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I’ve read so many 10-Ks, proxy statements, S-1s and other SEC filings during my lifetime that all of them became a blur of lookalike reports. That changed on March 26, 2020, when I read the Philip Morris International, Inc. (PMI) 2020 Proxy Statement. The PMI Proxy Statement differs from others in one critical respect. On pages 3-5 is a “Letter From The Board of Directors,” the text of which was unlike anything I had read in the past. The letter reaffirmed the board’s commitment to PMI’s corporate purpose, “to deliver a smoke-free future by focusing its resources to develop… smoke-free products that are less harmful than smoking.”
To the best of my knowledge, this is the first time a board of directors of a US publicly-held company has articulated a statement of corporate purpose, signed by every member of the board, in a document filed with the SEC. This act challenges conventional wisdom about the type of information that should or should not be included in SEC filings.
None of the signers of the August 2019 Business Roundtable “Statement on the Purpose of a Corporation” have issued their own Statement of Purpose. Very few, if any, international companies who have sterling reputations based on their ESG initiatives have issued a Statement of Purpose. How ironic that a tobacco company shall lead them.
The PMI board letter achieves high marks when measured against CECP Strategic Investor Initiative guidance on what should be said about how purpose drives strategy and how the strategy should operationalise the purpose. The PMI statement measures up well against The Statement of Purpose Guidance Document published by EOS at Federated Hermes, which asks companies to identify stakeholders most critical to value creation and sustainability.
PMI’s “Core Strategies for a Smoke-Free Future” operationalise the intent of the corporate purpose. Even though these strategies are not explicitly stated in the letter from the board or in other sections of the proxy statement, some readers may see a link between purpose and strategy when reading the board letter section titled, “Key Stakeholders to Deliver a Smoke-Free Future.” Those who are not familiar with PMI should peruse the company’s website specifically the page titled, Our Goal and Strategies. This page identifies the core strategies: Smoke-Free, Regulation, Talent, Growth, Transition, Sustainability, and Transparency. Perhaps, sometime in the near future, PMI will publish an integrated report, which would be an excellent vehicle for explaining how purpose drives strategy and how strategy acts on corporate purpose.
The board letter sections on employees, the public health community and shareholders illustrate how purpose and strategy are linked. With respect to employees, the board letter reads: “PMI’s ability to accomplish its purpose depends on the skills, dedication and relentless efforts of its employees”. The core strategy of “Talent” makes it clear to readers that PMI focus is to “be the employer of choice for our global workforce and work tirelessly to attract and retain talent”.
The purpose specifically addresses the importance of scientifically substantiating that smoke-free products that are less harmful than smoking. The board letter asks the public health community “to scrutinise its smoke-free products, to provide feedback for improvement and to be open to considering that PMI’s purpose aligns with the societal goal to change the health trajectories of the people who smoke”. This statement relates to the core strategy of “Transparency,” which reads, “Share progress, and invite dialogue and independent verification of out science”. The April 2019 investor presentation reiterates this point: “Put in place a rigorous and transparent scientific pre- and post-market assessment program that is unmatched in the industry”.
PMI recognises the importance of its shareholders. PMI “is dedicated to ensuring its shareholders continue to receive strong and sustainable financial returns over time, while recognising the initial uncertainty that transforming the Company’s business model may bring”. This is related to a core strategy of Growth: “Provide superior returns for our shareholders.”
At this point, some readers might be asking why anyone should be concerned with corporate purpose at a time when many companies are struggling to survive because of the impact of COVID-19 on businesses. In late March 2020, authors from McKinsey & Company wrote in a piece titled Demonstrating corporate purpose in the time of the coronavirus, “the magnitude of the coronavirus crisis confronts corporate leaders with the economic challenge of a lifetime. It also demands of them a moment of existential introspection: What defines their company’s purpose—its core reason for being and its impact on the world? Those who have carefully honed a sense of company purpose will find a foundation and set of values that can guide critical and decisive action.”
The abstract of a research paper, Corporate Purpose and Financial Performance, offers another reason to invest the time needed to construct a statement of corporate purpose. The authors used approximately 500,000 survey responses from people in US companies to measure worker perceptions about their employers. The authors found that “high purpose firms come in two forms: firms characterised by high camaraderie between workers and firms characterised by high clarity from management. We document that firms exhibiting both high purpose and clarity have systematically higher future accounting and stock market performance, even after controlling for current performance, and that this relation is driven by the perceptions of middle management and professional staff rather than senior executives, hourly or commissioned workers. Taken together, these results suggest that firms with mid-level employees with strong beliefs in the purpose of their organisation and the clarity in the path towards that purpose experience better performance.”
I find it fascinating that PMI, a US domiciled publicly held tobacco company, has set a quality standard for a statement of corporate purpose. Consider this. None of the signers of the August 2019 Business Roundtable “Statement on the Purpose of a Corporation” have issued their own Statement of Purpose. Very few, if any, international companies who have sterling reputations based on their ESG initiatives have issued a Statement of Purpose. How ironic that a tobacco company shall lead them.
Mike Krzus is an independent consultant and researcher. He is retired partner of Grant Thornton.