Companies have struggled with existential questions such as, “Why do we exist? What’s our contribution to society? What is our purpose?” for decades. Yet in recent years these questions have become more pressing. We live in a world where everyone has a voice. Society now demands a higher degree of accountability and transparency. A growing number of companies, in response, are boldly adopting sustainability as their core corporate purpose. Take for example Unilever, one of the leading companies in this space with its Sustainable Living Plan, which aims to make sustainable living commonplace.
In May 2016, Unilever CEO Paul Polman addressed an audience at Stanford Graduate School of Business about ‘pursuing purpose’. He said: “You need to have something where you want to have an impact and that aligns with your values. It will drive your passion. People’s self-worth should not be measured by their net-worth.” So while companies themselves are highly driven by their purpose, so too are the people within them. What can we learn about purpose in practice when we focus on sustainability as a case in point?
Corporate purpose and what it means for you
In my recent research with George Serafeim at Harvard Business School and Robert G. Eccles at Saïd Business School, we examined 180 US-based companies and classified them as high or low sustainability based on the adoption of environmental, social and governance (ESG) corporate policies in the 1990s. We studied them over an 18-year period to ensure we captured true commitment to purpose; not just the latest fad. The range of policies we used for the classification included carbon emissions reduction, work-life balance and human rights and more. Organisations with an in-depth understanding of their relationship with broader society and the environment were classified as high sustainability.
We found that firms with a high commitment to their sustainability purpose had a fundamentally different organisational DNA than those without such a purpose. More specifically, we found that high-sustainability companies are characterised by distinct governance mechanisms that directly involve the board in sustainability issues and link executive compensation to sustainability objectives. They also have a deeper level and more cohesive stakeholder engagement practices, coupled with effective, consistent processes. They take a longer-term horizon in their external communications and therefore attract more long-term investors. They pay greater attention to non-financial measures regarding employees, suppliers and customers, and are more likely to promote transparency by disclosing higher quality non-financial information.
What’s more, the high-sustainability companies dramatically outperform the low-sustainability ones in stock market and accounting measures of financial performance. In other words, not only did we find that purpose pays off in the long-run, but we find that an authentic commitment to purpose can be translated into four concrete principles.
One: strong and enabling governance
When companies are genuinely committed to purpose – and in this case to sustainability – it is reflected in their governance structure. The top of the organisation sets the tone and signals a credible pledge to purpose. Responsible businesses, therefore, have a governance structure that monitors and advises on environmental, social as well as financial issues. It is more likely that sustainability will be a formal board responsibility; that the board will set up a sustainability sub-committee; and that senior executive incentives are tied to the company’s environmental and social performance in addition to financial performance.
When leaders understand and thrive within the broader social and environmental context in which their businesses operate it also signals to employees, investors and key stakeholders how important purpose really is. Take Intel, which made social responsibility everyone's job when it launched clear sustainability goals in 2008 for 2012. The leadership team took a bold step and tied environmental performance to employee compensation. Since then, Intel has continued to rally the troops through a series of responsible competitions and sustainability projects. The winning teams receive environmental excellence awards and a pay bonus.