Jenny Scott and Jyoti Banerjee co-authored a paper Preparing for the Impact of Purpose which connects the purpose discussion that is so popular these days to management tools such as strategy and reputation. How can today’s executives navigate this difficult landscape? Here’s a quick introduction to the paper.
We live in a noisy world that likes to reduce complex, nuanced issues to their binary basics. Brexit or Remain? Right or Left? Purpose or Profit?
But, is the world is so polarised? It is full of paradox, conflicting incentives and people, in all their glorious complexities. This makes definitive statements, particularly in economics, difficult to hold up to scrutiny. The issue of purpose versus profit is a case in point.
Every few weeks there is some new public pronouncement that companies need to focus on their purpose, but even in this febrile environment, the statement by the 181 Business Roundtable CEOs that the purpose of a corporation is not just to serve shareholders but to “create value for all stakeholders” still got plenty of attention.
The debate over whether that trade-off between purpose and profit a) still exists, b) has been tempered or c) even eliminated has been building for some time. It is powered by both public demand that our corporations deliver more for society and well documented global imperatives such as environmental degradation, technological transformation and growing wealth inequality.
It is too soon to declare the trade-off defunct. However, there is a compelling and growing body of evidence that suggests not only that purpose no longer demands its pound of profitable flesh, but that it actually drives better financial returns over time.
Our paper (published by Jenny’s company Apella Advisors) draws together academic evidence, polling research and data points over more than 20 years to build the case that businesses whose strategies are actively driven by a purpose that optimises value for multiple stakeholders, perform better than those that do not. Such evidence takes the personal out of purpose, allowing business leaders to make informed decisions for which they will be held accountable.
There is fudge in the discussion around corporate purpose. It’s almost as if companies are being urged to find a purpose, any purpose, perhaps for the first time in their corporate lives. We think this is mistaken. Companies have always had a purpose, most often defined over the last forty years in terms of short-term maximisation of the return to shareholders. We call that Purpose 1, or P1.
We think the drive to purpose is more about defining Purpose 2, or P2, which is about optimising value across multiple stakeholders in multiple timeframes. We argue this evidence suggests that now is the time for businesses to move from a P1 world to a P2 world.
The question for corporates in this P2 world therefore becomes not what will generate the most money in the shortest time, but what will encourage each stakeholder to give their best? What purpose will bind all those stakeholders together? With signs that better returns are to be generated this way, it becomes a fiduciary duty.
The paper goes on to recognise the challenges of navigating successfully in this more nuanced world and argues that measuring and tracking a firm’s reputation across those multiple stakeholders provides one critical management tool in evaluating progress. Reputation is the sum total of stakeholder views of a corporate’s character and therefore their intentions towards that corporate, be that in terms of effort from employees, loyalty from customers, reliability of suppliers or trust from society as a whole.
With each one of those stakeholders driving value, their views on a corporate’s character become critical. They also become a critical lead indicator that businesses cannot afford to ignore.
The case for purpose-led organisations is not yet beyond dispute. We think a number of areas would benefit from additional work:
* More data is needed on the relationship between purpose and profit
* Companies serious about making purpose a meaningful anchor in their work need to introduce incentive structures that drive non-financial outcomes
* The definitions of success in a P2 world need to evolve – most P2 measures today, such as customer satisfaction or employee engagement, are couched in terms of the P1 metric of profit.
So yes to profit, yes to purpose, and less of the binary, simplistic polarities that we seem to be inundated with.