The role of the corporation in society is under review. The paradigm that corporations are run solely in the interests of shareholders is being contested. The emerging paradigm references stakeholders as the broader group that managers should consider in decision-making. 

This paper looks at whether a clear corporate purpose can impact the valuation of listed equities and how that relationship to value may arise. The impact of corporate purpose on performance is analysed through a dataset developed by BERA Brand Management. The data set is based on consumer perceptions of corporate purpose for 13 different attributes across over 200 brands. 

It also reviews the state of play in the debate on corporate purpose and draws on the results of a survey of CEOs of large-cap US companies.

Three main findings

1. Companies that scored high on corporate purpose metrics outperformed their low scoring counterparts on common measures of financial performance, market valuation, and shareholder value creation.

With the help of BERA purpose framework, researchers sorted the brands according to their average purpose scores, which are measured on a monthly basis on a scale of 1 to 100 and categorised those with scores below 50 as low purpose brands and those above 50 as high purpose brands. High purpose brands outperformed on common measures of financial performance, market valuation and shareholder value creation. 

1. The Covid crisis provided another important insight: the valuation and value creation advantage for companies scoring high on corporate purpose widened, sometimes materially, as the crisis developed and progressed.

Companies with the best purpose scores generally moved up and into the top quartile of total shareholder return performance, suggesting that the capital markets expected companies with stronger corporate purpose to maintain a stronger connection to their consumers and deliver more resilient financial performance. Compared to the pre-covid baseline, top-quartile total shareholder return (TSR) companies had higher average Purpose scores than bottom-quartile TSR companies by 16.7 points, a 35% difference. These results suggest companies that invest well in purpose improve their odds of outperforming during such periods — outperformance that ultimately benefits each of their stakeholder groups.

1. Researchers find that the average earnings before interest, taxes, depreciation, and amortisation (EBITDA) valuation multiple earned by high purpose brands is over 4 turns higher than that of low purpose brands. If sustained over time, this means high purpose brands would double their market value over 4x faster than low purpose brands.

Consumers increasingly favour brands that demonstrate a commitment to corporate purpose. 50% of CPG growth from 2013 to 2018 came from sustainability marketed products. This translates to financial performance — all else equal, a company more closely aligned to consumer preferences will need to spend less per dollar of revenue to acquire and serve that consumer than will a company that is misaligned with consumer preference, hence, the nearly 6% better return on capital, we see from high purpose brands.

1. An authentic corporate purpose, experienced through the brand and lived through the strategy, can help create both stakeholder and shareholder value. Stakeholders are customers, shareholders, employees, and communities with a vested interest in a company's strategies and development plans. All stakeholders are affected by a company's sustainability efforts, and those efforts affect society as a whole and the global environment.
2. Institutional investors expect corporations to have an authentic statement of purpose, however, the statement is just the start. More importantly, investors want a sense of how a clearly stated corporate purpose is applied within the business and how it features in management decision-making.
3. Companies that scored high on corporate purpose metrics outperformed their low scoring counterparts on common measures of financial performance, market valuation and shareholder value creation.
4. The average EBITDA valuation multiple earned by high purpose brands is over 4 turns higher than that of low purpose brands. If sustained over time, this means high purpose brands would double their market value over 4x faster than low purpose brands.
5. Corporate purpose has the potential to create value across stakeholder groups. However, a clear strategic vision is required to decide who and what to invest in and why as there is no world free of trade-offs.
6. During the Covid crisis the valuation and value creation advantage for companies scoring high on corporate purpose widened, sometimes materially, as the crisis developed and progressed. The analysis revealed that companies that invest well in purpose improve their odds of outperforming during crises such as Covid, benefitting both stakeholders and shareholders.
7. Corporations should continue to demonstrate that they have an authentic purpose, how it was arrived at, how it impacts the way the business is managed and overseen, and how the company interacts with key stakeholder groups. Corporations that develop and demonstrate a clear corporate purpose are well positioned to realise a return on purpose over the long term and through the uncertainty of crises.