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Profit with purpose – the new norm

Profit with purpose – the new norm

Posted on 10 December 2019

Why is this happening?

For many of years, a small group of businesses have been well-known for their commitment to driving change in society. Famous examples include The Body Shop and Patagonia. However, until relatively recently, such purpose-driven businesses have been a niche endeavour. The prevailing view as to how to run a business stemmed from Milton Freidman and his mantra that there is:

“one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits, so long as it stays within the rules of the game, which is to say, engage in open and free competition without deception or fraud." (Capitalism and Freedom, Milton Friedman, 1962).

However, over the last decade, in the wake of the 2008 financial crisis (which itself was preceded by numerous financial scandals, such as Enron) this near-50 year old orthodoxy is being increasingly challenged.

Larry Fink, the CEO and chair of New York-based investment manager BlackRock, in his 2019 annual letter to CEOs highlighted the dangers of a blinding fixation on putting profits ahead of purpose. Fink recognized how the global landscape was increasingly fragile and, as a result, susceptible to short-term behaviour by corporations and governments alike. He further illustrated how around the world, frustration with years of stagnant wages, the effect of technology on jobs, and uncertainty about the future had fueled popular anger, nationalism, and xenophobia. Trust in multilateralism and official institutions was crumbling. Amidst this backdrop, senior leaders — political and in the business world — could no longer continue to operate with their heads in the sand. "Business as usual" was no longer an option.

Added to that is the rise in influence of the millennial generation – and their attitudes towards to the role of business. Amongst this group, the view that the goal of business should be to 'improve society' has taken hold. The view of millennials is increasingly supported by the view of Generation Z. If anything, Gen Z are even more suspicious of the ability of businesses run on the traditional capitalist model to provide solutions to the issues that they (and the planet) are confronted with.

As the influence of Millennials and Gen Z increases, both in terms of buying power and their position within the workforce, businesses cannot simply ignore these voices and the generational shift in attitudes that they represent.

Have we reached the tipping point?

As an acknowledgment of the shifting societal views of the traditional corporate model, following on from Larry Fink's CEO letter, in August this year, the Board members of the Business Roundtable, a traditionally conservative lobby group for 200 of the largest US companies (e.g. Pepsi, Walmart) issued a statement to redefine the role of business in society — and how companies are perceived by an increasingly sceptical public.

Breaking with decades of long-held Friedman-esque corporate orthodoxy, the Business Roundtable issued a statement on “The Purpose of a Corporation,” arguing that companies should:

"no longer advance only the interests of shareholders."

Instead, the group said, they must also:

  • invest in their employees,
  • protect the environment, and
  • deal fairly and ethically with their suppliers.

The statement said “While each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all of our stakeholders… We commit to deliver value to all of them, for the future success of our companies, our communities and our country.”

Given that the CEOs of the biggest US companies have signed up to this thinking, effectively consigning the Friedman orthodoxy to the dustbin, it seems hard to argue against us having reached a tipping point – one where profit with purpose is set to become the new norm.

Profit with purpose is good business

It is unlikely that the CEOs represented on the board of the Business Roundtable made their pronouncement on the purpose of a corporation without believing that the shift away from shareholder primacy towards a broader set of purposes would be good for business - at least in the medium to long term. Indeed, the evidence seems to be that such businesses are seen as holding an advantage against their peers in three key areas: attracting customers, attracting and retaining the best people, and, increasingly, being attractive to investors.

Alignment with customer values

Given the increasing spending power of Millennials and Gen Z, values alignment is increasingly important to customers. Many are more willing to spend money on brands that take a shared stance on social and political issues they care about. Alignment helps create "stickiness" between a business and its customers, enabling marketers to worry less about churn and focus more on authenticity. That said, businesses have to maintain that authenticity and remain true to their values over time. Trust can be quickly eroded, so building and maintaining trust by demonstrably living the values that attracted customers in the first place is more important than traditional marketing.

Impact on employee engagement and retention

Numerous studies (including by the likes of Goldman Sachs and Deloitte) have found that the needs of Millennials as regards to their workplace are dramatically different from Generation X and the Baby Boomers. High among these is a desire to align personal and corporate values. Beyond the elusive work-life balance, the new generation of employees are also are looking for work-life integration: applying themselves to something that they feel passionate about, so that they can fulfil an economic need as well as a need for a higher purpose. Purpose-driven businesses will be better able to attract and keep their staff, as well as maintain greater engagement. However, as is the case with aligning values with those of their customers, businesses need to genuinely "walk the walk" by continuously demonstrating to their employees that they are genuinely living up to their values.

The investment backdrop

Increasingly, institutional investors are showing a desire to invest in businesses that are purpose-driven and have a social impact. Given that businesses that are most able to align with their customers' values enjoy better loyalty, given that purpose driven businesses are better equipped to engage and retain the best people, investors have come round to the idea that strong brands with meaningful purpose will be rewarded by the market. Supporting organisations with noble beliefs – as well as being a noble thing to do – should also be safe investment decision-making.

Larry Fink has predicted that social investments will become equivalent to core portfolios and has predicted that social investments will exceed US$400bn in next decade. In private equity, social impact funds are on the rise and are investing across all sectors with the aim of delivering a "double bottom line" by supporting growth, together with social utility.

With the growing trend for investors, consumers and employees to buy into companies that deliver positive social change alongside financial returns, the trend for business to adopt impactful social missions and have a clearly defined purpose looks set to continue. 

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