Sign Up Early for SB'24 San Diego and Save! Spring Rate Ends June 23rd.

Organizational Change
The Purpose of Governance:
Bridging the Say-Do Gap

If Boards acknowledge their fiduciary responsibility to act in the best interest of a company as defined by its purpose — and work with management to adopt a social purpose as the company’s reason for being and have oversight of the purpose — it can help propel the purpose economy into a formidable force for good.

Corporate governance standards and expectations continue to evolve in response to rising demands from investors, regulators and stakeholders — and in response to continuous improvement on the part of high-performing Boards. In recent years, with more companies clarifying their purpose as their meaningful reason to exist, their Boards are beginning to broaden their oversight role to include purpose. This is referred to as “Purpose Governance” — and it is essential to put organizations and society on a sustainable footing.

The purpose governance trend is a welcome one, as Boards that fail to oversee their company’s purpose face a governance gap. They put their companies at risk of inauthentic purpose or “purpose washing;” and worse, fail to realize the commercial and social impact of their purpose.

Some observers, such as Corporate Knights — a Canadian media and research company focused on advancing a sustainable economy — contend that there is a widescale purpose-governance gap. In 2022, it published the world’s first rating of social purpose companies — The Social Purpose Transition Pathway: Helping Companies Move from ‘Say to Do’ — which evaluated 34 Canadian companies and global brands with significant operations in Canada to assess their purpose governance and implementation maturity. The report found that many companies had corporate values that reflected their purpose, many Boards disclosed progress on the purpose through annual reports, and some included purpose in the corporate strategy. However, few Boards in their study included purpose oversight in their Board charters; and they also didn’t assign purpose responsibilities to the CEO through the job description. The report recommended that Boards close this purpose-governance gap.

In its quest to accelerate social purpose in business, the Canadian Purpose Economy Project (CPEP) identified Board oversight of corporate purpose as a key lever. If Boards acknowledge their fiduciary responsibility to act in the best interest of a company as defined by its purpose — if Boards work with management to adopt a social purpose as the company’s reason for being and have oversight of the purpose — it can help propel the purpose economy into a formidable force for good.

To dig into the topic, CPEP (whose mission is to create an enabling environment for social-purpose business to start, transition, thrive and grow) conducted a literature review on the Board’s role in purpose (and stakeholder) oversight which scanned over 40 reports and publications. From this research, it created a governance playbook for Boards — which concluded that Boards should embed the company’s purpose in 1) corporate strategy and culture; 2) performance management; 3) monitoring and reporting; and 4) governance protocols (aka Board charters).

CPEP then led a survey with five governance-education organizations to find out if Canadian Boards exemplified these practices, publishing the results in a milestone report, The State of Purpose Governance in Canada.

Members and alumni of Governance Professionals of Canada, The Directors College, Chartered Governance Institute of Canada, Competent Boards and the Canadian Corporate Counsel Association were canvassed on their purpose-governance practices. Of the nearly 200 corporate directors and governance professionals surveyed, the majority reported their organizations have a purpose statement approved by the Board that sets out why their companies exist; and half responded this purpose was in fact a “social purpose” to contribute to a better world.

Some might believe these numbers are high and that they overstate the number of Boards overseeing their company’s purpose and ensuring it is enacted through strategy. It is possible that respondents conflated a purpose — why the company exists — with its mission, which is what the company does to advance its purpose. It is also possible that directors and governance professionals are conflating purpose with their company’s sustainability or ESG (environmental, social and governance) commitments. On a positive note, one could conclude that the pro-purpose response rate suggests respondents align with the concept of purpose in business and governance.

In other areas, while most respondents are advancing their purpose through their corporate strategy, they also report they face some purpose-governance challenges — particularly, how to monitor and disclose purpose integration and impact — critical roles for Boards of purpose-driven firms. This is not surprising since, according to the survey, few Boards have received purpose education or education on the Board’s role in purpose oversight. Going forward, respondents believe purpose expertise or experience will be an important consideration in Board recruitment to help address this purpose-knowledge gap.

A big takeaway from the survey is the need for more purpose-governance education and greater purpose expertise on Boards. Education will reduce the risk of confusion and conflation, and greater authenticity and impact will result. This will reduce the purpose say-do gap and put purpose-driven companies on the path to success.

The five governance organizations agree on the need for more such education. To address that, they endorsed in principle a set of Purpose Governance Guidelines and are working them into their future governance curricula and certifications (click here for a webinar recording on the topic).

Boards are upending the old governance order, challenging governance as usual, and using the levers at their disposal to put their companies and society on a sustainable path.

And what is the purpose of governance, if not to advance purpose?