There’s a significant head of steam building up to reform section 172 of the Companies Act of 2006. And I know what you’re thinking. ‘Acacia Avenue truly know how to craft a riveting opening sentence.’ But before you click off, it does affect everyone that’s (still) reading this.
Ploughing on, section 172 deals with the purpose of companies, the reason why they exist, and the obligations that directors have as a result. Those duties read as if the text was phoned in by the statute drafter on a duvet day. The section talks nebulously about acting in good faith in a way that ‘would benefit members of the company as a whole’.
Hmm. Well, this got tightened up in 2018, with the new Corporate Governance Code, which is coming into force right now. It might partially explain the increasing amount of interest we see amongst companies of all sizes in clarifying their corporate purpose.
Of course, as with all trends, there’s more than one thing going on. To mention just one parallel strand, there is the much-mentioned tendency of Millennials to put potential employers under the microscope in terms of their values and declared purpose. In a competitive labour market, that sort of pressure mounts up.
As is often the case, entrepreneurs tend to be ahead of the game. We well remember one of our early clients, the founder of an entertainment business, who said that he had only one guiding principle, that ‘profit is a consequence’. When asked “A consequence of what?”, he’d reply with “Treating customers and employees in the right way.” All very simple, and smack in line with both the letter and the spirit of The Companies Act.
So why do larger, more established companies struggle with it? And hire firms like ours to help them? We see at least three reasons.
1. They started donkey’s years ago. And when they started, they had clarity about what they were about. But with growth and time comes new leadership, and that original clear-sightedness is harder to achieve as the business becomes more complex.
2. Times change and culture changes, and perhaps expectations change. Or maybe they don’t, but it’s hard to separate the cultural signal from the cultural noise.
3. And then there are customers. A few are passionate and vocal about corporate behaviour, and hold companies to close account. But most don’t care that much beyond product quality and service, and have opinions that evolve at glacial speed. Which cohort do you pay the most attention to?
As a result of all our time spent working with companies on their purpose, we’ve got plenty to say, but we’ll limit ourselves to four thought starters for now:
a) Listen equally to people inside and outside your company. A purpose must work for both audiences – motivating internally, and believable externally. Having said that, listening to both audiences via research will only take you so far. They will not and cannot give you the complete answer – that’s what leadership is for.
b) Root your purpose in something tangible that your business sells. It makes it real and not a box tick. One of our clients sells things for children, and central to their purpose a concept they call The Playground, which prevents them from ever forgetting their most important customers.
c) Don’t get confused by the terminology of vision, purpose and mission. Although they are often used interchangeably, in fact they are distinct and not complicated. Vision = what you see, meaning it represents your company’s point of view on the world. Purpose = why you do what you do, the reason you and your colleagues get out of bed and come to work. Mission = a specific major task, inspired by and aligned to the vision and purpose. The mission should change once it’s achieved.
d) Once you’ve worked your purpose out, leave it alone. How you do business will change often, why you do it shouldn’t. Helping you with your purpose is a project we only want to do once.