state-owned industries and companies will lead to new market entrants, increased competition and greater customer choice. One way for listed firms to remain relevant in this new business environment is to rediscover their purposes, their values and their vision.

The conclusion from these trends is that more change is coming, and governance is moving further up the investors’ agenda. The company that conducts business according to a profound sense of purpose in society will be rewarded by investors. This is no longer a ‘nice-to-have’.

A growing body of academic evidence points to multiple benefits deriving from a strong sense of corporate purpose. What began in business schools and universities is now a mainstay of the investment committees of the largest institutions. Increasingly, regulators want to measure values, culture and corporate purpose. And like all regulatory trends, you can be sure this will arrive in the Gulf before too long.

Perhaps the most important element in all this is that companies have to ensure the purpose narrative permeates the whole firm. Purpose must be embedded and integrated if it is to be meaningful. That dusty corner of the annual report will no longer suffice.

To integrate purpose from top to bottom, organizations must move beyond lofty abstractions and aspirations. Their leaders need to demonstrate in concrete terms what purpose means to them – and how they use it to prioritize what they are doing, particularly when under pressure.

Investors will be asking about GCC companies’ values, purpose, ethics and social role very soon, if they are not doing so already. Chairs need to ask themselves whether their organization is ready for this scrutiny. Woven words on websites won’t work.

Oliver Schutzmann is CEO of Iridium Advisors

Oliver Schutzmann

Oliver Schutzmann is CEO of Iridium Advisors