Why purpose-driven companies have a higher chance at success.
If you have a mission statement or brand purpose, perhaps one that was mostly side lined during busy seasons prior, now is the time to dust it off and ask, how could your brand act on this purpose with renewed relevance in these changed times?*
Purpose has been much talked about over the last decade. Hundreds of books and articles have been written about this topic. For years though, skeptics felt that this is just another buzzword or the flavour of the day. Leaders have found it very difficult to embed purpose and make it core to their business.
In recent times though, there is a renewed sense of urgency to try to ensure that purpose does not become a hollow word. In August last year, the Business Roundtable in the US made a pivotal declaration. Signed by 181 CEOs of major companies, the statement broadened the purpose of a corporation to benefit a much bigger group of stakeholders – extending beyond shareholders to include employees, customers, suppliers and communities. This is a big shift from shareholder primacy (i.e. the belief that corporations exist mainly to profit shareholders), which had been accepted as the core operating principle of business for decades.
We are increasingly recognising though that purpose from the side lines will not work. Today, we are dealing with climate change, dwindling natural resources, a widening economic gap, and the continued burden of historic inequalities. Leaders are recognising that corporations can and should play a role in improving the societies in which they operate. Moreover, long-term value creation depends on how well a company fulfils the needs of its customers, team members and communities. Consumers are also holding businesses to a higher standard with each passing day, and millennials prefer to work with purpose-driven companies.
So, my message this week focuses on relooking at your corporate purpose. To reshape it – to influence your strategic decisions, to define your core propositions, to guide resource allocation, to communicate it a more compelling way and to use it to motivate and inspire your employees.
In recent years, 35 US states have authorised the incorporation of benefit corporations, designed to balance purpose and profitability. In these for-profit companies, the “best interest of the corporation” includes environmental, social and governance principles (known as ESG), alongside profits. Examples include Patagonia, Kickstarter and Ben & Jerry’s.
The Business Roundtable’s updated definition reflects these new realities. As Darren Walker, President of the Ford Foundation, put it:
This is tremendous news because it is more critical than ever that businesses in the 21st century are focused on generating long-term value for all stakeholders and addressing the challenges we face, which will result in shared prosperity and sustainability for both business and society.
Purpose in the time of COVID
With the current pandemic, purpose has taken on an added urgency. We’ve seen the different ways in which businesses have responded to the crisis, all the way from panic-stricken layoffs to thoughtful ramping up of support for team members. In April, correspondent Peter Goodman wrote in the New York Times:
Today, with the planet under assault from a pandemic that has delivered the most profound economic pain since the Great Depression, key signatories [to the Business Roundtable] are furloughing employees, paying dividends to shareholders and provoking complaints from workers that they aren’t adequately protected from danger.
It’s relatively easy to do good during good times – but what about when the going gets tough? Under stress, there is a tendency to make short-sighted decisions for immediate profit, instead of taking a longer-term view to protect all stakeholders. How you react at a time like this says a lot about who you fundamentally are as a company.
In Shift Your Organisation from Panic to Purpose, published in the Harvard Business Review, the authors highlight the present opportunity for businesses to re-spark a sense of purpose:
When business as usual is impossible, it’s the perfect time to ask: What might business possible, business next, business better look like? What might business with purpose accomplish? The challenge for leaders now is to steer colleagues and associates from business panic to brand purpose. Indeed, (re)activating your purpose can provide stability to your people and forward momentum for your business.
Role of institutional investors
Investors will play a vital part in bringing this expanded definition of purpose to life. The signs of progress are certainly there. BlackRock CEO Larry Fink has been a strong advocate for purposeful business, motivated by the belief that it’s ultimately good for the bottom-line. The Norwegian Sovereign Wealth Fund, which manages 1.4 percent of global equities, is pushing for goals like board diversity and equal gender pay. Since 2004, when UN Secretary-General Kofi Annan highlighted ESG to financial institutions, investors have assigned US$ 30 trillion to companies with an ESG or SRI (Socially Responsible Investing) designation.
Europe leads the way in ESG-driven investing. As per data from the Global Sustainable Investment Alliance, nearly 50 percent of professionally managed assets in Europe adhere to some sustainable guidelines (versus only 26 percent in the US).
