Podcast: Brain Food for General Counsel

Companies are redefining what they are for: away from solely delivering shareholder returns and towards a central 'purpose'. But can that approach survive the coronavirus crisis? Do purpose-led companies have a better chance of thriving, even at the most testing of times?

Richard Foley of Pinsent Masons and Lisa MacCallum of Inspired Companies discuss how having a purpose changes a company and makes it more resilient when crisis hits.

Transcript

Matthew:

Hello and welcome to the Brain Food Podcast for GCs from Pinsent Masons. My name is Matthew Magee and I am a journalist at Pinsent Masons. Today we are talking about a fundamental change in the way that companies see themselves and what it means in times of crisis.

We'll be discussing purpose – an expression of what an organisation is for.

For 50 years or more the world's biggest companies have been about one thing and one thing only - earning profits to give to shareholders. Generating shareholder value has been the single defining goal at the heart of corporations guiding every decision from where to locate a factory to who to pick as CEO, but something is changing. Companies are beginning to reject 'shareholder supremacy' and define for themselves what lies at the heart of their organisation. They are adopting a purpose.

Purpose is meant to encapsulate what a company is for. To answer the question, why does it exist? When done well this means undertaking fundamental process of self examination, consultation and rigorous thought about the nature of the organisation. So we wanted to know what this means for GCs, heads of legal and the legal functions of companies engaged in this process. So I talked to purpose consultant Lisa MacCallum of Inspired Companies to find out more about what being purpose-led means and to Richard Foley, the senior partner at Pinsent Masons. He has not only led Pinsent Masons own purpose process but has spent a lot of time talking to chief executives, chief financial officers and chairman about fair purpose processes.

Now we are living through probably the biggest crisis to hit the economy and businesses that any of us has ever seen. So does having a purpose help cope with situations like coronavirus and lockdown? And is the purpose surviving contact with a crisis of this magnitude?

Lisa MacCallum:

We'll come back to what the current situation is revealing about purpose-led businesses a little later, but first I asked Lisa to help us with the big question. What is purpose?

Having a purpose is all about expressing why you exist as an organisation. That is fundamentally different from the commitments you make around your values. How you promise to behave. Which was also different to how you might describe yourselves in your actual identity and branding. Because the market is demanding that companies stand for bigger ideas. Companies are in a position now that even just to actually compete better they have to clarify for the market.

A good purpose statement today will be a purpose with many winners. Will be an idea to pursue with many winners. Not just one winner. That is the ultimate filter.

Matthew:

I am interested in where it crosses over into ESG. So environmental social and governance factors which is another big pressure point in how companies take decisions and how they think about what the outcomes of those decisions are and you do see some companies talking about purpose very much in terms of ESG factors as if if they tick some of those boxes that equals a purpose but If I understand it right you do not think that will achieve the same result?

Lisa MacCallum:

ESG is fundamentally not a purpose. Where we started with that a purpose statement gives you clarity as to why as an organisation you exist. It does not actually mean that ESG environmental social and governance factors are your purpose. Those things are more so commitments. So we will not destroy the planet. We will not serve humanity in a way that is negative and takes away and extracts from the human race and we will have governance systems that are above broad and high integrity. Those things are commitments for how your business will operate. It is not the reason your business exists. So: necessary but not sufficient.

Matthew:

So we have a pretty expert view on what a purpose is and you do not have to look very far to find lots of companies talking about it, but can we know how many of the worlds biggest companies are actually putting this into practice? Richard Foley has direct experience of the extent of the corporate world's interest.

Richard Foley:

I would say we are the bottom of an exponential curve. It is certainly the case that three years ago this was on hardly anybody's radar and they might have a handful of corporates. A really small number. It is now, I would say, something that over half of the corporates that we interact with are engaged with but I would say it is probably only 5% of that 50% that are pretty well advanced and again I look at our own experience. It took us a while to identify what we felt the purpose was of our business and then you have to raise awareness of that within your organisation but to then transition from being a business with a purpose to a purpose-led business is really tough and it takes a long time. So the fact there is relatively small number of businesses that could probably hold their hand up and say, 'I think we are genuinely purpose-led' - it's not a bad thing. It is just a consequence of time.

