Corporate purpose, capitals and agency

I had the luck to attend a short webinar on enterprise purpose recently. For the record the seminar was presented by strategy Fluid Rock Governance Academy.

For the uninitiated, the concept behind purpose is that the enterprise should contribute to long-term well-being and sustainability by taking altruistic actions to materially improve ESG. The concept feeds into branding by becoming a mechanism through which the consumer’s interaction with the brand becomes a method by which the transaction becomes a means to improve and secure the future. There you have it… purpose should be translatable into a bottom-line result.

This translation may be controversial. Generally, purpose is seen as ‘a reason to exist beyond profit’. However, this approach implies donation of value rather than a sustainable exchange of value, in which fulfillment of the bottom-line requirement contributes to longevity of the firm and impact on its purpose. The donation of value, even if treated as corporate social responsibility, has an impact on profitability if not offset by gains on transactions hence an impact on longevity.

The problem with purpose is that it is forecast without certainty. Although it may have a short-term result, it is more likely to have an impact in the long-term to very long-term. It is extremely difficult to predict an outcome in a volatile and uncertain environment.

Although purpose is encoded in corporate philosophy the enterprise has tenuous agency. Agency in this case translates into the ability to act intentionally, with forethought, to change a circumstance or the environment. Given the cost implication of purpose and the return it should generate the greater the degree of control over the outcome of purpose the better for all in the value chain.

The Fluid Rock speaker placed the firm as a pivot between the firm’s foundational capitals and its purpose. The capitals it referred to are those often used in integrated thinking and reporting, for instance the six capitals or UN SDGs, but in the case of the webinar, broader capitals developed through ESG-oriented activities, with an eye on long-term human wellbeing.

The firm is cast as an entity driven by financial capital with a set of parameters that achieve planned objectives. The conundrum is that by manipulating foundational capital, the firm has to obtain the optimistic results envisaged in its forecast purpose. How should the firm achieve its purpose with a degree of certainty?

The logical method is to focus on purpose which can be realistically attained. This will require tailoring the foundational capitals and narrowly managing activities in line with the mission. Referencing the mission will give agency to the transactions and operations that can sustain delivery of purpose.

The second challenge is to quantify the foundational capital, to measure, assess and refine activity and control impact on purpose. As the outcomes tend to be long to very long-term and often non-financial, the only immediate method will be to compare the expense of the investment (potential profit in non-implementation less profit with implementation) and add that to the book.

Statements by oil producers have questioned the viability of renewables in the face of the existing oil and gas. This points to the tenuous nature of sustainability and purpose. Ultimately, if the accounting and value of the asset cannot be resolved, the value of purpose as a driver of corporate philosophy cannot be relied upon as it will not be trustworthy. Regulation will be the only means to enforce corporate responsibility.

For better or for worse, acceptable measurement needs to be brought to the fore in thinking on this portentious field.