Profit with Purpose: Reforming Business to Address 21st Century Global Challenges

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This article is part of a series in which OECD experts and thought leaders – from around the world and all parts of society – address the COVID-19 crisis, discussing and developing solutions now and for the future. It aims to foster the fruitful exchange of expertise and perspectives across fields to help us rise to this critical challenge. Opinions expressed do not necessarily represent the views of the OECD.

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Even prior to the pandemic, the concept of corporate purpose was gaining increasing traction amongst businesses and investors. Much of that interest stemmed from growing concerns about climate change and businesses’ role in contributing to it. With COVID-19, corporate purpose has taken on heightened significance and the agenda has moved beyond environmental concerns to include a broad range of social issues around health, inclusivity and diversity. 

What can corporate purpose do to address the social, political and environmental challenges of the day? The answer is an immense amount, once it is understood what is meant by it. Corporate purpose is why a company exists, is created and its reason for being. The traditional view, dating back to the 1960s and the work of the Nobel Prize winning economist, Milton Friedman, was that corporate purpose is just about making money. He famously said that, “There is one and only one social responsibility of business...to increase its profits so long as it stays in the rules of the game”. 

Micro Businesses, Macro Challenges: Rebooting start-up policy by Jonathan Potter, Head of the Entrepreneurship Policy and Analysis Unit, OECD Centre for Entrepreneurship, SMEs, Regions and Cities

Micro Businesses, Macro Challenges: Rebooting start-up policy by Jonathan Potter, Head of the Entrepreneurship Policy and Analysis Unit, OECD Centre for Entrepreneurship, SMEs, Regions and Cities

That notion of corporate purpose has held sway ever since. However, it has increasingly come to be linked with problems of business in relation to the environment, inequality and social exclusion, as well as its successes in promoting economic growth and prosperity. Instead, corporate purpose is now associated with the interests of stakeholders beyond shareholders, such as customers, employees, suppliers and societies. In August 2019, the Business Roundtable jettisoned its 22-year advocacy of “shareholder primacy” in favour of a statement about corporate purpose that embraced customers, employees, suppliers and communities as well as shareholders. 

What lends still greater significance to corporate purpose is to see it in terms of the role business can play in addressing the problems that confront us as individuals and societies – and to do so in a way that is commercially viable and profitable. It is not about charity or philanthropy, it is about “producing profitable solutions to the problems of people and planet” and “not profiting from producing problems for people or planet”.

Business should recognise the massive bailouts it received from governments during the pandemic were part of a social contract, and that it is now expected to lead a recovery that supports all stakeholders, not just shareholders.

A corporate purpose is not vague or woolly. It is precise about what problems a firm is solving and for whom, and how, when and why that company is best suited to solving these challenges. It does not complicate business by setting multiple targets; it simplifies by clarifying them. It is neither descriptive of what a business does – a mission statement – nor purely aspirational about where it seeks to go – a vision statement. It is why it exists and its reason for being.     

Coronavirus illustrates why a clear notion of purpose is so important. Companies have been forced to make hard trade-offs between protecting their employees and cutting costs for their disadvantaged and vulnerable customers, between supporting their societies by providing equipment for treating coronavirus and sustaining dividend payments to pensioners who depend on them. Companies’ purposes and values determine their priorities in making such trade-offs.

Read the OECD Policy Response: COVID-19 and responsible business conduct

Read the OECD Policy Response: COVID-19 and responsible business conduct
Photo: Shutterstock/Ollyy

Still more significantly, purpose establishes how companies should respond to our changing preferences and priorities as employees, consumers, families and societies. It identifies the opportunities for long-term value creation as well as the threats they pose for business continuity and the basis on which they can credibly seek funding from their investors.

Business should recognise the massive bailouts it received from governments during the pandemic were part of a social contract, and that it is now expected to lead a recovery that supports all stakeholders, not just shareholders. Initially there was similar public support for bank bailouts during the financial crisis, but that rapidly turned to derision when it became clear that banks were not adequately recognising their social licences to operate. It is vital that business does not make the same mistake this time because the political and social consequences will be much more serious.

It is no longer a question of whether or why companies should be adopting purposes to solve problems profitably – but what problems they should be solving and how. 

But these threats are not the only reason for enacting corporate purpose. It is also simply good business. It makes for greater business resilience and superior performance over the long term. As the chart below illustrates, companies with high environmental, social and governance (ESG) scores in the United States earned higher returns for their shareholders during the period when stock markets were falling between the middle of February and March 2020, and also during the subsequent four weeks when they recovered. It is increasingly being recognised that ESG is a risk class and an investment opportunity for shareholder. 

Corporate purpose inspires employees with meaningful, fulfilling work for which they can feel proud and dignified, not ashamed and embarrassed. It promotes relations of trust between companies, their customers and societies, and it creates greater long-term value for investors.  

It is no longer a question of whether or why companies should be adopting purposes to solve problems profitably – but what problems they should be solving and how. The pandemic has created an exceptional opportunity for business, investors, governments and societies to recognise the potential that corporate purpose offers for solving 21st century global challenges. They should not waste it.  

Companies with high environmental, social and governance (ESG) scores in the United States earned higher returns for their shareholders during the period when stock markets were falling between the middle of February and March 2020, and also during the subsequent four weeks when they recovered.
Source: Johnstone-Louis, Mary, Bridget Kustin, Colin Mayer, Judith Stroehle and Boya Wang (2020), “Business in Times of Crisis”, Oxford Review of Economic Policy

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Colin Mayer

Peter Moores Professor of Management Studies, Saïd Business School at the University of Oxford

Colin Mayer is the Peter Moores Professor of Management Studies at the Saïd Business School at the University of Oxford. He is a Fellow of the British Academy, the Centre for Economic Policy Research and the European Corporate Governance Institute, a Professorial Fellow of Wadham College, Oxford and an Honorary Fellow of Oriel College, Oxford and St Anne’s College, Oxford. He is a member of the UK Government Natural Capital Committee, and the Board of Trustees of the Oxford Playhouse, and he was a member of the UK Competition Appeal Tribunal and the International Advisory Board of the Securities and Exchange Board of India. He was chairman of Oxera Ltd. between 1986 and 2010 and is a director of the energy modelling company, Aurora Energy Research Ltd. He was appointed Commander of the Order of the British Empire (CBE) in the 2017 New Year Honours. He leads the British Academy enquiry into “the Future of the Corporation” and his most recent book Prosperity: Better Business Makes the Greater Good is published by Oxford University Press.

1 Comments

Go to the profile of Rosario Sheen
Rosario Sheen 3 months ago

Yes, it's not a matter of choice. Having a purpose will take business leaders to think beyond quarterly  profits, be responsive to the increasing market challenges of the post-COVID19 new normal, and  potentiate their company. Unfortunately, short sighted people can't see this broader picture.