Practical analysis for investment professionals
05 February 2015

The Importance of Purpose for Driving Long-Term Corporate Value

Moving from whisper to rumble is the growing chorus of voices questioning the preeminence of shareholder value as business philosophy. Among them is Unni Krishnan, founder and CEO of Long Brand, a company continuing the philosophy he implemented at Brand Finance where he created their Indian operations, delivered more than 150 projects across 23 sectors, including helping the likes of Tata, Godrej, Larsen & Toubro, United Breweries Group, Amalgamations, and Raymond. In particular, Krishnan feels there is an opportunity for companies to better serve society if they bring corporate purpose, as expressed in authentic branding and mission statements, into alignment with the business’s actions.

CFA Institute: Is there a crisis in capitalism right now? If so, what is it?

Unni Krishnan: The crisis is one which is born of a worldview or a set of implicit assumptions we hold in employing capitalism rather than the system per se. We have been running the system with a mindware which is out of date and it requires a reboot.

The mechanistic and reductionist worldview which underlies business and political leadership promotes an inherently divided, disconnected, and piecemeal approach to capitalism. This has produced deep contradictions, fragmentation, and unintended consequences like climate change and social inequalities.

It is high time we snap out of this and put some of our dearly held collective assumptions to a litmus test. This is a good first step in any scientific inquiry when faced with stubborn intractable problems.

What are the elements of the “mechanistic and reductionist worldview” to which you are referring? And what are some examples of the consequences of these elements?

The principal elements came together from the times of the Enlightenment over 200 years ago. It had three broad streams which fused into what we generally accept as reality today. It has the Newtonian and Cartesian views which reinforced duality, linear causality and materialism. These ideas blended with Adam Smith, John Locke, and others who declared that the essential nature of man as Homo Economicus — rational, detached, acquisitive, and utilitarian.

This in turn combined well with Darwin’s survival of the fittest idea, which evolved into social Darwinism proclaiming the benefits of competition to weed out the weak. Over time, these ideas have coalesced into a widely accepted set of unquestioned beliefs and values we run society, science, and business with.

Today we have to confront the uncomfortable fact that this long-held collective worldview is breaking down spectacularly in all the three realms. If one surveys the corporate landscape we see these dogmas regularly expressing themselves through symptomatic challenges which firms are facing.

Consider HP which split up recently. The origins of its current problems lie in the past when it spun off Agilent, which represented half of its innovative culture and defined its purpose of existence. Devoid of its original business design crafted by Bill [Hewett] and Dave [Packard] over decades, the company was sucked into the vortex of hitting quarterly earnings estimates and today is nothing more than a shadow of its former self, being tossed around without the rudder of a purpose-led business architecture.

Similarly, IBM seems to be caught up with deploying most of its capital for share buybacks in an effort to chase quantitative EPS goals set up by Sam Palmisano. This was after all the firm run by Thomas Watson, Jr., who put in close to $35 billion (in today’s value) to invent the System 360. So what could be the long-term value creation upside for IBM if the $37 billion it invested in share buybacks in the past three years was deployed into innovation at a time when technology change is reshaping society?

There is a pressing need to litmus test the implicit assumptions and mental models being held by leadership and lay bare the long-term value creation upside/risks associated with it. Such an introspective pause can help release trapped true potential and surface unmitigated asymmetric risks.

So if I understand you correctly, you are diagnosing a kind of cultural illness within businesses, but also within capitalism itself? Assuming I’ve got that right, what is your prescription for the illness?

Quite right. We refer to it as the HIV of modern business. It originates with a “linear money machine” cognitive model of business held tacitly at the leadership level. The shareholder value maximization paradigm has legitimized this model to such an extent that most actors in the capitalistic system believe it to be a sacred law.

We put this default worldview into sharp focus and uncover the implicit assumptions held across leadership and management. From this start point, we map the entropic pathways these assumptions take to deplete purpose, values, culture, innovation, and reputation, thus shaving off vast chunks of long-term value of the firm. It lays bare in depth and detail the deviations/defects in the translation of values to value creation and its asymmetric risk.

Such a six sigma of values to value creation acts like a body blow (empathetically delivered) to the collective consciousness of the firm and puts leadership into a deep introspective pause. It prepares the ground to plant a purpose-led business architecture and visualize its nonlinear value creation upside.

Such a collaborative commons wealth creation model can be institutionalized through regular litmus testing of values to value sigma, so that it does not relapse to the old ways. This is an immunization program we have developed over a decade so that firms can fight back against short-termism and complexity which is sapping their longevity and vitality.

