Larry Fink’s (CEO of BlackRock) 2022 annual letter brings up two points that we think are essential for IROs to keep in mind this year: 1) having a sincere company purpose and strategy is more important than ever, and 2) young companies with disrupting ideas have more access to capital than ever before and are a threat to established companies that stall on innovation. This post will discuss these issues and give actionable advice. We also encourage you to read Fink’s full letter.
Sincere Company Purpose & Long-Term Value
Fink argues that the Covid-19 pandemic has accelerated already existing polarization, division, misinformation, and especially distrust of the media and the government. Thus creating an evermore difficult situation for CEOs, as stakeholders demand their companies take a stance on key issues. Employees, he argues, now look to their companies as a trusted source of information, over other traditional sources (media and government), making the company’s actions and the CEO’s voice even more important to society and to the success of the business.
Therefore, Fink recommends companies to be consistent in communication, have a clear purpose, a coherent strategy, and always a long-term view. Ask yourself, where does your company stand on important societal issues and how is that intrinsic to its long-term success?
Define a Company Purpose and communicate it effectively
McKinsey has thought extensively on purpose/company change. Their piece, Purpose: Shifting from why to how is a great place to start if you’re reanalyzing your company’s purpose.
The process of creating a meaningful purpose is inherently challenging because of how many stakeholders there are (employees, investors, communities, etc.), one group is bound to be made uncomfortable. That is why most companies have generic purpose statements that don’t challenge norms or directly look out for employees’ concerns. A McKinsey survey found that the top two priorities of employees are contributing to society and meaningful work, and only 21% and 11%, respectively, of purpose statements address those concerns. Also, they found that only 42% of employees say that their organizations’ purpose statements drive impact.
The benefits of having a sincere and inspiring purpose are immense, and can outweigh short-term stakeholder discomfort and potential revenue impacts. Among the upsides, it can create more loyal customers (helping revenue stability), reduce resource input costs, help win and keep better talent, boost employee motivation, access lower capital costs by meeting ESG criteria, better prepare your company to deal with a crisis, and make you a trendsetter and industry leader forcing competition to follow suit.
McKinsey lays out four basic steps for reflecting on purpose:
- Size up where you are and understand it from your stakeholders’ perspectives. This involves looking at how your purpose, strategy, and social and environmental impact all relate to each other, checking for misalignments. Some questions to ask yourself:
- Which pillars of our strategy are most and least congruent with our purpose?
- How would a ranking of our products and services according to purpose compare with one based on profitability?
- What is our unique contribution to the world?
- Who benefits from our success?
- Connect purpose with your company’s ‘superpower’. Take your company’s unique ability to create value, and connect that with how it supports ESG themes.
- Organize to keep purpose at the top of everyone’s mind, every day. Achieving a purpose-driven culture requires listening and being open to what you hear. So, workshops, discussions, surveys, and studies.
- Measure what you can, and learn from what you measure. On top of measuring and complying with certain norms or certificates, ask yourself what will society hold you accountable for in the future, and act on it today.
Not everybody will be happy, and insincerity will be rooted out
In another annual letter, Terry Smith from Fundsmith (some call him the Warren Buffet of the UK) said that Unilever is losing touch with its sustainability drive, especially with its Hellmann’s brand, “A company which feels it has to define the purpose of Hellmann’s mayonnaise has in our view clearly lost the plot. The Hellmann’s brand has existed since 1913 so we would guess that by now consumers have figured out its purpose. Spoiler alert — salads and sandwiches.”
Would that be his comment if Unilever wasn’t down 9% on the year and one of Fundsmiths’ worst performing companies? Probably not, but it’s a good reminder to have a sincere purpose that communicates long-term value, if Terry Smith doesn’t get it, then the general public probably doesn’t get it either. Also, not everybody will be understanding or on board with your purpose, especially if it prioritizes long-term value over short-term gains. Larry Fink on the subject says, “As a CEO, I know this firsthand. In this polarized world, CEOs will invariably have one set of stakeholders demanding that we do one thing, while another set of stakeholders demand that we do just the opposite.”
Easy Access to Capital is Rewarding Innovation
Larry Fink’s main thesis is that stakeholder capitalism’s purpose is to serve its stakeholders, and if a company does this effectively value is created and sustained, measured by long-term profitability. Therefore, companies need to constantly evolve to make good on the promise of long-term value, and if not competition will step in.
These days the pace of evolution and competition has accelerated. Young and disruptive companies, especially ones that provide sustainable technology solutions, have access to large amounts of capital from diverse sources. Blackrock will be focusing on investing their resources as well in the companies that have the best long-term outlook, whether they are startups or established companies.
This is also true in Mexico, which has had several unicorn companies emerge ($1 billion dollar valuation). Over the past couple of years, many foreign funds are entering the Mexican and LATAM markets, generally investing in tech startups. Kavak was named the first Mexican Unicorn in October 2020 and seven more companies have reached the $1 billion dollar valuation since then.
From an IR perspective it is increasingly important to communicate to your investors how you are innovating and staying relevant, and how you are going to be around for the long-term. If you are an established company, why are you a better bet than a startup in your industry?
Miranda IR is happy to help you workshop your company’s purpose and investment thesis.
Contacts at Miranda Partners