The exam question - is there a return on purpose?
Lots of the clients we work with at Good Innovation are leading the Purpose agenda for some of the biggest brands in the world. They tell me that they’re being asked to make the business case for purpose. Most of these are heritage brands who have been around for decades, and are transitioning to becoming more purposeful.
So, is it really true that businesses become more successful and grow because they take purpose seriously?
Like any good question, there are 2 sides to the argument - the believers and the sceptics. So in this article we’re going to be exploring real examples and evidence from businesses who believe the answer is yes, and looking into 8 specific business benefits they attribute to becoming a more purposeful company.
First, what do we mean by ‘purpose’?
It feels like there’s a whole other blog post on this one, but to keep it brief for now…
Arguably every company does good simply by providing jobs, paying tax, contributing to the economy. But this isn’t what I’m talking about.
And most businesses have a mission - Disney's is 'to entertain, inform and inspire people around the globe through the power of unparalleled storytelling', Aviva's is to "protect people each day, help them to get on with their lives and support them when they've had a problem", and Natwest's is "to champion potential, helping people, families and businesses to thrive". But this isn’t what I mean either.
Purpose is about business being a force for good. Doing more than the day job and serving shareholders, by taking responsibility for having a positive impact on society. This could be supporting the climate crisis - the ‘E’ of ESG - i.e. Aviva committing to be a net zero organisation by 2040. Or addressing a social inequality - the ‘S’ of ESG - like Blackrock whose Foundation focuses on helping people build financial security, and their employee engagement programs which equip employees to be agents of social change in their communities.
I’ve heard it called lots of different things; corporate social responsibility, sustainability, Diversity, equity and Inclusion. But for now, I’ll call it Purpose.
The sceptics vs the believers
Each side of the argument cares about this question for different reasons. The sceptics want to use it to justify the Nobel prize winning economist Milton Friedman’s argument that “there is one, and only one social responsibility of business - to increase its profits.”
On the other hand the believers, who amongst others include 180 CEO’s from some of the biggest companies in the world, think the choice between purpose and profit is a false dichotomy. They believe that business should be a force for good, and believe that purpose does not come at the expense of profit, but it can actually help a business grow.
It’s also worth acknowledging that when it’s done badly, and companies get called out for purpose washing it can have the opposite effect. A quick google will throw up lots of examples, but here are 10 good ones.
But when it’s done well, there’s plenty of evidence that it can help businesses thrive and stand out from the competition. As Alex Edmans put it in his excellent book on the subject, Grow the Pie, “To reach the land of profit, follow the road of purpose.” Edmans sets out a compelling, evidence based argument for how purpose and profit is not an either or choice. If you’re looking for a persuasive, robust and highly practical book on this subject, I highly recommend ‘Grow the Pie’.
Is there any evidence that it can really drive business benefits?
The short answer is yes. Lots. There’s a growing body of research developing from the likes of Deloitte, Mckinsey and Accenture indicating that purpose driven companies are associated with a variety of performance benefits.
According to a report by Fortuna Advisors and the CEO Investor Forum “high purpose brands outperformed low purpose brands on common measures of financial performance, market valuation, and shareholder value creation”.
Break this down, specifically how can purpose help businesses succeed?
Speaking to the clients from some of the biggest brands in the world, I identified 8 specific areas where purpose drives business performance. It’s not an exhaustive list, they don't all apply to everyone, and the weighting of each area will vary from business to business. But they are some of the most common measures a business attributes value to being a purposeful company.
1. Shareholder value - ‘a 1-unit increase in purpose (on a scale of 0 to 100), is associated with a 1.2% increase in valuation. For the median S&P 500 company by revenue and valuation, this suggests that improving from a median score on purpose to a top-quartile score could be worth an incremental $9.2 billion in shareholder value’. (The Return on Purpose - Gregory Milano)
2. Brand Reputation - Accenture Strategy’s ‘From me to we: The rise of the purpose-led brand’, their most recent global survey of nearly 30,000 consumers, found that “62% of customers want companies to take a stand on current and broadly relevant issues like sustainability, transparency or fair employment practices.”
3. Market share: Purpose is by no means the silver bullet to grabbing more market share. According to IPSOS, only 12% of millennials have chosen a brand because of its morally responsible behaviour. Only 16% have boycotted a brand for that reason. And for grudge purchases like home insurance for example, price trumps purpose for the vast majority of customers. But, according to a recent McKinsey report, over 75% of consumers have tried new brands, different places to shop, or methods of shopping, since the pandemic started. And in some cases, when price and efficacy stay constant, purpose can be an area where businesses can stand out from their competitors. The Cone/Porter Novelli survey found that 66% of consumers would switch from a product they typically buy, to a new product from a Purpose-driven company.
4. Customer Loyalty - again, purpose is not a counterweight to providing a crap product or service. But, it can help paint your brand in a more positive light to your customers and in turn prevent them going to your competitors. Accenture found that more than half (53%) of consumers who are disappointed with a brand’s words or actions on a social issue complain about it, with 47% walking away in frustration, with 17% not coming back.
5. Attracting Future Talent - The Cone Communications Millennial Employee Study found that 64% of Millennials won’t take a job if their employee doesn’t have a strong purpose, and 83% would be more loyal to a company that helps them contribute to social and environmental issues (vs. 70% average).
6. Retaining your best talent - Deloitte Insights 2020 Global Marketing Trends Report found that purpose-driven companies had 40% higher levels of workforce retention than their competitors.
7. Growth The Kantar Purpose 2020 study demonstrates that over a period of 12 years, the brands with high perceived positive impact have a brand value growth of 175%, versus 86% for medium positive impact and 70% for low positive impact.
8. Investment Swell Investing's "Money Meets Morals" study finds that the vast majority of Gen Z investors aged 18-24 (84%) are either already invested in socially responsible and impact investments or plan to invest in the future.
Ok, so there’s lots of stats, but how do we know it’s not just a fad?
It would be a fair challenge to point out that these are just statistics from a specific moment in time. But a 20-year study by the Torrey Project shows a clear trend over time.
After comparing companies’ financial performance of different companies on the NASDAQ and NYSE over the past 20 years, they found that while companies who just ‘do the day job’ ethically enjoy a higher level of stock price growth (50% higher than that of the S&P 500 over the same period).
But companies who go that step further and adopt a stakeholder-focused model that Alex Edmans sets out in his Grow the Pie book, (one that explicitly serves employees, customers, suppliers, business partners, investors, local communities, the environment, and society) have historically shown even higher returns than standard ethical companies (100% higher than that of the S&P 500 over the same period).
In summary…
There’s plenty of evidence out there to demonstrate that there is indeed a Return on Purpose.
It doesn’t mean that companies have to become more purposeful, or that they can’t succeed without it. Take a look at the likes of Apple who constantly get accused of not taking purpose seriously. They seem to be doing ok.
It’s not as simple as saying that companies have to take purpose seriously or they're doomed.
But if you’re being asked to make the case for purpose, whether it’s your job to make that happen, or you just want to work for a company that takes it seriously, then these 8 drivers of business performance are a good place to start.
Keep the conversation going…
If you’re interested in this topic, have something to say on it, or you’re thinking about it in the context of the company you work for then we’d love to hear from you. You can email me at ryan@goodinnovation.co.uk and we’ll set up a time to talk.