What are the elements of a typical therapeutic intervention?

All interventions have three foundational elements. We begin with putting the stated and unstated leadership challenges through the values to value creation litmus test which I described earlier.

The second step is to build a purpose-led business architecture through collective leadership intuition. It begins with purpose of existence which emerges after a few cycles of brutal introspection when the mechanistic model assumptions fall away. Such a purpose of existence will serve some of society’s greatest challenges and aspirations and produce extreme trust with stakeholders. It will capture the imagination of people in a quest for shared meaning across functions and levels. This sets up powerful lateral coherence inside and outside the firm to produce long-now financial value. Such outcomes can be reinvested in a returns-to-purpose virtuous cycle, moving into higher orbits in time.

The final third step is to plant seeds of personal transformation at leadership through perennial principles. There are four timeless capabilities in vanguard leaders — a capacity for deep introspection, a bias towards the long view, swiftly slow in actions, and awaiting accelerating returns.

What are some concrete examples of success you can mention?

What constitutes the success of an emergent service such as ours? The opportunity to co-create such an atypical approach with more than 80 clients over 11 years, including some of the largest Indian MNCs like Tata, Godrej, Reliance, L&T, and global firms like Lafarge, has been worthwhile.

Engagements have consistently generated a strong positive dissonance with the status quo of financial capitalism and that is rewarding. When clients make brave attempts to execute on purpose-led models and generate superior value outcomes, we are thrilled.

Finally, when our clients are ready to leave inhibitions behind and openly engage in deep yet discomforting conversations, we feel privileged. This is how we view success and maybe that is unusual, too.

We are in the twilight zone of a great transition where the fundamentals of capitalism are being reshaped in a profound manner. Letting go of the familiar and embracing an alternative narrative will call for courageous conversations and deep collaboration across disciplines. So multidisciplinary finance can play a lead role in the regeneration of capitalism.

The upcoming 68th CFA Institute Annual Conference in Frankfurt will include a panel discussion on Long-Termism and the New Era of Fidicuary Capitalism. Delegates will hear Keith P. Ambachtsheer, Leo de Bever, and Andrew Sheng discuss common threads that run through long-term-oriented, successful investment organizations in a session moderated by Roger Urwin.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Image credit: ©iStockPhoto.com/retrorocket

About the Author(s)
Jason Voss, CFA

Jason Voss, CFA, tirelessly focuses on improving the ability of investors to better serve end clients. He is the author of the Foreword Reviews Business Book of the Year Finalist, The Intuitive Investor and the CEO of Active Investment Management (AIM) Consulting. Previously, he was a portfolio manager at Davis Selected Advisers, L.P., where he co-managed the Davis Appreciation and Income Fund to noteworthy returns. Voss holds a BA in economics and an MBA in finance and accounting from the University of Colorado.

Ethics Statement

My statement of ethics is very simple, really: I treat others as I would like to be treated. In my opinion, all systems of ethics distill to this simple statement. If you believe I have deviated from this standard, I would love to hear from you: jason@jasonapollovoss.com

15 thoughts on “The Importance of Purpose for Driving Long-Term Corporate Value”

  1. John Swannick says:

    The ‘crisis’ is with our failure to understand the nature of value not values. The growing realisation that we inadequately value the overwhelming majority of inputs and outputs and so, no surprise, we can’t manage the process and have no control over the end outcome. The consecutive short-term wins over the long-term because the oscillations are shallower, short-term, and it’s easier to claim you achieved somewhere near your 99.96% target before resetting. Properly account for value and even the Shareholder Value thesis might start to make sense.

    1. Hello John,

      Thank you for sharing your thoughts. I find your observation about the shallower short-term oscillations particularly insightful.

      Yours, in service,

      Jason

  2. Ashok says:

    As Ashwath Damodaran put it .. strategy is the soft-porn of the academic world. This one seem to fit well into that description. What do these words mean in this article – mindware, newtonian, cartesian, vortex, entropic pathways, and…. lateral coherence, long-now financial value, returns-to-purpose, and…. perennial principles, co-create, positive dissonance.

    1. Hello Ashok,

      Thank you for highlighting some of the difficult language in the interview. In general, I believe that Mr. Krishnan is simply saying that a values orientation drives long-term value creation for businesses and their stakeholders. I also believe – based on our sidebar conversations – that he is exactly highlighting the fact that for most businesses strategy is something that they ‘have’ to do, rather than something that is taken particularly seriously.

