The Challenges of Balancing Purpose with Performance

Investors now expect firms to have a purpose that meets the needs of all stakeholders and delivers returns. It is a difficult equation to balance. 28 May 2021 The Challenges of Balancing Purpose with Performance

Isabella Champion-Sinclair and Paris Mudan pen an article for Board Agenda on the board’s difficult task to balance performance with purpose.

Over the past few years, we have seen considerable changes in behaviour from a large portion of the providers of capital. An increase in responsible investing coupled with more forceful stewardship practices has resulted in companies and boards adapting to a reimagined idea of business that looks further than economic returns for shareholders, but on a societal commitment to a range of additional stakeholders. In fact, in 2019, the Business Roundtable, which is made up of CEOs from approximately 200 major US companies, issued a statement redefining the purpose of a corporation. It moved away from the notion of a company’s purpose being that of simply maximising profits for shareholders, to delivering value to all stakeholders.

Many companies have been called out over the last few years over lack of diversity and representation, pay inequality between genders, poor oversight of supply chains, and environmental mismanagement, among other issues. Last summer, for example, fast fashion retailer Boohoo was publicly condemned by its investors for the conditions its garment factory employees were working under in Leicester, and the fact that they were being paid less than half the country’s minimum wage.

Holding the company accountable, one of Boohoo’s largest shareholders, Aberdeen Standard Investments, sold 27 million shares worth almost £80m, representing two thirds of its holding in the company. Before the Leicester working conditions were publicly revealed, Boohoo was a popular holding for investors with an Environmental, Social, and Governance (ESG) focus, showcasing the need for a lot more scrutiny on the side of investors.

Described as one of the top corporate scandals in recent history, the 2015 Volkswagen (VW) emissions scandal revealed VW had been installing defective devices to cheat emissions tests. The scandal led to its share price to plunge as much as 23%, wiping out over $17 billion in market value. The sheer scale of misconduct led to the CEO’s swift resignation and VW has since worked hard to boost its sustainability efforts and linked a portion of executive pay to ESG targets.

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