So I would say that I have met more CEOs and CFOs in the last 12 or 18 months than I have met in the previous six, seven years put together around any topic and most of the conversations I am having with CFOs and CEOs at the moment is around purpose or perhaps the wider inclusion or RB [responsible business] world. What I am hearing consistently is exactly the same as resonated in our business, is that if you cannot explain to the world why you exist as an organisation then the default setting is you only exist to enrich yourself and that is a pretty unedifying position is far as your customers are concerned, as far as you suppliers are concerned and actually in particularly as far as your employees are concerned and so what is important here, and CEOs in seeing this, is that there is real competitive advantage to be found in working out why as an organisation you exist and being able to articulate that in a way that is authentic to your customers, to your suppliers and to your employees.

Lisa MacCallum:

I think the new regulations that have recently gone through at least the public companies in the UK have required companies to be clear about what their purpose is and that that purpose needs to be beyond shareholder interests and profit maximisation. So, that is probably at least for listed companies new information in the UK that is out there and I think the outcome of that, however, really is being that there is a first step of coming up with a purpose statement and it has been celebrated and all companies even have bigger statements than they had before. I think the disappointment there is a lot of action has not been necessarily as widespread as has been hoped, I think from that regulation.

And do I think that is because business leaders do not want to do it? No, I actually think that's because there has not been a roadmap for how companies actually deliver on these much bigger, wider, broader purpose statements. We have operated in the corporate sector for 80 or more years and we have become very good at wiring our companies to deliver to mission statements like 'we want to be the number one in our industry' - one winner goals. Now these new purpose statements fundamentally by definition - if you think about Nike's mission statement it is to inspire and innovate, or to bring inspiration and innovation to every athlete in the world and if you have a body you are an athlete - that is a many winners goal. Google's is to organise the world's information and to make it accessible and useful. It was not to become the number one search engine in the world. So, these are by definition many winner statements and we are not practised yet in the corporate sector as to how to wire an organisation to deliver against that with finite resources.

Matthew:

Coronavirus and the associated lockdowns are causing issues for every organisation and at a scale most of us would have found hard to imagine before the crisis. So are companies with a purpose better off? Does it better equip them to rise to meet these challenges?

Richard Foley:

I think when you've got a clear sense of purpose identified within your business it causes you to ensure that all the short term decisions you have to make in the context of CV19 you make through a long term lens. Your purpose helps guide you as to ultimately the things that you have to do because they're the core things you believe in and that won't change, that'll be there way after the pandemic fades away, so all of the short term decisions you have to make now in the context of CV19 have to fit within that long term purposeful structure.

Matthew:

Companies with a purpose will say that they behave differently to those without one, so are we seeing this in the decision-making around Covid-19?

Richard Foley:

Yes I think purpose led businesses will behave differently in the sense that part of the challenge we face with CV19 is that there are so many decisions to make it's easy to get lost in the maelstrom and a lot of purpose-led businesses talk about purpose giving them a north star so that gives them some really simple guiding principles and having those principles guide you through that morass of decision-making really helps.

I know these are clichés but it's remarkable how true they've been, this whole thing about crisis reveals character rather than forming it or reveals culture rather than forming it. If you think about purpose in that context it is absolutely true. It's very easy when everything's going well to talk about what you might think of as wider aspirations, but can you hold true to that when heat is really on? That's the acid test.

Matthew:

It's been a long time since this much attention and scrutiny has been focused on the behaviour and decision-making of companies. The stakes couldn't be higher – the world is watching how companies are conducting themselves through this crisis.

Richard Foley:

Your suppliers are watching, your customers are watching and your employees perhaps in particular are watching. When you look at some of the wider agendas that businesses have been working on for a while, whether it's inclusion and diversity, whether it's how you innovate around the delivery of legal services or whether it's around purpose. If we're honest with ourselves these have not been driving significant buying decisions – and I mean buying, if you're an employee who do you go and work for, if you're a customer who do you employ? And I think we'll see more and more of that and I think that would be a good thing. You actually want to be judged by this stuff, this is the stuff that matters. And you don't want to be judged just as a matter of sentiment, people saying 'oh that was nice I thought Pinsent Masons were really good', you want more than that, you want people saying 'actually that's exactly the kind of business I want to work with', whether that's working with as a customer, working with as a supplier or working with as a colleague.

