Can purpose drive corporate profits, or is it a myth?
We hear a common refrain that companies must have ‘purpose’. It’s the silence that ensues when asking how this can be done while also growing the bottom line that is troubling. However there are companies gaining a competitive edge by addressing the right societal issues in the right ways, and their methods will be acutely more valuable in our post-COVID world.
I worked for 17 years in senior roles in the funds management industry before taking a leap into the unknown to join the gig economy – just before the global financial crisis arrived in 2008. My investment work was interesting, challenging and well paid, however I found poor corporate behaviour frustrating because of its impact on the environment and peoples’ lives, and because there seemed to be no easy way to dissuade them from doing so.
What’s been tried?
At work, I helped my firm build in consideration of environmental, social and governance (ESG) factors into our investment processes. It made sense, however the partial naivety of this approach would be exposed down the track when companies like Volkswagen, with high ESG scores, became embroiled in scandals.
Ethical investing was another avenue for making change, but the market was small and I struggled with the idea of classifying companies as good or bad because, in reality, there are only shades of grey.
Philanthropy and corporate social responsibility (CSR) programs implemented by companies themselves are often marginal because they are either about making employees feel good or public relations exercises. The major banks in Australia incurred the wrath of our royal commission because damage was being done in their core business, not because they lacked giving and CSR programs.
To date, we’ve been relying on hope that hasn’t materialised or the ‘stick’ in the form of rules, regulations and laws to bring about the level of change required to head off major problems like climate change. John Elkington, the inventor of the triple bottom line concept, recently noted:
“Whereas CEOs, CFOs, and other corporate leaders move heaven and earth to ensure that they hit their profit targets, the same is very rarely true of their people and planet targets. Clearly, the Triple Bottom Line has failed to bury the single bottom line paradigm”
It led me to ask: if ESG, ethical investing, philanthropy and CSR aren’t creating the magnitude of change needed, is there an alternative way of bridging the gap between profitability and social good? Is there an approach that provides more than hope, that resembles the ‘carrot’ rather than the ‘stick’?
Connecting profit with purpose
A year into my transformation from investment manager to consultant, I came across a Harvard Business Review paper that changed my life. It was called Strategy & Society: The Link Between Competitive Advantage and Corporate Social Responsibility, authored by Michael E. Porter (of Porter’s five competitive forces fame) and Mark R. Kramer, a strategic philanthropist.
Their paper contended that social and environmental problems presented three types of opportunities for companies:
- They might impose costs on doing business that can be reduced through modest investments
- They may present new product and market opportunities; and
- Broader, more collaborative actions that improve the profitability of entire industries or regions.
For example, when Suncorp partnered with Good Shepherd Microfinance to create insurance products for low income earners – a demographic with few available or affordable product choices – it’s an example of what Porter & Kramer call creating shared value. This is a new lens for innovation that is driven by a business case, tightening the nexus between profit and purpose.
Personally, this discovery was electrifying as I knew that businesses would only bring resources en masse to our biggest problems if there was ‘something in it for them’. As an enthusiast, I received an invitation to Boston in 2013 to work with Mark Kramer and 30 practitioners from around the globe and have since built a career on increasing awareness, running educational programs and applying shared value principles.
The principles encourage businesses to willingly bring more resources to problems for longer and they are the subject of my book, Connecting Profit With Purpose. From an employee engagement perspective, they deliver purpose for professionals in a way that is congruent with profitable business.
Australia is fairly advanced in this field, with examples such as Bendigo and Adelaide Bank’s community bank model, NAB’s preemptive approach to financial hardship, IAG organising it’s business around social purpose, Lion growing its mid-strength beer presence and Uncle Toby’s Oats (Nestle) supporting farmers in establishing local oat production.
This is not to say these companies are beyond reproach, there are problem areas for some of them in the way they go about their business, but getting clear on their corporate purpose and recognising instances of shared value creation is a powerful driver of cultural change, one that shareholders will support given it adds to profitability.
A multi-sector initiative I’ve assisted in Wagga Wagga has helped linked unemployed youths in social housing with entry level job opportunities – reducing employment and turnover costs for local industry. We didn’t need to ask government to set up an expensive program, we drew upon existing support services and the commercial incentive of business.
I’ve also documented small to medium sized businesses creating shared value: Battery World’s recycling initiative, Blantyre Farms re-purposing food waste and real estate agents in Sydney’s MacArthur area helping to reduce unnecessary tenancy evictions that often lead to homelessness. In all of these cases, the link to profitability is the catalyst for creating and sustaining win-win outcomes.
A word of warning though, the CEO of AIA Australia, Damien Mu notes that ‘purpose’ sounds pretty cool when you hear it in a TED talk, however it takes a much higher level of care to go ahead and effect positive change.
Our challenge is to grasp the concept and apply it in our circles of influence and our work roles.
Business prosperity depends on the health of the society it operates within – coronavirus has made that link abundantly clear. Up until now, too many businesses have acted as if they are independent of society: running down natural resources, exploiting people, arbitraging rules and regulations or promulgating dubious sales and marketing practices because they’ve been putting shareholder returns first.
With government budgets under extreme strain, the days of businesses externalising costs to society are numbered. It means that corporate executives and leaders must craft new business models that will likely involve partnerships with nonprofits, government and communities of interest.
Competitive advantage can be created and sustained using shared value principles. Not only does it feed the bottom line, it improves the sustainability of future earnings.
If approached in the right way, purpose drives corporate profit growth. Myth busted.
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This article was first published in FirstLinks.