Only 7 percent of Fortune 500 CEOs believe their companies should “mainly focus on making profits and not be distracted by social goals.”1 And with good reason. While shareholder capitalism has catalyzed enormous progress, it also has struggled to address deeply vexing issues such as climate change and income inequality—or, looking forward, the employment implications of artificial intelligence.
But where do we go from here? How do we deliver a sense of purpose across a wide range of environmental, social, and governance (ESG) priorities? Doing so means moving from business as usual to a less traveled path that may feel like “painting outside the lines.” Are we going too far beyond our core mandate? Does it mean we’ll lose focus on bottom-line results? Will transparency expose painful tensions better left unexamined? Will our boards, management teams, employees, and stakeholders want to follow us, or will they think we have “lost the plot”? There are no easy answers to these questions; corporate engagement is messy, and pitfalls, including criticism from skeptical stakeholders, abound.
Yet when companies fully leverage their scale to benefit society, the impact can be extraordinary. The power of purpose is evident as the world fights the urgent threat of the COVID-19 pandemic, with a number of companies doubling down on their purpose, at the very time stakeholders need it the most (for more, see “Demonstrating corporate purpose in the time of coronavirus”). Business also has an opportunity, and an obligation, to engage on the urgent needs of our planet, where waiting for governments and nongovernmental organizations to act on their own through traditional means such as regulation and community engagement carries risk.
Fortunately, a “how to” playbook is starting to emerge as a growing number of companies lead. In this article, we try to distill some inspiring steps taken by forward-looking companies. In doing so, we don’t pretend to have all the answers. What we present here is some early thinking about the road ahead from our research and engagement with clients around the world. We hope this will help you wherever you are on your journey.
Confronting the purpose gap
The August 2019 Business Roundtable Statement, which elevated stakeholder interests to the same level as shareholders’ interests, represents both a reappraisal of purpose and a reflection of tensions that have been boiling over. Customers are boycotting the products of companies whose values they view as contrary to their own. Investors are migrating to ESG funds. And the majority of employees in the corporate world feel “disengaged”; they are agitating for decisions and behaviors that they can be proud to stand behind and gravitating toward companies that have a clear, unequivocal, and positive impact on the world.
Organizations turning a blind eye will face inevitable blowback. In just the past year, companies have witnessed hundreds of thousands of employees walking out over climate issues and recurrent high-profile petitions about business practices that have raised the ire of socially conscious interest groups. Digital platforms are powerful amplifiers. As historian Niall Ferguson warns in a recent McKinsey Quarterly interview, “If your company has not been on the receiving end of a Twitter storm, then don’t worry, it soon will be.”
Despite all this, the potential is extraordinary for business to serve as a force for good. Corporate social responsibility (CSR) initiatives remain a powerful lever. We also see burgeoning opportunities for businesses to contribute that extend beyond traditional CSR—such as deploying digital tools and advanced analytics to address global challenges, as well as mobilizing diverse ecosystems of players to pursue goals that no individual business (or government) could realize on its own. To take just one example, apparel giants such as H&M, Kering, Nike, and PVH have joined forces to create Global Fashion Agenda, a not-for-profit organization that promotes sustainable fashion, from the efficient use of resources and secure work environments to closed-loop recycling. Often, though, these opportunities feel tangential. Many executives tell us they feel their own companies do great CSR work but wish those efforts could extend into the core, adding meaning to the day-to-day experience of their employees and themselves.
We’d suggest that the disconnects between public perceptions of business and its potential for good, or between employees’ desire for meaning at work versus what they experience, reflect a purpose gap. In a recent McKinsey survey comprising a representative sample of more than 1,000 participants from US companies, 82 percent affirmed the importance of purpose, but only 42 percent reported that their company’s stated “purpose” had much effect (exhibit). That shouldn’t be surprising. Many companies’ purpose statements are so generic that they do little to challenge business as usual, and others don’t emphasize the concerns of employees. Contributing to society and creating meaningful work, the top two priorities of employees in our survey, are the focus of just 21 percent and 11 percent of purpose statements, respectively.
We’d further suggest that there is a frustratingly simple reason why business leaders have struggled to square all these circles with coherent statements and credible actions: it’s difficult to solve, simultaneously, for the interests of employees, communities, suppliers, the environment, customers, and shareholders. Tensions and trade-offs abound as we strive to align our business and societal goals; to integrate that identity into the heart of our organizations; and to deliver on our purpose, including its measurement, management, and communication.
Placing purpose at the core
What’s needed is relatively clear: it’s deep reflection on your corporate identity—what you really stand for—which may well lead to material changes in your strategy and even your governance (such as your status as a public company, a private company, or a public-benefit corporation).
But how do you pull this off? What are the mechanics of getting it done and making it real? How do you embrace challenging trade-offs and uncomfortable truths that, if unaddressed, are likely to perpetuate the purpose gap and give rise to rhetoric that’s not accompanied by credible action?