      Comparing a business to a person may be instructive…I believe most of us know those who approach their lives with goals not in alignment with their actual passions. So, for example, you may encounter a young college graduate that wants to work in finance, not to be the best finance professional for his/her clients, but to maximize their personal wealth. Sad to say, in my experience, this person usually exits the business because their actions were out of accord with their passions; passions driven by their personal values. In my own career, I love the ideal of the detective, the Sherlock Holmes ideal, if you will. That was what I found interesting about investment management: “solving the crime.” Or, more germane to the conversation, seeing the world better than the other detectives so the story that connected disparate facts was more accurate.

      Scale this conversation up from the individual to the business and I believe Mr. Krishnan is saying the same thing: strategy should not be soft-porn. Instead, it should be something of meaning, something worth fighting for, and something that drives long-term value.

      I hope this helps to clarify what his intentions were in the interview.

      Yours, in service,

      Jason

  3. Savio Cardozo says:

    Hello Jason
    We tried to slay this dragon last year but it is one that keeps coming back from the dead.
    If I understand his comments correctly (and I am not certain that I do as the language he used was dense and complex) I think that Mr. Krishnan is advocating that companies focus on doing what it is they said they were going to do, as described in their mission statements, instead of going off on tangents.
    This is very laudable, something I hope corporate management and their boards are focused on, and by linking the achievement of corporate objectives to executive compensation, result in serving their shareholders.
    The only masters that corporate executives should serve are the shareholders.
    Anything else results in the principal-agent problem, examples of which abound, some of them elegantly described in your book, memorable ones being Enron, and the CFO with the 3-inch watch.
    There is nothing wrong per se with returning cash to shareholders instead of wasting it on pet projects.
    My two cents for the pro-shareholder camp.
    Best wishes
    Savio
    PS I just finished reading your book – you have done an excellent job at making a complex subject easily accessible to reader with simple exercises and examples from your own life. I am now trying to unlearn some left brain bad habits – thank you for putting this book together.

    1. David Hurst says:

      @Savio
      There many problem with maximizing shareholder value although on the surface it sounds as though it ought to work. It seems to encourage gaming the system by encouraging executives to focus more on the short-term numbers than on the long-term challenge of creating customers. Roger Martin has likened it to allowing professional players in sport to bet on the outcomes of the games they play in – it would corrupt the game.

      1. Savio Cardozo says:

        Hello David
        Thank you for your interesting analogy of professional sports.
        I have found that the only effective way to minimize the principal-agent problem is through compensation, using Economic Value Added as the measure of performance.
        The beauty of this measure is that it is simple to measure, can apply to divisions within corporations or private companies, and it addresses the needs of both the fleeting and buy and hold shareholder.
        I very much enjoyed your fascinating article, particularly the closing line on reaching consensus on not just the end goal but agreeing on the means used to get there. Like you elegantly phrased it, it is a message of hope and call to action.
        While I believe that all people have good intentions I also firmly believe that compensation is the crux of influencing desired outcomes, and with an increase in consciousness, the path to the outcomes will hopefully have a positive impact on all constituents.
        Thank you again for the article – it has greatly contributed to my new mental training on mindfulness.
        Best wishes
        Savio

        1. Hello again, Savio : )

          I am a large proponent of EVA-based compensation, as opposed to EPS growth, or stock price growth. Question for you: how as a shareowner do I collect on the delivery of EVA? What is my residual claim on this thing called Economic Value Added? Isn’t my only claim to EPS? Or to dividends declared by the board? Isn’t EVA interested in the overall success of the entire business, and not just one claimant, shareholders? If I truly managed a business for the benefit of shareholders I would lever the heck out of the balance sheet, use any residual income to buy back shares so that there was only one shareholder who collects all of that subsequent residual. Put another way, how is it that EVA is in accord with shareholder value? What if I only want to hold the stock for 2 months – that is a time horizon that won’t witness the next EVA calculation? Managing the business for shareholder value demands that I be treated equally to the person who gets a residual claim on EVA at its next calculation, too.

          For me, the way out of this pickle, and implied in your own points, is that business managers must manage the business and in alignment with the life span of the corporation, namely perpetuity. EVA is an appropriate measurer of this philosophy and therefore appropriate for compensating management. But here the focus is not on one claimant, it is on the entirety of the business, and businesses per the income statement, have many claimants.

