We’re reaching a tipping point in purpose-led companies, as governments, investors and consumers increasingly indicate that they prefer companies that address global problems through competitive and profitable strategies. But many companies have not yet awakened to that reality to rethink how they will compete effectively in this new world.
In May 2019, the French National Assembly ratified a new law (“Loi Pacte”) that established a new corporate statute: the “mission-driven corporation.” Inspired by similar developments in the U.S., starting with Maryland’s 2010 “Benefit Corporation” that spread in various forms to some 35 states, the statute makes company boards and executives accountable to both profit and societal objectives. It also protects them from making decisions that balance these objectives in cases when trade-offs exist, for example, between investing in more sustainable and profitable models in the long-term and maximizing short-term profits. To make this work, however, enhanced transparency is mandated: such companies must report on all objectives, and audit progress and results independently.
The French law adds an important twist by adding a third condition on top of declaring a company purpose and spelling out concrete societal objectives and targets: mission-driven companies must also appoint a third “mission review” committee (in addition to a board of directors and a shareholder assembly), and the committee must include at least one salaried employee. In parallel, the government is “encouraging” all companies in France with any degree of state ownership to declare a societal purpose by 2020 and consider its social and environmental footprint.
Government interest in purpose-led companies is matched by rising investor and consumer preference. In 2017, Danone North America became one of the largest Benefit Corporations in the U.S., with $6B in revenue. As Danone is a French company, the move certainly influenced the new “Pacte” legislation described above. In the same year, Danone announced it partnered with 12 leading global banks to “lower its loan rates if Danone increased its verified positive impact in the world." One key criterion recognized in Danone’s amended credit facility is the percentage of Danone's consolidated sales from its Certified B Corp subsidiaries. And this year, Enel, a global utility leading in the transition to clean energy access launched the world’s first “pay for performance green bond,” raising some $1.5B (over-subscribed by $2.5B more). If the company reaches its goal to have 55% of assets installed generating renewable energy by 2021, it will pay a 25 basis point lower interest rate on the bond. And such financing gains are just the frosting on the cake: as it comes on top of winning market share with “conscious consumers” (and conscious corporate buyers in the B2B markets) that are giving preference to purpose-led companies. Benefit corporations, for example, are growing on average 28 times faster than most companies for that reason.
We at FSG believe that the purpose tide is irreversible now that governments, investors, and consumers are giving preference to better companies. But they do so, only if the companies’ purpose is truly “societal” and “authentic.” This occurs when companies’ core strategic and operational objectives include commonly recognized societal challenges. And yet, most companies today have either no clear purpose; a conventional purpose (e.g. “bake the best bread in the world”); a purpose that is a mere communication tagline without strategic “bite;” or a relevant purpose that has not yet fundamentally changed strategy or operations. Considering what’s coming from government, customers, and society at large, that may not a good place to be. FSG is glad to help.