Purpose-driven business

Purpose-driven business

Pandemic has driven home the message that companies need to be about more than just profit.

Nearly 10 months since coronavirus lockdowns first started, many companies have been pushed close to the abyss by the sharp curtailment of business activity and greatly reduced revenues.

Asia, home to some of the world's fastest-growing economies, has already seen declining growth and rising poverty. Many executives have had to make painful decisions to suspend or lay off staff at the peak of the protracted pandemic.

The tourism industry, on which many regional economies including Thailand rely so heavily, has been devastated. Millions of people have lost income and jobs, from food vendors to staff of giant household names like Traveloka and AirAsia.

According to a World Bank forecast, the pandemic will cause the deepest recession since World War II, with global growth contracting by 5.2% and the largest proportion of economies undergoing declines in per capita output since 1870.

The year ahead looks highly uncertain as a second wave of coronavirus has emerged in different parts of the world, and no one can rule out a third if an effective vaccine cannot be delivered soon.

However, this is also a critical moment for companies to reassert their purposes and business models, in order to bounce back with more resilience and sustainability to survive and, hopefully, thrive in the post-Covid world.

For leading Asian executives, how to reset, rebuild and reimagine the ways of doing business will be critical to coping with ongoing and about-to-happen changes in the way they operate. With substantial unpredictability ahead, they say the possibility of new crises looms as a result of resource depletion, overconsumption and climate change.

"At least for ourselves, we found that this whole pandemic has made everyone in our company realise at a much deeper, more profound individual level, what a purpose-driven company and what the purpose-driven life is," says Ho Kwon Ping, executive chairman of Banyan Tree Holdings Limited.

"One of the basic purposes of a purpose-driven company is to build a culture of resilience. It's pointless to talk about the business's purpose if the basic purpose is not taking care of your own people," he said at the recent Global Compact Network Singapore Virtual Summit 2020 held in Singapore.

The tourism and hospitality sectors, he said, have been hardest hit by the pandemic due to travel restrictions and lockdowns. Banyan Tree, a Singapore-based leisure business group, reported a 43% drop in its revenue to S$75.4 million in the first half of 2020.

As it's unclear when the pandemic will end, the international hospitality company decided to pull back certain projects in Australia and Thailand, which resulted in the write-down of property development costs of S$14.28 million, according to a statement posted on the company's website. In June, around 10% of the 11,000 staff across its brands were laid off.

But many of them were put into a hiring programme, in which they will be hired back first when the pandemic is over. The company also is helping staff to find new roles and offer them flexible employment or reskilling training for other jobs.

Dilhan Pillay Sandrasegara, CEO of Temasek International SUPPLIED

EMPATHY AND RESILIENCE

For Mr Ho, this is the way the company sends a strong message to all employees that "I'm with you," emphasising the culture of empathy that will help keep the company and its people resilient during difficult times.

"This is an opportunity as much as a crisis. Covid will end. Banyan Tree will survive. We will prosper again before the next crisis hits us," he said. "But every time we are hit by a crisis, as a company and as people, people come back stronger."

In the midst of the months-long coronavirus crisis, boards and senior executives of some companies must decide to prioritise the safety and survival of their stakeholders -- including employees, customers, and suppliers -- departing from the traditional approach of shareholder primacy.

Because without stakeholders, the companies may not recover and thrive again.

In 1970, the economist Milton Friedman first wrote in The New York Times about shareholder primacy, which came to be known as the "Friedman doctrine".

A free-market advocate who later received the Nobel Prize for economics in 1976, Friedman expressed scepticism about executives' commitments to social responsibility. He said such actions would reduce returns to shareholders, raise prices to customers and lower the wages of some employees. In other words, an executive would "spend someone else's money" for general social interest.

His idea has greatly influenced corporations to set goals to maximise profits and growth, ignoring the possibility that the market can be inefficient.

Friedman's ideas were attractive to fast-growing Asian countries that had embraced a free-market approach, albeit often in combination with state intervention that he would not agree with.

The nations that turned to an opening-up policy in the early stage of their economic development such as Thailand, Singapore and South Korea saw gross domestic product (GDP) per capita grow by four, six and 11 times, respectively, between 1980 and 2005. Poverty was driven down. The educational attainment and competitive capacity of their populations increased dramatically.

But the vulnerability of a free market with a primary purpose of profit-making become painfully apparent during the 1997-98 Asian economic crisis, in which excessive speculation and credit bubbles led to an economic meltdown.

The crisis also exposed crony capitalism, in which shareholders of companies joined hands with the political class to generate personal wealth at the expense of others.

However, more Asian corporations and investors are now stepping up to prioritise a broader range of stakeholder groups, in line with a growing global movement, and moving away from shareholder primacy.

