041 Purpose = Sustainability + Profit
Updated: Mar 15, 2022
Last week I shared doubts and the lack of progress on stakeholder capitalism—some studies and experts argue that focusing on purpose does not improve financial performance.
In the second part of the three-part series of the Business Case for Stakeholder Capitalism, I share other research where doing good led to doing well. Which story is the right one?
Stock Market Outperformance
Raj Sisodia, one of the authors behind Firms of Endearment and Conscious Capitalism, found that the companies he identified as Firms of Endearment outperformed the S&P 500 index by more than fourteen times.
Companies defined as Firms of Endearment and those that practice Conscious Capitalism share the belief in creating value and a win/win outcome for all business stakeholders. Firms of Endearment include Disney and Nordstrom, and Conscious Capitalism companies examples include Whole Foods and Southwest Airlines.
Jim Stengel, author of GROW: How Ideals Power Growth and Profit at the World’s Greatest Companies, found a cause and effect relationship between purpose and business results. Purpose helps companies create loyal relationships with consumers and inspires their teams to perform better at work. In his book, the Stengel 50, businesses that he identified as purpose-driven are 400 percent more profitable than investing in the S&P 500.
John Kotter and James Heskett, Harvard Business School professors and authors of Corporate Culture and Performance, found that company cultures which valued employees, customers, and investors outperformed companies that did not have such cultures in terms of revenue, stock price and profitability growth. Compared to less value-driven companies, the impact on net income growth was more than seven times by such stakeholder-focused businesses.
More Money Back On Your Investment
Robert Eccles, Ioannis Ioannou, and George Serafeim, in their paper, "The Impact of Corporate Sustainability on Organizational Processes and Performance", reported that High Sustainability companies returned almost 50 percent more to their investors compared to Low Sustainability companies. They inferred that “companies can adopt environmentally and socially responsible policies without sacrificing shareholder wealth creation”.
High Sustainability companies made the Board of Directors responsible for sustainability, engaged actively with stakeholders, and focused on long-term financial and non-financial results.
In a more recent article, Eccles clarified the difference between corporate purpose and sustainability, which are sometimes used synonymously. Long-term value creation starts with clarity of purpose, followed by creating profitable products and services that are sustainable.
To be effective, a company needs to be purpose-driven and profitable with a sustainable business model. Missing either of these elements would lead to the company not creating value for part of their stakeholders whether it be the planet and communities, or investors. Danone was cited as an example of a company committed to sustainability but was financially unsustainable, which led to the ouster of its CEO earlier in 2021.
In the UK, certified B Corps, or purpose-driven companies, grew twenty-eight times faster than the national economic growth of 0.5 percent. The growth was attributed to increased demand from consumers and employees seeking out purpose-driven businesses to buy from and work with.
Happier Employees, Stronger Businesses
Ultimately the business case for value creation for all stakeholders comes down to the company's employees and teams. When leaders take care of employees and increase team well-being, productivity, innovation, stability, and resilience of the organization tend to improve. Deloitte's research found purpose-driven companies reported 30 percent more innovation and 40 percent more workforce retention than competitors.
Andrew Kassoy, the Co-Founder of B Lab, the organization that certifies companies that focus on social good as B Corps, reported that B Corps were 63 percent more likely to survive the financial crisis in 2008 compared to other similar-sized businesses. The resilience of B Corps is attributed to an innovative and more engaged, and empowered workforce that purpose-driven organizations have.
Tony Schwartz, CEO of The Energy Project, a consulting practice focused on increasing employee engagement, argued that employees become more engaged at work when their needs are met. Employee engagement can lead to higher profitability (22 percent) and customer ratings (10 percent).
Satisfied employees also help their employers outperform competitors by 2 to 4 percent in long-term stock performance. Happier employees lead to more stability and lower attrition. This results in better products and services to customers, improved customer satisfaction, and, finally, business results.
Reconciling News and Data
“What you see and what you hear depends a great deal on where you are standing”, said author CS Lewis.
In the first part of this series on the Business Case of Stakeholder Capitalism, I highlighted how one could be seduced by the current hype around sustainability and ESG. In this second part, different research show how doing good can create multiple stakeholder impact and outperform comparable industry players.
The jury is out as to whether purpose-driven companies actually produce superior financial performance compared to their peers.
It could be hard for investors not to be swept up and swayed by popular market opinion and trends. Quite a number of asset management firms are pouring money into ESG-led businesses. But can these firms produce the needed financial return for investors?
Similarly, for customers and communities, outside looking in, the situation could be confusing. How do we know which companies are “purpose” washing, announcing initiatives without follow-through in their actions? How might we predict which companies would outperform their peers based on their purpose statement?
A practical way could be to look beyond company statements of purpose and look beneath the surface. Look not just at what they say, but also what they do. Pay less attention to the glossy branding exercises, and look for evidence of what the company has done or is doing.
One way to identify companies that truly practice stakeholder capitalism would be to understand the culture. What are the values that drive the organization? How does the company treat its employees? How well (rather than how much) do they invest in their employees? Are their employees satisfied working with the company?
I examine this idea further in the final part of this series. Stay tuned!