Creating a Purpose-Driven Organisation

HUMAN CAPITAL LEADERSHIP INSTITUTE
A collection of insights from HCLI’s Directors-in-Dialogue series
CREATING A PURPOSE-DRIVEN
ORGANISATION

Copyright © Human Capital Leadership Institute
ABOUT DIRECTORS-IN-DIALOGUE
Debate. Discuss. Discover.
2
Boards today face a range of complex challenges as
stakeholders demand greater transparency and accountability
across decisions that affect the success and sustainability of
enterprises.
As thought-provoking as it is insightful, the Directors-in-
Dialogue is a series of highly interactive forums that facilitate
robust, in-depth discussions and debates on topical subjects of
high relevance to board directors today.
Specifically tailored to address the evolving needs of board
directors in Asia, participants are provided with the most current
thinking on board effectiveness from global thought leaders and
subject matter experts, blended with valuable insights and
practical “usable” knowledge from some of Asia’s most
renowned boardroom leaders and practitioners.
The discussion themes for each forum vary and are continually
refreshed to reflect subjects that are top-of-mind for board
directors in Asia today.

One of the paradoxes of business today is that the most
profitable businesses in the world are not those which are the
most profit-focused. Substantial research has consistently
shown that purpose-driven organisations generate far more
returns as compared to profit-driven organisations. If any
organisation’s leader and its people get the purpose right,
profits will follow. This reality runs contradictory to the common
understanding of the story of business.
Businesses around the world are undergoing a major shift.
After the global financial crisis, boards, business leaders and
policy makers recognise that business is a key institution in
meeting the challenges of every society, and it will play an
increasingly important role in building better societies and
making the world a better place.
In short, the story of business is changing. There are many
different versions of this new purpose-driven story, from
Corporate Social Responsibility to Conscious Capitalism,
Shared Value, Just Capital, Patient Capital, Socially
Responsible Investing, and others. Some of these ideas are
merely bolted onto current business models, while others
represent more systematic changes.
Facilitated by Professor Edward Freeman, the Elis and Signe
Olsson Professor of Business Administration at the Darden
School of Business, University of Virginia, and one of the
world’s leading scholars in the field of business ethics, this
Directors-in-Dialogue session is designed as an interactive
dialogue to examine how directors can lead the process of
change to create a new story of business.
This slide deck captures the key insights presented and
discussed during the session. HCLI hopes that the collection of
bite-sized insights here will contribute towards knowledge, such
that more in the business community will benefit.
CREATING A PURPOSE-DRIVEN ORGANISATION
A Synopsis
3

LET’S BEGIN WITH A
QUESTION
What makes
a business
successful?
4

Here’s what
participants at
the Directors-in-
Dialogue session
said:
5

HERE’S ANOTHER
QUESTION
What if it’s
something
else that
truly makes a
business
successful?
6

Something else like…
Real Human Beings
Collaborating to
Create Value and
Trade With
Each Other
7
Source: 2017 R. Edward Freeman

HMM, REALLY?
This doesn’t
square with
the Story of
Business.
8

1. Business is primarily about making money and profits.
2. The only constituency that really matters are shareholders, or “owners” or financiers.
3. Capitalism works because people are completely self-interested, and will only act for
others if they have the proper incentives.
THE STORY OF BUSINESS IS:
9

• If people are purely self-interested, will they truly collaborate with each other to create
value?
• What is value anyway? It is not quite the same as profits, right?
• And, what do the shareholders say?
SO, THE DOUBTS ARE:
10

MULL OVER THIS REAL SITUATION SHARED BY
A DIRECTOR
11
An international company
does forestry operations in
the Congo Basin. It does
so on a sustainable basis,
complying with all the local
laws and regulations, and
abiding by global best
practices. In fact, all its
forestry operations are
certified by the Forest
Stewardship Council.

One day, its operations came under attack
by two local NGOs. Apparently, because of
the forestry operations and opening of
roads, a malaria epidemic had occurred in
the village communities around the forest.
The company brought in a leading expert
from the UK and set up an independent
investigation to establish the cause of the
epidemic. The NGOs were invited to join
the investigation but declined. In due
course, the independent investigation
established that there was no causal
relationship between the opening of roads
and the malaria epidemic – there were
other reasons for the epidemic.
12
Unfortunately, there has been significant
negative PR exposure for the company.
Because of the noise created by the
NGOs, the company’s shareholders and
bankers are questioning why the company
is involved in this incident. The matter has
become a distraction to business as usual.