Last year the Business Roundtable, a non-profit association based in Washington, issued a statement on corporate purpose signed by 181 CEOs from US-based companies. They pledged a commitment to each of five stakeholder groups -- customers, employees, suppliers, communities and shareholders.

"The importance of serving stakeholders and embracing purpose is becoming increasingly central to the way companies understand their roles in the society," said Deborah Ho, head of Southeast Asia for BlackRock, the world's largest fund manager.

In January BlackRock announced a commitment to make sustainability a key guiding factor in its investing strategy, as described in a letter to clients and chief executive Larry Fink's letter to CEOs.

It pledged to build more resilient portfolios, including integrating Environmental, Social and Governance (ESG) indices in its investment products, and removing companies generating more than 25% of their revenues from thermal coal production.

Speaking during the Global Compact Network Singapore Virtual Summit 2020, Ms Ho said that sustainability-integrated portfolios would provide risk-adjusted returns and growth in the long term.

"It's going to become harder and harder, or rather more expensive, for companies that don't embrace and demonstrate sustainability practices," she said.

"If the market rewards innovation, most people will want to be there in a minute," says Tan Chong Meng, Group CEO of the global port and terminal operator PSA International. SUPPLIED

CARBON-NEUTRAL INVESTING

The Singapore government investment holding company Temasek has targeted a net-zero carbon portfolio by 2050 as part of its attempt to be responsible for broader stakeholder groups affected by climate change.

Dilhan Pillay Sandrasegara, CEO of Temasek International, said the company achieved carbon neutrality in its portfolios last year, and would reduce half of net emissions attributable to portfolios by 2030, equivalent to 7 million tonnes of carbon dioxide.

To achieve that, Temasek will invest more in sustainability-based sectors including food, water, waste, renewable energy, transport and urban development.

It will adopt ESG and Sustainable Development Goals (SDG) metrics as well as make contributions to the Paris Agreement, the UN-brokered pact that seeks to keep the increase in global average temperature to below 1.5 degrees Celsius above pre-industrial levels.

"Companies have to be on that journey (to sustainability), because the capital market will reward them, and it may not support them if they are not on that journey in the longer term," said Mr Sandrasegara.

Yet many companies in emerging Asian economies do not yet have the capacity, infrastructure and technology to make a shift toward sustainability practices. They cling to cheap and conventional technology to speed up revenue growth.

The Philippines and Vietnam, for example, have depended on coal for generating electricity and lack the capacity to spur renewable energy innovation. The palm oil companies in Indonesia and Malaysia, the world's top palm oil producers and exporters, rely on large-scale farming that offers far from optimal productivity and causes extensive deforestation.

Another challenge lies in governments that do not make a big push for economic reform because the political class has thrived from the status quo. Sustainability cannot happen when governments don't put the right ecosystem in place.

"It's not easy for companies to reform and transition," said Tan Chong Meng, Group CEO of PSA International, one of the world's largest port and terminal operators.

He said discussions need to take place between corporate boards and all stakeholders, including shareholders, to find a balance between profit and principle. Customers also need to be more conscious of their consumption impact and have the will to move together with businesses toward sustainability.

"Businesses will take time to translate these bottom-up possibilities into transformative innovations," said Mr Tan. "If the market rewards innovation, most people will want to be there in a minute."

Some signs of change in attitudes are emerging, however. According to a Global Energy Monitor analysis, new coal power proposals and construction in Southeast Asia have declined by 70% as of the first half of 2020 compared to 2015.

The decline reflects public pressure on Japan and South Korea, the region's largest financial backers of new coal plants, to scale back or end their support for conventional energy projects.

Ho Kwon Ping, executive chairman of Banyan Tree Holdings Limited SUPPLIED

BIG-COMPANY LEADERSHIP

South Korea-based Hyundai Motor Group is another big company that is pursuing sustainability in concrete ways. It has set up an open innovation lab in Singapore, which will partner with local suppliers, small and medium enterprises, universities and research institutes to lead the shift in the mobility value chain toward clean energy.

"Big companies have to bring the ecosystem and their supply base on the journey. They have a role to play in helping their supply base be part of that journey," said Mr Sandrasegara of Temasek.

Governments, he said, also have a role in devising incentives that can make it possible for small- and medium-sized companies to adopt sustainability as a core goal.

In this way, all stakeholders can advance and prosper together in the pursuit of sustainability in the post-Covid world.

The United Nations Global Compact, now celebrating its 20th year, is the world's largest corporate sustainability initiative, with more than 11,500 business members in 156 countries.

Corporate sustainability, it says, starts with a company's value system and a principles-based approach to doing business. This means operating in ways that, at a minimum, meet fundamental responsibilities in the areas of human rights, labour, environment and anti-corruption. Members of the Compact pledge to abide by a total of 10 principles in all phases of their activity.

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