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.
What does it mean for you?
If you are a senior executive, set ambitious targets and provide generous incentives that fully reflect your organisation’s purpose. You fail to send out a consistent and credible message when, for example, social responsibility is part of your company’s media rhetoric yet only financial performance is incentivised.
Leaders that set ambitious goals are more likely to inspire, enable and empower their people to find novel, innovative ways of reaching them. It is similar to when US President John F Kennedy, in 1961, set the ambitious goal of sending an American “safely to the moon before the end of the decade”. It was not about questioning the objective. Instead, it was about realising that business-as-usual would not garner results. NASA had to rethink its strategy and work with radical new technologies to get there. Corporate leaders need to clearly articulate their company’s purpose and convince employees to passionately implement purpose into everything they do – purpose should become routine.
Two: purposeful stakeholder engagement
Corporate purpose must resonate with the company’s stakeholders including its employees, customers, shareholders and local communities. Our research finds that companies driven by their high-sustainability purpose are more focused on understanding the needs of their stakeholders, making investments in managing these relationships and reporting internally as well as externally on the quality of their stakeholder relationships. In other words, purpose-driven organisations are more proactive, more transparent and more accountable in the way they engage with their stakeholders.
Being consistent with purpose is not always as easy as it sounds – doing so becomes increasingly challenging in difficult trade-off situations with stakeholders. Consider, for example, a situation where an environmentally responsible, green product is more costly to produce than a brown equivalent. In this scenario, the brown product may be more financially profitable, yet it will compromise corporate purpose. A green product, on the other hand, is likely to be more expensive. What should a company do? The answer lies in stakeholder-driven innovation. Recent research finds that a broader stakeholder orientation leads to more and better innovation. Why? Because purpose-driven companies offer a more secure work environment that promotes experimentation and tolerates failure.
Companies can powerfully resolve trade-offs via deep stakeholder engagement by using purpose as a guidepost. They can innovate their way out of trade-offs and, at the same time, reinforce their commitment to purpose.
What does it mean for you?
The question to ask here is, “How do I put purpose into my everyday job through my stakeholder relationships?” First, put a structured process in place and enter a rich dialogue consistent with your company’s values: engaging with your stakeholders should never be ad hoc. Second, consider training your managers in stakeholder engagement. Perform due diligence by examining the costs, opportunities and risks for each stakeholder engagement. Develop a common understanding and agree on engagement process consistent with your purpose. Third, meaningful relationships are the fabric of purpose. This principle hinges on your ability to manage the agreed procedures, which should include how the board receives feedback and how you intend to share results with the general public.
Three: long-term, decision-making horizons
The time horizon of a company’s decision-making process says a lot about its corporate purpose. We found that high-sustainability companies adopt long-term horizons. They communicate with analysts using more balanced language – talking about the short-term as well as the long-term – they also discuss both financial and non-financial issues. As a result, they are able to attract more long-term investors.
Responsible leaders play a critical role in communicating the long-term orientation of their business, and in so doing, implement purpose in practice. Here are two examples of CEOs that adopt longer-term views, integrate social and environmental challenges and take a proactive approach to managing their investor base. The first is Starbucks’ chief executive Howard Schultz. Diversity is intrinsic to the company’s purpose and a fundamental pillar of the company’s social license to operate in the long-run. At an annual meeting in 2013, a shareholder complained that the company had lost customers because of its support for same-sex marriage. Schultz responded: “I would suspect not many things, companies, products, investments have returned 38% over the last 12 months. Having said that, it is not an economic decision to me. The lens in which we are making that decision is through the lens of our people. We employ over 200,000 people in this company, and we want to embrace diversity. Of all kinds.”
The second is Unilever’s Paul Polman who announced the Sustainable Living Plan a year after inheriting a sluggish business in 2009. Polman placed consumers (and society) at the heart of Unilever’s business model. Its new bold long-term vision became “to double the size of the business while helping one billion people to improve their health and wellbeing, halving the environmental footprint and enhancing suppliers’ livelihoods”. Polman also encouraged long-term shareholders when he declared the end of quarterly profit reporting to discourage hedge funds from short-term investment. He said: “Are they really my shareholders if they own my stock for a nanosecond?”
What does it mean for you?
Be proactive and reject excessive short-termism. Long-term targets are of course met by a series of shorter ones, but you can shift your thinking (and your team’s) to see the bigger, longer-term picture.
Nowhere is this clearer than in times of crisis. My research ‘The Dog That Didn’t Bark: Long-Term Strategies in Times of Recession’ with Caroline Flammer at Boston University, shows that companies face two options during periods of recession: to save or invest their way out of it. We explored the strategies of US companies during the Great Recession of 2007–09. The results were striking. As Intel’s chairman Craig Barrett puts it, “You can’t save your way out of recession – you have to invest your way out” (Fortune 2009). We found that companies perform better in the recovery period when they maintain their strategic investments in their innovation capability and their stakeholder relations.
If your industry is suffering from a jolt, it is your job to question impromptu decisions such as “slash your budget” and “turn a blind eye to stakeholder demands”. Build long-term organisational resilience by maintaining your commitments towards your stakeholders – your promise is even more valuable when times are tough. Sticking to agreed values signals a heartfelt pledge to purpose.
Four: credible measurement and transparency
Measuring and reporting on a company’s multifaceted performance releases a ‘purpose flare’. Such measures are essential for leaders in determining how well they are executing purpose. For example, we found that high-sustainability companies are more likely to measure and report on environmental and social metrics in addition to financial results. They also have a higher level of transparency in their disclosure of non-financial information.
The circular economy demonstrates this principle well. Any company that aims to achieve 100% circularity cannot do so overnight. They typically use a step process instead – or a strategic ladder. In so doing, companies (big and small) are able to benchmark their achievements towards circularity gradually over time through third-party verification. In other words, measurement and transparency (both internal and external) are essential for implementing purpose: it signals commitment, generates accountability and allows for better-informed decision-making.
Desso, now part of Tarkett, which aims to become the world leader in making environmentally responsible flooring products, addresses this point. It has remodelled the business according to the Cradle to Cradle design – a framework that shifts from thinking ‘less bad’ to ‘more good’. Desso took a phased approach, such as switching 50% of the energy used to renewable sources between 2008 and 2015. This high degree of transparency and consistent measurement of progress towards circularity allowed for small victories to be celebrated on a public stage. The incremental wins also allowed Desso to signal a genuine commitment to its purpose – closing the loop on its product cycles – and scale up the company’s positive environmental impact.
What does it mean for you?
We know that authentic leaders work in transparent organisations. Establish credible metrics that will capture your company’s commitment to purpose. Use metrics that extend beyond the financials to measure your organisation against the expectations of its non-shareholding stakeholders, such as local communities. Such metrics have the power to incentivise employees and furthermore, influence the way your company is perceived.
Purpose in practice requires the right people. If you are working for a company whose purpose does not align with your own, consider leaving it in favour of an organisation that fits your personal values. Corporate purpose offers a significant leadership lesson: it can help bring meaning to people’s work. When purpose is deemed truthful and is understood, employees throughout the organisation can become advocates of their own contributions – and their firm’s contribution to society at large.
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