THE COMPANY’S BOARD IS NOW FACED WITH
TWO CHOICES:
A. Shut down the forestry operations in
the area and walk away. While the
operations are profitable and meet the
company’s minimum threshold for
returns, it is a small business and not
very significant for the company.
13
B. Continue as the company has an
ongoing responsibility to the village
communities around the forest.
Comprising a population of 4,000
people, 80-90% of the economy of
these villages depend on the
company’s forestry operations.
Furthermore, the board is clear that
anyone else who inherits the business
will most likely run it very differently.
Meaning, not based on sustainable
forestry practices. The forest
environment and village communities
will be destroyed.

A QUESTION FOR YOU
If you are a
director of
this company,
which would
you choose?
14

FOLLOW-UP QUESTION
Will your
choice differ
if the Story
of Business
is reframed?
15

HERE’S WHAT WE MEAN:
16
The OLD Story of Business
Source: 2017 R. Edward
Freeman
A NEW Story
Business is primarily about
making money and profits
The only constituency that really matters are
shareholders, or “owners” or financiers
Capitalism works because people are
completely self-interested, and will only act
for others if they have the proper incentives
1
2
3
The “Purpose”
Principle
The “Stakeholder”
Principle
The “Human Complexity”
Principle

• Business is primarily driven by purpose, and not by profits.
• Making money and profits are the means to an end, but not an end in themselves.
Profits are like red blood cells. We need red blood cells to live, but making red blood
cells is not our purpose to live. Likewise, making money and profits is not the purpose
of business.
• The purpose of business is about the difference that the organisation and its people
are trying to make.
THE “PURPOSE” PRINCIPLE MEANS:
17

• Creating value for shareholders, as well as customers, employees, suppliers, and
communities. Building and leading a business involve getting these interests going in
the same direction.
• Doing this does not mean the business will be successful. BUT it means the business
can be successful – and likely worth building and leaving for the next generation.
• Consider the proof of possibility…
THE “STAKEHOLDER” PRINCIPLE MEANS:
18

In the book, “Firms of Endearment: How world-class companies profit from passion
and purpose”, research by the authors found that these stakeholder-oriented firms of
endearment (FoEs) outperformed the S&P 500 and even the “Good to Great”
companies in the long term!
19
Check out http://www.firmsofendearment.com/ to learn more.

• Capitalism works because we are complex creatures with many needs and wants,
and we can cooperate to create value for each other.
• Humans as “complex creatures” means we:
• Make decisions based on reason, as well as values.
• Are relational and social, as well as individual.
• Have aspirations for themselves, as well as others.
• Want to be a part of something larger than themselves, as well as master the environment.
THE “HUMAN COMPLEXITY” PRINCIPLE MEANS:
20

Of course, if we only treat people with the carrot and stick approach…
… We will get jackasses.
21

THAT’S A NICE STORY.
But it’s
challenging
to translate
from fiction
to fact.
Here’s why.
22

FIRSTLY, PEOPLE GET MIRED IN DISCUSSIONS
AROUND PURPOSE AND PROFIT.
23
Even among the participants at the Directors-in-Dialogue session, they had these
questions when thinking about purpose-driven organisations:
What is the connection
between purpose and profit?
What is the role of profit in
purpose-driven organisations?
Purpose in systems
and processes?
Difficult.
Is it purpose OR profit, or
purpose AND profit? Is there a
conflict or do great companies
dissolve such conflicts?
Who determines
the purpose,
and how?
Do employees
understand the
purpose?

IF A BUSINESS NOW
WANTS TO BE
PURPOSE-DRIVEN
How does it
start on this
journey?
24

SO, A DIRECTOR SHARED A COMPANY’S
JOURNEY OF DISCOVERING ITS PURPOSE:
25
Right at the start 7-8 years
ago
3 years
ago
Today
Didn’t understand
what purpose was
Looked at the world’s demands of their
industry, and realised current practices
cannot meet those demands without
cataclysmic consequences on the
environment and society
Surveyed 8,000 senior employees
to discover what will really inspire
them (not just satisfy nor engage).
Gave them a dozen purposes to
choose from.
THE WORLD’S
PRODUCE
OF FOOD
And create
long-term
value!
Really understood what a purpose meant:
What are we on fire about? What is the big problem
we are trying to solve? Therefore, what is our cause?
Formulated a purpose, with the
understanding that it was “how
we conduct our business”

