Director's Toolbox: Purpose

What board directors need to know about one of the biggest leadership trends in years.

The field of knowledge that board members must understand has grown sharply in today’s global economy and constant tech disruptions. This regular series will explore many of those key topics.

What is corporate purpose and why should a board care?

Purpose is the “why” behind every organization. It provides a sense of meaning: why the business exists and what it’s hoping to achieve beyond profits. “When executed best, purpose is woven through the company,” says Daryl Brewster, CEO of Chief Executives for Corporate Purpose (CECP), a CEO-led coalition. “It’s not just the topic du jour. It’s long-term.”

Purpose drives a company’s vision, commitment, and engagement, and can lead to spectacular financial results, which is why investors are increasingly joining customers in demanding that companies stand for something higher than profits. Hard data backs up the clamor. A recent survey reported that 88% of Americans said they would buy products from a purpose-driven brand over a traditional one. And a 2016 Korn Ferry study found that consumer companies led by purpose massively beat the compound annual growth rate of the whole S&P 500 Consumer sector—9.85% compared to 2.4%. “A purpose-driven company outperforms the rest,” says Brewster, who sits on one public board and three private ones. “If a board wants that performance, purpose is critical.”

How purpose-driven are senior executives generally?

At first glance, companies seem to be doing a good job. Nearly three-quarters of executives surveyed in a Korn Ferry study said their principal motivation is the belief that their work has purpose and meaning. That same study also discovered that for 51% of participating executives, employers mostly reward the ability to create such value. “Purpose is more and more important in the new economy,” says Jean-Marc Laouchez, president of the Korn Ferry Institute.

When corporate captains exhibit an authentic sense of purpose, they wind up lifting the entire ship. Korn Ferry Institute research has found that 90% of workers in purpose-driven organizations report feeling engaged, compared to 32% of employees in conventional companies. Another Korn Ferry Institute report noted that a one-point increase in corporate purpose, on a five-point scale, correlates with a nearly 10% decline in employee turnover and a 12%–16% improvement in the EBITDA margin. “When we look at the correlation between purpose and engagement, typically mission and values that have broader reach and appeal tend to drive more energy and relentless performance,” says Laouchez.

But caution: A sincere commitment to purpose is not a given. Corporate leaders who spout platitudes about their firm’s purpose but never translate those principles into action wind up exposing the company to activist attacks and destroying value. For a fuller account of this risk, please read our related article “Getting Nabbed for ‘Purpose Washing.’”

What should boards do to bolster a company’s purpose?

Organizations are accountable for their purpose statement, and consumers will severely punish any company that doesn’t live up to its stated creed. High-functioning boards, Brewster says, use oversight to mitigate that risk, keeping organizations in line with their purpose by monitoring areas like CEO compensation and tenure, financial reporting, and resource management. Furthermore, wise directors continuously ask questions about how the company’s purpose is being realized on the shop floor. “Purpose can help prevent some of those compliance issues from happening and help you respond quicker when they do,” says Brewster.

Purpose is an organization’s North Star. A board of course has a fiduciary responsibility to shareholders and ensuring healthy returns, but the best ones, adds Laouchez, also nurture the organization’s underlying meaning—its “true north”—by making sure its purpose is both well-defined and aligned with what leadership is trying to realize. “At the end of the day, it is the value that the organization is going to provide to the world,” he says. “Purpose is becoming the new strategy.”