Matthew:

So, where did GCs and heads of legal fit into all of this? We will hear from Lisa later about how the chief purpose officer in a company absolutely has to be the chief executive. So where does that leave senior lawyers? You can read in our companion piece at the Pinsent Masons website. Just search for 'the purposeful GC' about how the GC can be thought of as the conscience of the company helping to frame and make the really big decisions. So does purpose provide an opportunity for them to step into even more of a leadership position? How should they approach purpose?

Richard Foley:

So I guess that from a starting point really is legal functions, not trying to set them aside, set themselves aside from the rest of the business. I guess one of the things about purpose is that if it does not run its way through the entirety of an organisation, then the organisation is not purpose-led. So if you look at the legal function and you look at what they do in seeking to enable the business to deliver their strategies. If the legal function thinks well purpose is not really for us or that is really only something that happens in the business then you kind of immediately fail that authenticity test.

Matthew:

So if it is going to have an effect, what does that look like or what is that likely to look like? What are some of the kinds of changes that legal functions will see as a result of this?

Richard Foley:

So, I think our legal functions will…what I see here is the need to think much broader than what is the legal or regulatory answer to this particular topic or issue and start thinking much more about what is the right or appropriate thing for my organisation to do. This legal functions, whether they are in-house teams or whether they are external teams, have sort of either felt or put themselves in a bit of a kind of legal box. I think if you are looking at purpose-led organisation, if every decision that they make including the legal decisions that they make, they have to make in a purposeful way or in a way that is consistent with their own purpose.

So I guess that the kind of…the most obvious effect will be…look cause a matter of contract or law or regulation the answer is X, however, and then it is the bit you add on after the however that I think it is important here. However, not withstanding that the right thing to do having regard to what our organisation stands for, is X.

Matthew:

And, that might bring into conflict with other executives at the organisation is…are GC are going to find themselves coming up against people resist in taking that role. Who see them in a more traditional role and what can we do to overcome that?

Richard Foley:

Yes I mean, I think they will because the reality is in any organisation there will be different amounts of Kool-Aid that are being drunk by different folk on the board or EXCO or what it really is and if general council and legal functions is find their snag. They give unpalatable advice based on law or regulation which might not be to the financial benefit or the strategic benefit of a business but that is their job. They have to do that. I guess what I would say is that the exactly the same applies when the legal function is saying look; give them what we say we stand for. Give them why we say we exist as an organisation. I have to tell you, you should not do it that way and it seems and in some respects sounds even more difficult for them, because it is bad enough saying no you cannot do that because you are not allowed to as a matter of law and regulation. It is much trickier when you say you cannot do that because you should not because it is wrong.

Matthew:

So given your experience talking to chief executives and to boards, how many organisation or are organisations ready to hear that message from GCs or GCs seen in that light just now or did they need to change the entire perception?

Richard Foley:

I would say that increasingly general council are thought of as facilitators and implementers of corporate strategies. I think their most…most of them or enlightened organisations and I would say increasing number of organisations they have moved out of the pure legal box a while ago. Whether the legal functions are seen pretty regularly more in that kind of corporate conscience way. I think the answer to be honest will lie in where the CEO and all the CFOs sits in purpose from all generally. If they are absolutely wedded to it then yes they are going to want to hear from the general council and anyone else about what is the right thing to do. Not just what is the kind of correct thing to do. They kind of purpose washing and they have heard about this and they know they got to do it and also on their website and then yes that will be a long way to go there.

Matthew:

There is an opportunity for a greater leadership role for GCs here because they are concerned with regulations and laws and thinking about how companies should behave. They have been thinking about these questions for a long time. So, there are opportunities here for them to be leaders within their organisations to a greater extent and before through purpose programs.

Richard Foley:

General Council have the and I think an almost unique position of being able to say to the corporate the things they can and cannot do. Well certainly giving that advice in the kind of strongest possible term. Particular around compliance and regulation that is pretty black and white, but around legal nuance. I think when you…but that is an obvious person there for you would turn to. Almost with that you were given a smell test here. What you are saying to me is that legally we could do X, but you are telling me that we should not because of the wider reputational risk or so forth. So the fact that the general council in particular of that particular of that kind of trusted adviser role but they are in that proper trusted adviser role. You think it would not be a very big step for that trust and the advice being sort to move into that purpose space beyond the pure legal regulator or compliance space.

