by Professor Owen Skae, Director of Rhodes Business School

The purpose of business

Business has not always covered itself in glory

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“Law is to justice, as medicine is to health, as business is to _________?’’ This is the opening line of an article on the purpose of business titled Toward a theory of business by Thomas Donaldson from the Wharton School, University of Pennsylvania and James P. Walsh, Ross School of Business, University of Michigan.

In answering the question “…as business is to __________?”, in other words, what is the purpose of business, the authors explain that business students and colleagues generally react with “an awkward silence”. “People are surprised that the answer does not roll off the lips,” they write. “There is always a sense in the room that we should know the answer and yet, we do not. Then the answers come. A cluster of people will focus on profit, money, and wealth. Others, more expansively, will talk about value creation and prosperity. One colleague memorably said ‘our f******-up global economy’…”

So what is the purpose of business?

The starting point is that business is central to society. Without it, we would not have innovation, employment, economic development … a whole lot of things that business has brought to us.

The problem is that business has not always covered itself in glory. With all the corporate scandals and destruction of value we have experienced local and globally, it is widely acknowledged that this has led to a breakdown in trust. If they are to restore trust, organisations, boards, CEOs and managers are compelled to consider what the purpose of business is, and how business can do better for a better world.

In this regard, I was interested to see the June 2019 Article in Fortune by Kathy Bloomgarden on purpose-driven companies titled How Purpose-Driven Companies Address Business’ Greatest Challenges. She writes: “There is much discussion these days about CEO activism, and companies are under pressure to wield their power to enact positive change in the world.”

But, she adds, while many CEOs are scrambling to decide on their purpose and which issues to tackle, “many don’t understand that that purpose and performance are intrinsically linked”. She adds that outside a handful of A-list CEOs, the purpose-driven approach still isn’t widely endorsed, and that CEOs in general need to embrace this approach to enhance their performance and to combat the idea that capitalism is in crisis.

In a similar vein, a 2018 survey of US Fortune 1000 CEOs and other C-suite executives on business and purpose, commissioned by global company

Covestro LLC, says: “The purpose-driven company has taken root—and will continue to grow in the coming decade… Stakeholders, including top talent, increasingly are demanding companies have a purpose beyond making a profit and that a company’s future success and competitiveness will hinge on its commitment to helping solve society’s problems.”

Rebecca Lucore, head of corporate social responsibility and sustainability at Covestro LLC, put it this way: “Today, purpose is more than just a buzzword. Companies have to deliver on the promise of making society better – they have to do it through their actions and by enabling their employees to realize their own personal need to be part of something greater than themselves.”

Major findings in the survey include:

  • An overwhelming 86 percent of CEOs/c-suite executives confirm that today’s top talent is more inclined to work for companies that have a demonstrated commitment to social issues compared to ones that don’t.
  • Four in five (80 percent) agree that a company’s future growth and success will hinge on a values-driven mission that balances profit and purpose; and, three-quarters (75 percent) believe these companies will have a competitive advantage over those that do not.
  • Half or more respondents report that integrating a purpose-driven approach has transformed different aspects of their business, including Environment, Safety and Governance; Corporate Social Responsibility/Philanthropy; Communication and Reputation Management (71 percent, respectively); Human Resources (60 percent); Growth and Business Strategy (59 percent); Sales and Marketing (54 percent), Innovation, R&D, Products and Services; and, Shareholder and Investor Relations (53 percent, respectively).
  • Some two-thirds (68 percent) say it is important for their companies to empower their employees’ personal sense of purpose and predict employee desire for purpose will increase over the next 10 years (64 percent), primarily due to Millennials and their mindset (33 percent).

A year later, in an August 19, 2019 article in Fortune by Alan Murray titled: America’s CEOs Seek a New Purpose for the Corporation, provided some perspective on business purpose then and now. He writes: “In 1997, the influential Business Roundtable (BRT), an association of the chief executive officers of nearly 200 of America’s most prominent companies, enshrined the philosophy of corporate purpose in a formal statement: ‘The paramount duty of management and of boards of directors is to the corporation’s stockholders’, the group declared.

“On August 19, 2019,” Murray writes, “the BRT announced a new purpose for the corporation and tossed the old one into the dustbin. The new statement is 300 words long, and shareholders aren’t mentioned until word 250. Before that, the group refers to creating ‘value for customers’, ‘investing in employees’, fostering ‘diversity and inclusion’, ‘dealing fairly and ethically with suppliers’, ‘supporting the communities in which we work’, and ‘protecting the environment’.”

