Governance of organizations with purpose

14 of June 2022
INCAE Business School

"INCAE is the best business school in Latin America, but to its academic prestige, business support and economic driver, is added its commitment to be an organization with a purpose." Those were the words of Robert Artavia, President of the Board of Directors, during the presentation of INCAE's Annual Report 2021. During his speech, he presented the topic “Governance of organizations with purpose"as the ideal goal for independent social or institutional groupings. 

“Perhaps the first question one should ask is: Why do we need purposeful organizations? What has changed in the business environment that encourages and demands it? In this sense, as Winston Churchill said, the private business sector has been the horse that pulls the development cart. I have no doubt about that and, therefore, I believe that the purpose of the company is the fundamental creation of value through products, services, wealth and innovation to enhance a community, a society or a productive sector and bring goods and benefits to those who invest and take a risk to generate value for others. 

“When we speak today of organizations with a purpose, let us not lose sight of that fundamental role of the productive private organization: to continue being the horse that pulls the development cart. However, we are today in an environment that demands more of us: the advent of the fourth Industrial Revolution accelerated many things, including the growth of inequality and mistrust between sectors of society; the included and the excluded, the rich and the poor; groups that have new expectations of social participation with all legitimacy, and that generates an environment where trust demands much more from organizations”. 

“At the same time, we have a context that presents risks on four fronts:

  1. An environment at risk due to climatic and environmental factors. Climate change, storms, volcanoes, etc. We are in an era where the sixth mass extinction seems to be advancing by leaps and bounds and we must be aware that it is real and, therefore, there is a responsibility on those who use resources that are extracted from nature.
  2. Nations of the region with deep poverty and marked inequalities. When we analyze the rate of social growth, we find that some of our countries are among the most unequal in terms of income, living conditions, services, levels of growth and social welfare.
  3. General deterioration of the governability of the State and growth of populism, arbitrariness in decision-making and the deterioration of democracy.  We have active and developing tyrannies. Populists ruling in different parts of the region, putting at risk the form of government that has led the West to become the center of development (until the rise of China). This leads us to question what is the model that we should manage for our nations. 
  4. Deepening and acceleration of technological change and the fourth Industrial Revolution. We are approaching the fifth revolution without having completed the third. We see South Korea announce that the world's first 6G network is about to take off, and we can't even imagine what it will mean for organizations and society.

“We have a social contract where the deep mistrust that has been created between sectors, communities, companies and institutions causes high transaction costs. This makes it difficult in our societies to manage efficiently. In the region we do not have that healthy environment where transparency and trust allow us to advance steadily. 

In general, in societies like ours, Purposeful Organizations They must be a response to the famous phrase of Stephen Schmidheiny, Founder of Viva Trust and Director Emeritus of INCAE: There are no successful companies in failed societies. 

“And we are failed societies: in at least three countries in the region, the first export -and the most important for its economic balance- is people; it is youth looking for opportunities elsewhere. Our crime rates are among the highest in the world. Our growth is much lower than that of economies of similar levels of development in Asia. We can hardly say that we are successful societies and this means that those of us who have the strength to be in this horse-drawn cart of development must transcend to a higher purpose”. 

What is a purposeful organization? 

"Organizations with a purpose are those that are managed with the intention of creating value for society beyond the delivery of a good or the provision of a quality service at a fair price. Here we recognize that the delivery of a good or service at a fair price is the primary function of the productive sector. A organization with purpose is willing to transcend this basic function.” 

First level of an Organization with purpose

This level is the Triple Baseline Management, Which consists of 1) Creation of economic value; 2) Creation of social value and 3) Responsible environmental management.  ”This only works if you have clearly defined performance parameters beforehand. We can't think of one triple bottom line if we measure after the fact what was achieved and why it was not achieved. We must carry out an analysis and set goals for social and environmental performance, as well as demand a small exhortation rate on our financial investments”. 

Second level of an Organization with purpose

“At this level -explains Roberto Artavia-, organizations with a purpose must optimize legal and regulatory compliance; ethical and moral behavior with a code of ethics and conduct that demands integrity and environmental, social ethics and excellence. 

“The commitment to operational excellence, eco-efficiency and added value is a dimension of the same ethic, but it obliges us to ensure that we add the maximum value to each resource that we extract from the community. And, furthermore, the conviction that, in order to transcend, the organizational culture must be based on values: culture cannot simply be about maximizing profits”. 

Third level of an Organization with purpose

The third level seeks to achieve excellence in labor relations, have a positive presence in the community, offer good relations with shareholders, creditors and other stakeholders, as well as have a stable and sustainable value chain. 

