The case for Purpose

It is easy to see/hear the increase in the use of the word “Purpose”, especially in business publications, and strike it off as the latest warm fuzzy fad that doesn’t practically help close sales, improve profit, manage people or survive Covid shutdowns.

In this note, I’ll make the case that ‘Purpose’ is an important part of hard/tangible/financial value creation for organisations of all sizes by covering:?

• Financial performance
• Investor attitudes
• Employees
• Strategy
• Customers, Community & Crowd
• Resilience
• And some other data that might be useful to some.

Purpose is correlated with financial performance

In a review of over 2000 academic studies on the impact of purpose on equity returns the authors found 63% of studies found a positive correlation (vs 8% that found a negative correlation).

This happens because Purpose can generate topline growth (or serve as an insurance policy against revenue slippage) by creating more loyal customers, fostering trust, and preserving your customer base at a time when 47 percent of consumers disappointed with a brand’s stance on a social issue stop buying its products—and 17 percent will never return.

Also, Purpose-driven environmental stewardship can reduce costs—for example, by improving energy or water efficiency or the need to buy carbon credits.

Purpose can also improve your balance sheet. Danone, the French food multinational, has achieved materially lower capital costs by meeting a set of ESG criteria, including the registration of certain brands to B Corps over time. This move is backed by a syndicate of banks that have committed to rewarding purposeful business with cheaper capital.

The research on Firms of Endearment was a thorough analysis of purpose before that became the term in vogue. Raj Sisodia and his team compared the returns of firms that meet the Firms of Endearment criteria vs Good to great criteria vs the S&P500 over a 15 year period which included 2 global financial crises as well as?unprecedented bull markets. Their conclusion: Firms of Endearment returned more than 10x the S&P500 and more than 6x the Good to Great firms.

Purpose is a pre-requisite for investors.

The market outperformance of purpose-oriented firms has garnered the attention of private investors and?institutional investors. None more so than the world’s?largest asset manager who last week committed to making?sustainability an integral part of their investment framework guiding decisions over $10Tn of assets.?

They see climate risk as investment risk and have committed to playing a more active role of investment stewardship to "engage with companies regarding governance and sustainable business practices that we believe promote durable, long-term profitability.” And this is not just?platitudes, last year they focussed on 440 carbon-intensive companies and voted against 64 directors and removed 69 companies from the universe of assets available to their active equity clients. Two of those directors were at ExxonMobil.

In NZ, there is a Bill before parliament that proposes to force Company Directors to consider more than just Shareholder interest’s (profit) when making decisions.?

Gradually, then suddenly. Suddenly is here and this is now bigger than the Ethical Investing and Stakeholder?Capitalism movements.?

Purpose is important in the global war of talent

The Covid-19 pandemic accelerated the trends for remote working and globally distributed teams by 5-10 years. The 'Great Resignation' rapidly changed the talent wars into a global talent war.

Purpose can unleash employee potential—helping you win the war for talent, retain your best people, and boost employee motivation. Today, about two-thirds of millennials take a company’s social and environmental commitments into account when deciding where to work. Harder to find skills and experience (such as cyber security, data scientists and machine learning developers) are even more influenced by this.

Employees that feel their companies purpose is in alignment with their own are 2-3x more loyal, engaged and willing to advocate for their company than employees who do not see this alignment.

Purpose trumps strategy

One way purpose is influencing?strategy?is to?influence the?‘where to play’ decision. The world’s biggest problems are its biggest future markets with literally trillions of dollars at stake in areas such as energy sector decarbonisation; climate change transition; human health and wellbeing. A purpose-driven strategy reframes markets, TAMs and opportunities as it redefines the playing field.

The other way purpose is influencing strategy is in the?‘how to play’ decisions. The old 5 year business plan is truly dead. Firms taking advantage of the?unprecedented?value creation over the last 10 years are doing so with clear purpose - a north-star - and near term strategic priorities with clear metrics and accountability. They strike a balance between rudderless agility and rigid strategies. This form of strategy does not work without a clear purpose as anchor.

Purpose draws in customers, community & crowd.

One of the most important levers of exponential growth identified in the Exponential Organizations book is the power of Community & Crowd.?By definition these people sit outside the organisation and its customers, firms?don’t?control these people but they play a very important role in growth and customer acquisition.?What draws these people in is purpose and alignment with the individual's.

The classic example is TED. They went from an annual elitist conference in California to one of the world’s largest media brands by tapping into and unleashing the vast community aligned with their purpose: Ideas Worth Spreading.

Purpose is enduring and increases resilience.

Authentically orienting around Purpose stops organisations from losing touch with their environment.?Purpose?can make you more aware of shifting external expectations, policy directions, and industry standards—thereby helping you identify risks you might otherwise miss. If a crisis does strike, preexisting alignment on the organization’s core reason for being will enable a coordinated, values-driven response that is authentic to your people and compelling to stakeholders. “Trusted” brands bounce back faster after product mishaps and economic shocks, particularly when they respond effectively.?

When AirBnB CEO Brian Chesky penned this letter to employees as he laid off 25% of employees in the face of a global pandemic that literally stopped travel, he did so with authenticity and a return to the original purpose. "When we started Airbnb, it was about belonging and connection.”?From this anchor point he explained how the company was going to focus on their core purpose, which means reducing investment in things did not directly support the core of their host community. AirBnB is still worth more than the 5 largest hotel chains and were the best performing Travel stock through Covid.?

Other data to support a business case for purpose-oriented companies.