          Again, as always, respectfully yours,

          Jason

    2. Hello Savio,

      See my response to Ashok below. I think that Mr. Krishnan is saying that not only should businesses do what they say they are going to do, but that they ought to mean what they say, and do what they say, too. In speaking with him I thought he would make a lovely advocate for something that I believe drives long-term value for firms. Namely, organizations with passion, that are driven by an actual mission or values system that inspires in-house alignment, and out-in-the-real-world results.

      Regarding the shareholder value vs. stakeholder value conversation…I will weigh in with two observations not knowing if this is ground already covered elsewhere. First, as an analyst an understanding of the business via its financial statements is critical. The income statement can be viewed as the stakeholder return statement. Namely, starting with the top line, revenues, you see monies paid to a business by its customers. So customers must be satisfied, else there is diminishing revenue. Next up, you pay the suppliers of the business as accounted for by cost of goods sold. Push too hard on your suppliers and they don’t do business with you for very long. If you don’t push hard enough then the supplier’s shareholders are dissatisfied. So company management must have good relationships with its suppliers. Moving down the income statement we next pay employees with SG&A. If employees are dissatisfied with their work, total compensation, and pay then they vacate the firm and the firm has no one to execute the business plan. So management must satisfy this group of folks, too. Then there is R&D, which is a form of investment in the firm that everyone has a vested interest in, because the R&D drives long-term top line growth. Then you have to pay your debt-holders and treat them well. Violate a covenant, miss an interest payment, and this class of stakeholders can put the firm in technical default, thus raising the required rates of return for the firm and cutting them off from the cheapest capital to which they have access. Next is the taxing authority. Irritating the jurisdictions in which firms operate is a prescription for regulatory hell. At long last you come to shareholders. But funds only dribble down this far if the firm’s management have ably managed all of the lines above the bottom line. My point is that firms are already managing the business for the benefit of stakeholders. In fact, the long-term viability of the business insists that they do so. If any one of the constituents in the income statement is peeved they can induce pain for the entire organization. Wise management manages everything.

      Second point, when we say that we manage the business for shareholder value we imply that there is only one type of shareholder. Yet, there are HFT firms that hold shares for milliseconds; day and momentum traders; growth funds; value funds; pension funds; and so forth. Each of these shareholders has a different set of priorities, including some that are only ‘invested’ because they like the volatility in the stock and would prefer massive fluctuations; different investment time horizons; and different constituents to whom they answer. So when we say that a firm should be managed to maximize shareholder value, which shareholder are we talking about? The typical answer from the shareholder value community is the long-term shareholder. I would reply with two questions, 1) what is long-term?; and 2) if firms are, in fact, managing for shareholder value, and the definition of shareholders is long-term shareholders, then firms must be doing a very bad job of this because turnover ratios are extremely high and getting higher, so what can be done to change this equation? And this in the face of record profitability. So which shareholder should management focus on? And what are the data that show that this is wise and prudent?

      Completely separately, I am so pleased to read that you enjoyed The Intuitive Investor. I invested much time, energy, money, and reputation to bring it to fruition because I believed that the ideas within deserved to be a part of the conversation.

      Yours, in service,

      Jason

      1. Savio Cardozo says:

        Hello Jason
        Thank you for your interesting response.
        First I am relieved to hear that Mr. Krishnan was indeed saying what I thought he was.
        I loved your income statement walkthrough of stakeholders – I will never look at an income statement the same way again.
        You bring up an interesting question – just who is the shareholder in a listed company that I insist management serve exclusively? Is it that fleeting nanosecond investor, the widows and orphans who are beneficiaries of that pension fund that owns a long term stake, or the Davis Fund that has a medium term position?
        In my somewhat simplistic view the shareholder is someone who owns the shares of the company at that point in time.
        The length of time that this shareholder will own the shares is determined by the investment thesis and model used to make his/her buy decision which will (should) also determine his/her sell decision.
        As you have successfully demonstrated, all astute money managers will take profits – meaning that they will cease to be shareholders – some in nanoseconds, others in months or years.
        I think management should expend its efforts on ensuring that the future stream of cash flows is expected, by existing and potential investors, to increase, which should lead to an increase in its stock price, which, in theory, should satisfy the interests of both the fleeting and long term investors.
        To bolster my shareholder-exclusive-focus cause, I will quote from CFA Institute’s excellent publication called the Corporate Governance of Listed Companies “Corporate governance is the arrangement of checks, balances, and incentives a company needs in order to minimize and manage the conflicting interests between insiders and external shareowners”.
        From my somewhat limited personal experience of being a former owner of a company, and also being an advisor to management and other owners, the word stakeholder is only meaningful to me when used in the context of delivering value to the shareholder. Anything else can result in a slippery slope.
        Best wishes
        Savio

        1. Hello Savio,

          I love your response…clearly articulated and elegantly argued. Well done. Thank you always for civil discourse (the course I tilt toward when trying to advance discussions).