Lisa MacCallum:

Lawyers have this problem solving skill set that is so sharp and so brilliant so put it to work. Put it to work on solving to deliver against a really big idea with many winners. Put it to work on solving for what it means for the strategy as you have an organisation. Is it...there is a will for sceptics 100%. Play that role, lawyers are very good at it, but do not be a nay say. You have to enable this because at the end of the day if your organisation is not clear on why it exists, then you are not going to be in that position to gain the support of society to get behind you and that is how you can create competitive advantage. So, the GC's in the room please bring your scepticism' in but do not be a naysayer because then if you are a naysayer then push too much against this then you will fundamentally put your organisations to disadvantage. I would say look at the direction that the market is heading. Look at how the cord of public opinion is really determining their brand status and growth of organisations the success and failure of them and figure out how what lawyers are so good at can take into account that power dynamic and advice the companies that you work for to go with it. Not work against it.

Richard Foley:

Lawyers are lovely people but they do like structure and they do like to know where the line is between black and white and understanding that you have to start thinking about why an organisation does what it does not just what it does and how it does is something that people who tend to gravitate towards law kind of struggle with it a bit because we like our process and we like our evidence and we like to know what is going on. So, I guess the pitfall is do not look at this too literally all of the time. The number of conversations that we have had is well, okay which you see this but you talk about progress but some progress can be negative.

Some changes can be back. Well you know I know that, but we are not talking about them are we? But I do not have to slay we stand for good change. It is simplicity. Think about the essence of this rather than what the actual words say and that is probably quite challenging for a lot of people in the legal fraternity because all our training is about what the words say and a lot of this is about looking behind that I suppose.

Matthew:

The concept of purpose is that positive and empowering one and that can be uplifting but we should not lose sight of just how radical it is overturning the corporate orthodoxy of shareholder value that has ruled the roost for decades. So I ask Lisa and first Richard how this is going down with senior executives and chairman who are after all accountable to those shareholders?

Richard Foley:

I think there are two types of answers to that. I think there has certainly been a shift in investors and shareholders over the last, I do not know, year or two where they are just not going to accept that the only thing that matters is the rate of return. So, there has definitely been a shift. You see so much evidence of that around you. You have got to pick up the [19:55] deal. You know going to the news or whatever it is. So there is definitely a change in the way investors and shareholders, or some investors and some shareholders are thinking whereby they are saying look I know the return is highest over there but I have looked at the way that company generates its return and I am not prepared to invest this. So certainly that has to change but I think the much bigger point is that shareholders and investors are increasingly coming to the view what those corporates that do business in the right way are going to be the most successful corporates longer term and therefore the returns will go up.

So I have kind of, I never got this purpose for us as profit debate. I mean the whole point about becoming a purpose-led business is it will make you a better business, you will attract better employees, you will attract better customers, you will attract better suppliers and you will therefore out perform your impairs and there are some interesting Harvard case studies on the performance levels for purpose-led businesses as apposed to businesses that are not purpose-led.

So you got that longer term thing of I could get a great rate in return from this business in the short term because I have seen the way they treat their suppliers and so on and so forth, but I do not believe those corporates will survive and therefore I will switch my investment into those businesses that I think will be long term sustainable and therefore you get better shareholder return.

Lisa MacCallum:

I just saw a report in the last couple of days that came out from Deloitte that said that 80% of mainstream investors now are requiring this are asking for it and so I think absolutely what we have seen is that the investment community understands that organisations that - I think if we go back to the environmental social and governance commitments - organisations that do not get to that basic level of commitment as a requirement to becoming purpose-led, they are going to be the more risky investments. So they look to those measures to help decide who they are going to invest in. That is becoming quite normal now.

Larry Fink, chief executive of the biggest investment engine in the world, has stated very clearly that the companies that are going to be investing and recommending need to have a purpose and so he has put companies on notice in that way. So, investment funds have definitely moved in the direction of this. I think everyone is still looking for guidance on how to pick the winners. How can you actually pick the authentic companies'?