It sounds like a giant step for good, but, as Murray says, there are reservations, such as those expressed by Anand Giridharadas, author of the book Winners Take All: The Elite Charade of Changing the World. Giridharadas says: “It has become socially unacceptable as a company or a rich person not to be doing good. CEOs are asking the question: ‘What can I do to make the world better?’

“But what many are failing to do is ask: ‘What have I done that may be drowning out any of the do-gooding I’m doing?’ ” He cites the 2017 tax bill, supported by the Business Roundtable, as an example. The lion’s share of the benefits, he argues, ended up in the hands of the top 1%, increasing the income inequality underlying many social problems. What I see are well-meaning activities that are virtuous side hustles,” he argues, “while key activities of their business are relatively undisturbed … ”

The social and ethical consciousness of business clearly needs to be scrutinised to ensure it is doing what it is supposed to be doing, but the good thing is there is robust dialogue about this in the United States and we would like to see more of this here in South Africa. As much as we are waiting for President Ramaphosa to be more proactive about enforcing social and ethical behaviour, the same could be said about corporate leadership in South Africa – what is being done by companies to align purpose and performance? In short, business should be beyond reproach.

For purpose we need to look no further than the International Integrated Reporting Council’s (IIRC) six capitals for Integrated Reporting (IR), namely, financial, manufactured, intellectual, human, social and relationship, and natural capital, all of which are equally important. Following the requirements of the King IV Code, it is mandatory for listed companies in South Africa to address all of these equally in their integrated reports, but they should also be voluntarily regarded as the gold-standard of business purpose for ethical and effective leadership for all companies and organisations, big or small.

It is interesting to note though, a study of 54 integrated reports included in the IIRC database, found that the richer elements of the business model disclosure in many companies are outcomes, with companies being a little more sketchy on inputs, business activities and outputs. The study was conducted by Gaia Melloni, Riccardo Stacchezzini and Alessandro Lai, published in 2016 in the Journal of Management and Governance, and titled: The tone of business model disclosure: an impression management analysis of the integrated reports.

They explained that most companies presented information that on the face of it was non-future looking and non-quantitative. In essence they observed the dominance of a positive tone in disclosure and hence concluded companies seemed more focused on impression management strategies.

This brings me to a 2019 article, also in the Journal of Management and Governance, titled: Visualizing and managing value creation through integrated reporting practices: a dynamic resource-based perspective, authored by Federico Barnabè and Maria Cleofe Giorgino.

They constructed resource maps of two oil and gas companies, namely Sasol and ENI, based on information provided in their respective Integrated Reports for 2015 and 2016. In the authors’ view the ratio of positive to negative causal links in the value creation process was three times for ENI, whilst only two times for Sasol, hence concluding that Sasol depleted assets, whilst ENI invested in growing processes.

The similarities made for interesting analysis, most significant being: “’Employment enhancement’ for Sasol and ‘Employment and Job Enhancement’ for ENI are respectively, 97% and 98% of feedback loops. Most tellingly though were the differences. In terms of the importance of customers (no mention in Sasol, but almost 68% of the processes in ENI) and environmental and social impacts (almost 10% in Sasol, but 47% in ENI) as Key Value Creation Spots.”

It needs to be said that Sasol has not had an opportunity to make the case against these findings, but what is universal is that integrated reports are a reflection of the mental models of the board members, CEOs and managers within companies. If, according to Barnabè et al, Sasol does not mention its customers once, and pays little attention to its environmental and social impacts, how does it see its purpose?

As we know, Sasol has been a lot in the news of late over its Lake Charles Chemicals Project in Louisiana, where the cost and time overruns are so huge that there is a call for one of the co-CEOs, Stephen Cornell, to step down. One would want to interrogate this further, but what comes to mind is that some of the problems Sasol is currently experiencing, might directly stem from how they were thinking in 2015 and 2016.

Compare this to the July survey by the New Paradigm Strategy Group for Fortune, cited in Murray’s article, where it says that 64% of Americans say a company’s “primary purpose” should be “making the world better”, and 41% of Fortune 500 CEOs say solving social problems should be “part of their core business strategy”, then perhaps Sasol and all South African companies need to think about what their purpose is with a high degree of urgency, given the landscape in which we currently find ourselves. 

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