          Several points via questions:

          * Would you agree that you have an implicit time horizon built into your explanation of how management should manage a company? Namely, it sounds as if you are advocating for management adopting a perpetual time horizon, yes? If so, how does that jibe with those shareholders, like an Icahn, who take large interests in business to influence board decision making, ergo managment, to restructure the company so that his payback period is, at most 18-24 months? In other words, management cannot afford to have a time horizon assumption if they are slavish to the generic conception of ‘shareholder.’ Here we get into some paradoxical situations. If management makes the choice to manage the business for perpetuity, yet the average holding period for their stock is not perpetuity (and always less than a year) how can management say they are managing the business for shareholders?

          * Then there is the small matter that while EPS may march upward in a linear fashion, stock price does not. For all shareholders to be satisfied they must be as confident as the philosophical shareowner who desires management manage a business for perpetuity that there will be an upward trajectory to EPS and that the share price will follow suit eventually. But that word ‘eventually’ is again a time horizon mismatch for most shareholders, where holding periods are always less than a year. Do all shareholder constituents agree that stock price will follow upward EPS growth? If not, we are back to the same problem: to which shareholders should management be held to account? And for what time horizon?

          * And last, if your time horizon is that management should manage the business for perpetuity I will point out a problem. Namely, managers in that equation are no longer managing for the benefit of shareholders. Instead, they are managing for the benefit of the entirety of, and the perpetuity of, the life of the business. This is a very different focus on the part of management. It is away from one claimant, shareholders, back to the benefit of all those that contribute to the success of the business, and have claims based on that success.

          Yours, in service,

          Jason

          1. Savio Cardozo says:

            Hello Jason
            There is an excellent book on Corporate Finance called the Fundamentals of Financial Management by Brigham and Houston that you refer to in your book The Intuitive Investor as recommended supplementary reading.
            In this book, each chapter is preceded by a real life illustration of what the chapter is about.
            Chapter 16, Managing Current Assets, has a story about the turnaround at Core Industries that encapsulates what I was getting at and which I think will answer your questions.
            I quote from this “At an annual meeting of shareholders the new CFO, Ray Steben said that while sales had increased by 12 percent, profits jumped 29 percent and the stock price 79 percent. The improvement resulted primarily from the company’s renewed focus on shareholder value and better working capital management. In Steben’s words ‘These strong sales and earnings figures are further evidence that shareholder value will continue to be focused upon, and your management will be stewards of the capital entrusted to them’ “.
            Using this as an example, management should, in my opinion, focus exclusively on maximizing shareholder value and improving corporate governance.
            As you point out, there will be factors that must be carefully considered so that this value is maximized, such as customers, employees, suppliers, environmental impact, technological advances, and so on.
            Hope this helps.
            Kind regards and a pleasant weekend
            Savio

          2. Hello Savio,

            Thank you for taking the time to thoughtfully express your answer and to return to the discussion.

            Yours, in service,

            Jason

  4. David Hurst says:

    It is rather unusual to find a CEO who has any knowledge of philosophy and the history of ideas but Unni Krishna seems to have a solid grasp. And you are absolutely right about the “soul” of HP as having been spun off with Agilent. The problem is one of the scale of the technologies. The medical devices and instrumentation businesses are inherently small scale. In divisions of a few hundred people the HP culture can flourish. When HP got into larger scale businesses the functional silos and separation of people in space and time made it much more difficult. For a deeper look at the issues see my recent article: http://www.themontrealreview.com/2009/Post-Rational-Management.php

    1. Hello David,

      Thank you for the two comments you made adding to the thread. I also appreciate Mr. Krishnan’s appreciation for philosophy and for the history of science.

      The Davis Funds, for whom I used to work as an investment manager, was HP’s ninth largest shareholder and we routinely discussed the cultural shift that happened at HP as its culture slammed headlong into the dot.com era. It was, and is, a very interesting time for businesses that take the long view.

      Yours, in service,

      Jason

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