We don’t yet have complete answers to these difficult questions. One thing we are convinced of, though, is that the only way to bridge a purpose gap is to embed your reflection, exploration, discussion, and action in the heart of your business and your organization. We describe here a necessary precondition for any of that, and then four steps for moving ahead: sizing up where you are, including your vulnerabilities; clarifying how your purpose connects with your company’s “superpower”; organizing with purpose in mind; and measuring and managing purpose so that it really becomes part of your core DNA.
Employees are agitating for decisions and behaviors that they can be proud to stand behind and gravitating toward companies that have a clear, unequivocal, and positive impact on the world.
Understand that purpose is personal and emotional
The precursor to action is embracing the emotion and complexity associated with hard work on purpose. There is no simple, input/output equation, which makes it hard to address purpose in the context of prevailing shareholder models. Purpose also is deeply intertwined with the people who make up an organization and who, like all of us, are messy at times. Founder-driven companies, such as Starbucks, sometimes find it easier to put purpose at their core, because their leaders connect with and shape purpose emotionally as well as logically. The rest of us need to make this personal, too.
1. Get real: Create a baseline from your stakeholders’ perspectives
Connecting purpose with the heart of your company means reappraising your core: the strategy you pursue, the operations driving you forward, and the organization itself. That’s hard work, and you can’t do it without deep engagement from your top team, employees, and broader stakeholders. But there’s no substitute. Your stakeholders care about the concrete consequences of your lived purpose, not the new phrase at the start of your annual report.
Start by taking a hard look at the relationships among your social and environmental impact, your strategy, and your purpose, which may be misaligned. Such a reappraisal could lead you to reevaluate some of those hard-to-reverse choices about where and how to compete that represent the core of an effective strategy. The resulting friction is uncomfortable, but also extremely valuable. You can encourage it on an ongoing basis by building purpose-linked questions into your key strategy, budgeting, and capital-investment discussions, for example: “Which pillars of our strategy are most and least congruent with our purpose? How would a ranking of our products and services according to purpose compare with one based on profitability?” Questions such as these cause everyone to pause, legitimize healthy introspection, and boost the odds of spotting instances when taking a short-term revenue or margin hit is a small price to pay for being true to who you are or want to be. (For a more complete set of purpose-related questions, see sidebar, “Questioning purpose.”)
Your self-assessment must go well beyond strategy. Measure your social and environmental impact, starting with a review of your supply-chain and supplier risks. Society now holds you responsible for your entire business chain, beyond your corporate walls, including what your suppliers do. If you, as a senior leader, have not been personally involved with supplier issues recently, go and see for yourself. You don’t need another report; you need deep conviction—either that your supply chain is healthy and sound today or that you have a plan to make it so tomorrow. You need to recognize your vulnerabilities in the eyes of society and tackle them.
Dig deep into the makeup of your products. If you make cell phones, how much plastic in the product is recycled versus new, and how easy are your phones to repair versus replace, which carries additional environmental cost? Your impact also extends to the resources, including energy, that are required for the consumption of your products, in their entirety. Starbucks recently estimated that about 20 percent of its total carbon footprint was related to the production of dairy products consumed with its coffee.
Engage a wide range of stakeholders early as a key input into the process. A basic-materials company we know interviewed 150 external stakeholders, including investors who had chosen not to invest in its industry, as well as CEOs in other industries, all with an eye toward understanding their posture and process related to purpose. Such engagement brings out new perspectives, mitigates risk, and avoids surprises later on. What would an activist discover by digging deeply? Where are you most vulnerable? What is the central thing that critical stakeholders believe society expects from you, and are you doing enough about that? Are you focusing on only a couple of the United Nations’ Sustainable Development Goals, while critics would emphasize others at the bottom of your to-do list? Or are you “doing good” in some areas of your business, while hoping this makes up for negatives in others? All these can be calibrated and assessed, to some degree. At times, doing so may demand the courage to let your stakeholders’ perceptions of where you are trump your own views.
The only way to bridge a purpose gap is to embed your reflection, exploration, discussion, and action in the heart of your business and your organization.
2. Connect purpose with your company’s ‘superpower’
As you take stock and tackle your company’s vulnerabilities, you also need to set bold aspirations and push for specificity on the alignment between purpose and value. It’s often present. Research by author and professor Raj Sisodia suggests that purpose-led companies significantly outperformed the S&P 500 between 1996 and 2011.2 More than 2,000 academic studies have examined the impact of environmental, social, and governance propositions on equity returns, and 63 percent of them found positive results (versus only 8 percent that were negative).
Such outcomes don’t arise magically because a company decides to be purpose-driven. They take shape most effectively when purpose connects with a company’s “superpower”—its unique ability to create value and drive progress across ESG themes. For example, the multinational retailer H&M, whose CEO was previously its chief sustainability officer, has embraced the superpower of its supply chain by opening it up to rival brands that can use it to accelerate their own sustainability efforts.
Identifying and building around unique assets, capabilities, or points of leverage with the potential for outsize impact on social challenges can create value in a variety of ways:
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.
Purpose-driven environmental stewardship can reduce costs—for example, by improving energy or water efficiency.
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.
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. This remains as powerful a truth as it was in 1982, when Johnson & Johnson recalled and repackaged Tylenol following a tampering tragedy.