BUT HERE’S ANOTHER
CHALLENGE
Create long-
term value?
Do the
shareholders
agree?
26

THE DIRECTOR SHARED THAT THERE WAS
RESISTANCE FROM THE SHAREHOLDERS:
27
The company listed 12 years ago,
and had no control as to who
registered as a shareholder.
Five years ago, 57% of its registered
shareholders were institutional
shareholders with short time
horizons – the average holding
period was 3-5 months.
How can you commit
shareholder funds to
such distant returns?!
We are not going to
be a shareholder in 6
months, let alone 7-
12 years!
Your business is to
do your business
well and generate
value for us. There
are costs to us as
shareholders.

SO, THE COMPANY DECIDED TO GET THE “RIGHT”
SHAREHOLDERS.
28
• It made a voluntary offer to change its shareholder base from short-term to long-term.
• Today, two long-term shareholders own 76% of the company; management owns
another 9%. Hence, while publicly listed, the company is virtually a private company.
• Essentially, the company needed supportive shareholders who would hold its stock for
at least 7 years and who are aligned with the tenure of its strategy. This gave the
company space to live out its purpose, and time to realise value creation.

BUT 7 YEARS – AT LEAST!
ASK YOURSELF:
If I am the
management of
this company,
will I see the
returns during
my stint?
29

ADMITTEDLY YES, YOU MIGHT NOT GET GLORY
ON YOUR WATCH.
30
The director who shared about this company did not dismiss the possibility that the
returns to the company will not be realised during the tenure of the current
management team. He said:
“You might not get glory on your watch as the CEO, but as the
steward of the company, you need to make those choices so
that the long-term value creation objectives that you have are
sustained.”
Hearing this, another participant remarked:
“Leadership is long-term stewardship, maybe even beyond
your stint. Otherwise, you are an opportunist.”

SO, IT BOILS DOWN TO LEADERSHIP…
31
• There is a distinction between management and leadership. Managers use the carrot
and stick approach well. Leaders have genuine concern for others.
• You can say leaders are truly “complex creatures”. A quick recap as to what this
means:
• Make decisions based on reason, as well as values.
• Are relational and social, as well as individual.
• Have aspirations for themselves, as well as others.
• Want to be a part of something larger than themselves, as well as master the environment.
• Are you a leader?

LAST QUESTION
Do you want to
tell the new
Story of
Business, and
help make it real
for the world?
32

REMEMBER 3 QUICK POINTS TO GET STARTED
33
The NEW Story of Business
Your Action
The “Purpose” Principle
The “Stakeholder” Principle
The “Human Complexity” Principle
1
2
3
Discover purpose.
What difference does your business
want to make to the world?
Find shareholders who support you
serving your stakeholders and
creating long-term value.
Forgo your glory.
Become a steward and help
others develop this mind-set too.

THE FINAL WORD TO
BOARDS
• Encourage management to take risks – this
does not mean negative surprises are permitted.
Instead, management must be stewards of the
investments they have recommended, monitor
what is going well and what is not, and be open
with the board when things are not going well.
• Make use of every opportunity to have values-
based conversations with the CEO and
management team, “What is the right thing to do?
What are the values at stake here?”
• Do not measure the CEO and management on
stock price or profitability alone. If serious
about a purpose-driven, stakeholder-oriented
business, look at a balanced scorecard.
Employee engagement is a good place to start.
But don’t just do surveys. Review employee
turnover, exit interview data, and even Glassdoor!
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The Human Capital Leadership Institute is a centre of excellence
that facilitates the acceleration of leadership development and
strategic human capital management capabilities in Asia. Through
its efforts, HCLI aims to develop global leaders with a strong
understanding of leading in Asia, as well as to build Asian leaders
with the ability to lead on the global stage. The institute achieves
this by driving Asia-specific research and insights, creating
industry-relevant executive development programmes and
fostering rich networks between thought leaders in business,
government and academia.
HCLI is a subsidiary of Temasek Management Services, which is
wholly owned by Temasek Holdings (Private) Limited, and is
supported by the Singapore Ministry of Manpower and the
Singapore Economic Development Board.
For further information, please visit www.hcli.org
ABOUT HCLI
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Creating a Purpose-Driven Organisation

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