Purpose and Profit: What Companies Are Getting It Right?
Harvard Business Review (HBR) released an updated research paper that constructed measurement between financial performance and purpose. In the study ‘Corporate Purpose and Financial Performance’ it was established that companies with high purpose outperform the market by 5% - 7% per year, grow faster and have higher profitability.
Interestingly, this correlation is clearly linked to a particular scenario. The companies that scored high on purpose also had clarity from senior management on the direction of the company. By clearly setting expectations and how this translates for employees roles and responsibilities, purpose is driven through the organisation by the perceptions of professionals and middle management. Named ‘Purpose-Clarity’ organisations, they systematically have higher future accounting and stock market performance, even after controlling for current performance.
While improved financial performance is only one of the many benefits for Purpose-Clarity companies, the amendments to expand the Statement of the Purpose of a Corporation from nearly 200 of America's most powerful CEOs of the Business Roundtable makes sense. Moving away from purely maximising shareholder returns to delivering value to all key stakeholders including customers, the environment, suppliers, employees, the community and shareholders will ensure the purpose of these companies will be at the core of their business strategy and governance model for the benefit of all.
The Business Roundtable employ around 15 million people and collectively $7 trillion dollars in revenue annually. Their presence transcends national borders and their impact is global.
Purpose in business, what companies are getting it right?
Market response to the Statement
A few themes have emerged from the market since the announcement - ranging from the complex legal ramifications of the amendments, to enthusiasm and not unexpectedly, compounded scepticism.
However, one theme is clear - aspiration needs to be translated into action or the Statement will be regarded as nothing more than a PR exercise. As the Washington Post reported, there was sparse detail on how the revised commitments would change behaviour in the future, what shifts in policy or practices the public should now expect or how success in a stakeholder-driven approach to capitalism might be measured.
The CEOs of for-profit community, Benefit Corporation (B Corp), including Patagonia and Ben & Jerry's took out a full-page ad in the New York Times urging the Roundtable CEOs to join their movement after their announcement of the amended Statement. Certified B Corporations status legally enables members to balance the impact on their stakeholders in addition to their shareholders in their decision-making. In essence, they balance purpose with profit as a force for good.
Unlike B Corp's governance model, there’s currently no legislative requirement for the CEOs of the Business Roundtable to comply with the revision. However, they've advanced the conversation with an open commitment change. As a first step it should guide corporations as benchmark for best practice in business strategy and governance.
Big companies already getting purpose right
Outside the Business Roundtable, many companies in the B Corp as well as the likes of Unilever are already reaping the rewards of purpose.
Unilever announced that its purpose-led Sustainable Living Brands are growing 69% faster than the rest of the business and delivering 75% of the company’s growth. Unilever CEO Alan Jope said: “Two-thirds of consumers around the world say they choose brands because of their stand on social issues, and over 90% of millennials say they would switch brands for one which champions a cause.”
“We believe the evidence is clear and compelling that brands with purpose grow. Purpose creates relevance for a brand; it drives talk-ability, builds penetration and reduces price elasticity. In fact, we believe this so strongly that we are prepared to commit that in the future, every Unilever brand will be a brand with purpose.”
Purpose is core to remaining relevant
HBR advises many high growth companies already use purpose to stay relevant in a fast changing world. The following article provides further examples of companies reaping the rewards of putting purpose at the core of their business strategy.
You can read the full article here https://hbr.org/2019/09/put-purpose-at-the-core-of-your-strategy.
Words by Katrina Savell
References:
https://www.hbs.edu/faculty/Pages/item.aspx?num=54523
https://hbswk.hbs.edu/item/corporate-purpose-and-financial-performance
https://www.businessroundtable.org/business-roundtable-redefines-the-purpose-of-a-corporation-to-promote-an-economy-that-serves-all-americans
http://www.businessroundtable.org/
https://corpgov.law.harvard.edu/2020/08/28/brt-statement-of-corporate-purpose-debate-continues/
https://www.washingtonpost.com/business/2019/08/21/what-watch-now-that-ceos-have-rewritten-purpose-corporation/?noredirect=on
http://www.bcorporation.net/
http://www.patagonia.com/
http://benandjerrys.com/
http://www.unilever.com/
https://www.unilever.com/news/press-releases/2019/unilevers-purpose-led-brands-outperform.html
https://hbr.org/2019/09/put-purpose-at-the-core-of-your-strategy.