Matthew:

Something Lisa and Richard returned to again and again as we talked was the scale of the project to become purpose-led, about the gulf between organisation that go through the motions and have a purpose and those who undertake wholesale cultural change and become truly purpose-led.

So how big a job is this, and what are the consequences of being half hearted?

Lisa MacCallum:

It is the most important thing the company. If you have said there is a reason to exist and you have articulated it you have successfully articulated the reason for your company to exist, you are going to have to pursue that for the perpetuity.

So what I can say on the up side is that all organisations that I have worked with that have actually gone about it in a authentic way and truly want to understand what it is and then put mechanisms in place to ensure that the momentum to become purpose-led actually delivers and that they have invested importantly in that transition. This is one of those things that is a new muscle. Organisations need to learn what it means to have a purpose and how that shapes strategy; how that actually has an effect on redefining success for an organisation; how it redefines how people are measured and rewarded and all sorts of things involved after you have clarity around your purpose. This is an 'in perpetuity' effort. You just get better and better and better at it. Until it becomes sort of the way of working.

Matthew:

This is not a project with an end date.

Lisa MacCallum:

Absolutely not. In fact another mistake that is being made today is if you communicate purpose to the CFO then the CFO based on all the statistics you give them on a business case, might fund an initiative and then that initiative will complete with all the other strategic initiatives that are going on and that is another mistake that is being made today. Purpose is something that the entire organisation needs to own and lead in unison. Yes, there may be number of guardians that really focus on the transition to ensure that it is actually occurring within the organisation, but the chief purpose office make no mistake, is the chief executive officer. That is step number one that everyone needs to own that purpose in order for the organisation to authentically deliver against it.

Richard Foley:

The common thread of businesses who has done it really well, is that they have not driven it. They have led it from the top but they have not driven it from the top. If your CEO and your board tells the business why it exists, that is a struggle. You go into the business and ask the business to explain to you why they think they exist as individuals in the business, why they think the business exists, why did they join, why did they stay, what did their best day look like, when were they most proud, when were they most happy? The businesses that seem to have done best here are the ones that reached into their business and asked the business to identify the things that end up as the essence of the purpose.

So I use this phrase about relentless enthusiasm and I know it irritates an awful lot of people but your leadership has to be relentlessly enthusiastic and that it is difficult over a long period of time but in my view it is critical.

Secondly, the alignment of your strategy to your purpose for me is an absolute fundamental to the long term sustainability because if ever there comes a time when people believe that purpose sits in some kind of parallel universe and not praised alongside the core business, you are dead. So, in purposeful strategy and whenever you are talking about strategy referencing the language of your purpose, the consistency of wording and talking about how you...your strategy is the what, with your purpose being the why so making that link. And then the third thing really is you do have to get people positive endorsement of where this is working well. So the most powerful thing for any organisation is when you can point to customers that have chosen to use you over your competitors because they believe the sort of stuff that you believe in.

My impression talking to the GC community is they are significantly more confident about engaging in discussions around purpose and the right ways of going about business than they were only a couple of years ago and I am not at all suggesting that they were going about business the wrong way but there is so much noise and information and about how corporates and how CEOs and how chairs of boards are embracing and getting to understand the benefits of a purpose-led and I think that has given GCs a lot more confidence to step forward and kind of step in and say look, when we are thinking about…even if it is just mundane as our terms and conditions we should not just be thinking about wholesale risk allocation to whoever can bear it in the least. We should be thinking about: what are we trying to achieve here? What will benefit our customers most? What benefit our suppliers most? What will be the right thing to do? Certainly the conversations that I have with general counsel is that they are increasingly confident in wanting to express views about how the legal function can help deliver the purposeful strategies and help protect corporates from some of the risks that are out in there that are not purely legal or 'I know we did that but the law allowed us to do that' - well it is not good enough anymore.

Matthew:

Well thanks for listening to Brain Food for General Counsel from Pinsent Masons. We will be here every month to give you food for thought and hopefully help you navigate daily life and find time to think about some of the bigger issues out there. It was produced and presented by Matthew Magee for Pinsent Masons, the international professional services firm with law at its core.