“At this level -suggests don Roberto- we must look for a positive presence in the community. Social responsibility and philanthropy are a first and second step in that direction, but the positive presence has to be part of the same strategy and dynamics of the organization and not just mechanisms that combine generosity and compensation, precisely, for the use we make of the resources of the planet and the community.

“When talking about excellence in labor relations, it is necessary to adequately compensate, to train a workforce that evolves at the speed of change. We must guarantee good business practices, good relations with shareholders, creditors. And, of course, a sustainable and stable value chain. It is not just about optimizing the economics, but also the triple bottom line. This is the model of the organization with a purpose”.

Higher purpose of governance of an organization

“The higher purpose must be an essential part of the mission and vision, be clearly articulated and deployed in the organization's strategy and value propositions to its customers and other stakeholders. 

“The purpose should not be invented after the fact, which is a custom that I see in many organizations and unions. It has to be part of the mission function, of the strategic vision, rather than stand-alone, post-deployment strategic and operational social responsibility and philanthropy efforts. 

“What does our strategy require of nature and of society? Of course, we need human capital, information and data, energy, natural and material resources, financial capital and other categories that we could integrate, but be aware of what are those assets of society that we are taking to manage them, to create that social productive value and environmental. 

“It is true that economic value has been the fundamental driver of strategies, historically. We make important fiscal contributions to allow local and national governments to function. We have an environmental footprint, we must answer for it and mitigate it. We generate jobs that have an impact on the lives of families and the community. We generate innovation, knowledge, new practices. It is about ensuring that the final balance of the companies is positive, giving back to the company, to nature and to society something greater than what we are demanding. 

“Just as there are indices to measure the creation of wealth above the weighted cost of capital, we need to ensure that the organization with purpose transcends the economic and reaches the total balance of the relationship with its environment. For this to happen, there must first be: diversity and representation. If we want to have disruptive thinking and understanding of different factors of development and purpose, we have to have diversity and representation of the cutting-edge issues, from the issues of the vision to the structure of the government, with relevant capacities for their proper management. It is about bringing people with relevant capacities for the deployment and articulation of the strategy in accordance with the reading of the context and the opportunities.

“It is necessary to have a corporate governance that constantly evaluates the performance of the factors of the Triple baseline that we indicated. It is not simply to say: we had a good year because we grew in sales, in units and in internal profitability. Let's have a three-dimensional evaluation system where we select and reward key executives aligned with the purposeful strategy to advance in the financial and marketing part of the business. 

"Furthermore -he suggests-, there must be a vocation to be transparent and periodically render accounts to different stakeholders, from national and municipal authorities, to our shareholders and partners, to the public of interest, to clients, creditors and collaborators and to be sure that the Corporate Governance is really being managed to maximize value in the indicated dimensions”. 

Roberto Artavia explains it this way: “A shared vision of what is the desired aggregate impact on our society, on our good, is necessary. We need common values; It doesn't matter if we have different technical visions of the development and the process, it is necessary to share certain impact values ​​to unite us in the path of that higher purpose and, in addition, ensure a consistent execution.

“Something important is that management is capable of executing that vision, of making decisions based on those values ​​and achieving that performance where the company creates and returns to the community something much larger than the resources of the planet and of the society that it consumes. . 

“Impact is not an abstraction. When we talk about impact investments, it is precisely in a framework like this. The ethical banking, for example, implies offering a profitable loan, generating an adequate return to savers and investors and, at the same time, being measured by this balance between social, environmental and company requirements. We must learn to measure the social impact on our collaborators, how our products create real value in the markets; how we reduce or mitigate the environmental footprint, and this should lead to better labor relations.

“In a company with a purpose, it is easier to identify, feel proud and participate in it. Better relations with the state and government could emerge as another impact. Better relations with shareholders, with creditors, suppliers, etc. A more stable value chain, a more satisfied financial market and, of course, better community relations at all levels”. 

“If the next time in your Board the only report is sales and profits, it means that we have not yet found the transcendental purpose of the organization and that we only plan the strategy as if it were the creation of economic, financial and growth value. We need to manage it, and the strategy must be supervised with the statement of the correct statement, so that managers and decision makers do so with the vision of the purpose.

“We have to learn to measure results based on triple bottom line. If we cannot measure the impact, we are not really achieving the fundamental purpose. Taking up the phrase of Winston Churchill, many look at the businessman as the predator; others, like the dairy cow that needs to be milked and few like the robust horse that pulls the development cart. Managing a company with purpose is responding strongly to that. 

“We are the robust horse that pulls the development cart and, ultimately, gives it sustainability, credibility and an environment conducive to its fullest development. We must all have a purpose that transcends the merely economic and financial and ensure that our organizations are sources of social value, environmental mitigation, community growth, and resources for more transparent governments. So, somehow we can recover from some of these negative trends that hang over our societies.