Closer to home, Indian investors have also started looking beyond profitability alone. Securities regulator SEBI now requires the top 500 listed companies to disclose their ESG initiatives in an annual business responsibility report. To enable more informed investment, it has also advised businesses to adopt integrated reporting voluntarily, including disclosure of six capitals (financial, manufactured, intellectual, human, social and relationship, and natural).
Reinforcing purpose in India Inc
In 2007, the Indian government introduced a 10-point social charter, encouraging India Inc to collaborate with the government to create a “culture of caring, sharing and belonging”. The Companies Act of 2013 requires directors to promote the interests of employees, shareholders and the community, as well as to protect the environment. Indian businesses also have to assign a part of their profit towards social obligations.
Indeed, many legacy Indian businesses are trying to go above and beyond the letter of the law to invest considerably in social causes. This trend is admirable, but there’s still a lot more to be done. Instead of being a separate policy or side initiative, a broader purpose should be integrated into the very fabric of companies. And there’s no better time to start than right now, in this window of possibility created by the pandemic.
Boards of companies have to play a more pivotal role in this journey. They need to step up more to ensure that companies truly live up to and deliver on the purpose. They are the ultimate guardians of purpose. They should hold management teams more accountable. Purpose discussions need to be a core part of the Board agenda. Boards need to set explicit purpose goals and monitor these alongside financial objectives. Tensions and trade-offs between social value and economic value will inevitably arise. Boards should acknowledge these and create an space for authentic discussions.
Here are five suggestions for companies to seize the moment and lead the way into a more purpose-driven chapter of doing business:
1. Clarify brand purpose
The short term nature of business as usual often side lines purpose. The disruption over the past few months has created an unprecedented pause. There is an opportunity here for companies to renew their sense of purpose. Be clear about what your purpose is. Make sure that it is not generic words on a wall. Ask yourself: How can you uniquely make a difference in people’s lives? How can you reshape your purpose in the evolving landscape? How can you align new measures with your values?
2. Let identity inspire action
Purpose can help chart the route ahead. Microsoft, for example, drew on its legacy to create a new “first responder” mindset: they’re now adapting their software to track the virus and manage its impact. Other businesses are reframing their capabilities to serve communities: several factories have been redeployed to manufacture goods like ventilators, hand sanitisers and protective gear. How can your organisation respond to the needs of the hour in a way that’s true to your identity?
3. Put people first
A company’s commitment to care for team members and vendors must go beyond messaging. Value statements and emails are a good start, but they don’t mean much if at the first sign of trouble, the business starts downsizing or leaves suppliers high and dry. On the other hand, treating people as partners creates immense goodwill and loyalty, while also setting up the company to thrive once the situation normalises.
Wendy’s, for example, is reallocating US$ 40 million from its advertising budget (which was meant to promote a new breakfast menu) towards supporting franchisees. Several companies are providing childcare and mental health support to support their workforce.
4. Build coalitions of support
Remember that you are not in this alone. Many companies are grappling with how to embed purpose. Reach out to partners to get their support and to your peers to learn and share. As Indira Nooyi and Professor Vijay Govindarajan highlight in their HBR article, Becoming a better corporate citizen:
They [companies] will have to proactively deal with skeptical NGOs that argue that purpose-driven strategies are nothing more than window dressing. They should learn to engage with those critics, explain that they are trying something new, and candidly admit that they are coming late to the table. Listening closely, reframing NGOs as partners, and showing that the company takes criticism seriously can often diffuse a tense situation.
5. Measure social goals
Corporate CEOs are usually held accountable for financial performance alone. Setting and monitoring social goals should be as important as financial goals.. Boards should draft a clear purpose statement for the company. Companies should also adopt integrated reporting, allowing investors and stakeholders to assess “purpose performance”.
I hope more of us are inspired to redefine and activate corporate purpose. The time to begin is right now. As the former CEO of Best Buy, Hubert Joly, says:
This is a time when performance is not defined by a company’s share price or whether it will hit its EPS guidance. This is a time when performance will be judged by how a company and its leadership serve everyone and fulfil a higher purpose —and specifically how they have shown up and met the requirements and expectations of its multiple stakeholders.
*From Harvard Business Review, Shift Your Organization from Panic to Purpose, by Scott Goodson, Ali Demos and Charles Dhanaraj, April 27, 2020