Purpose can 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 role of the leader is first to inspire creative thinking about what makes you unique, how it links to purpose, and why it could be valuable—and then to encourage rigor in embedding it in your company’s core. As you strive to connect the superpower of your business with its impact on society, you’re likely to identify a rich constellation of potential purpose initiatives. Some are near-term win–wins, delivering immediate societal and financial benefits. Others clearly help society now but take longer to yield bottom-line results. There also are bigger, “moon shot” bets, whose potential benefit to society is enormous but, for shareholders, perhaps unclear. If you have already built momentum with initiatives in the first two categories, it’s easier to stretch for moon shots—which are the most meaningful, generate the most internal satisfaction, and also capture external attention (including motivating others to act). For example, Patagonia’s commitment to repairing jackets, to encourage reusing them, has been emulated by other makers of outdoor wear.
The role of the leader is first to inspire creative thinking about what makes you unique, how it links to purpose, and why it could be valuable—and then to encourage rigor in embedding it in your company’s core.
3. Organize to keep purpose at the top of everyone’s mind, every day
Then there’s the organization itself. Do your people routinely reflect on purpose? Do your critical organizational building blocks—whether they are business units, agile squads, or pockets of functional expertise—have the autonomy and incentives to do their work with purpose? Are your purpose-driven functions (such as philanthropy) self-contained silos, or are they connected with the core of your business?
What about your culture? That, too, is part of your social impact. Just because you deliver good service to customers doesn’t legitimize a toxic culture in your organization that excludes people. Dig deep to assess your own culture, the level of engagement of your own people, and the degree to which they feel empowered to bring their best selves to work.
Above all, do you understand what your employees care about—their sources of meaning, aspirations, and anxieties around social issues? Many CEOs are concerned that the majority of their employees are not actively engaged. What would it take for employees to bring enthusiasm, creativity, and collaboration to work, in addition to discipline? Connecting your people’s individual purpose with organizational purpose is the critical link. An Asian insurer provides explicit space in its leadership programs to reflect on this connection. Meanwhile, a US-based healthcare company has prototyped an app with which people can explore their values and purpose and make workplace connections to enable the pursuit of those aims.
Making that link—in other words, achieving a truly purpose-driven culture—requires listening and being very open to what you hear. According to the leader of a recent effort to reexamine purpose at Nordea, a large bank in Scandinavia, it was indispensable to spend time “listening to more than 7,000 people in and around our organization over a period of six months . . . in workshops . . . online with surveys . . . [and] in more than 1,500 coffee-corner discussions. . . . We discussed deeply why people had joined us, why they stayed, and what they see as impact for a financial institution.” That’s what it looks like when organizations move purpose past slogans and buzzwords.
Connecting purpose with the heart of your company means reappraising your core: the strategy you pursue, the operations driving you forward, and the organization itself.
4. Measure what you can, and learn from what you measure
We all know that what gets measured gets done. But when it comes to purpose, what metrics best reflect impact across the ESG playing field? For complex, far-flung organizations, it can be easy to feel overwhelmed by the seemingly endless array of conflicting reporting standards. Different geographies demand different levels of rigor, and keeping up with the range of voluntary reporting initiatives can be taxing. Popular frameworks such as the United Nations’ Sustainable Development Goals or the Global Reporting Initiative framework are useful touchstones, but they cannot serve as the sole basis of measurement efforts.
Instead, you should ask yourself and your peers questions like the following: What data and evidence are critical to understanding your organization’s total social, environmental, and financial impact? How much insight are your current reporting outputs generating about your efforts to deliver on purpose? When was the last time you took action in response to a metric about your purpose? Perhaps even more important: What is not currently being measured or reported that society will hold you accountable for in the future—such as the greenhouse-gas emissions associated with your industry? And what metrics do your performance-management systems take into account? Seventh Generation, a maker of cleaning and personal-care products, recently built sustainability targets into the incentive system for its entire workforce, in service of its goal of being a zero-waste company by 2025.
Changing how you incentivize people, including the integration of societal-impact goals into compensation, is a “proof point” taken seriously by stakeholders. What other proof points can you build in? Measuring and reducing your carbon footprint and making substantial, measurable investments in reskilling are good examples. Ideally, such proof points become mutually reinforcing. Shell, for example, has plans to set short-term carbon-emissions targets and link executive compensation to performance against them.
You may need to create new metrics that more precisely reflect the tensions you are seeking to reconcile for you and your stakeholders. At PayPal, CEO Dan Schulman and his leadership team became concerned when they realized that a significant portion of their nearly 25,000 employees, particularly at the entry level and in hourly positions, were struggling to make ends meet despite the fact that the company was paying wages at or above market rate. To Schulman, this “seemed ridiculous” for a company whose purpose focuses on improving the financial health of its customers. As he put it, the “market wasn’t working” for these employees—or for many others similarly situated.
PayPal surveyed its employees to assess their financial wellness, developed and began tracking metrics such as a new “net disposable income” calculation for its employees, and took immediate action to improve these metrics and provide its employees with financial security. By significantly lowering the cost of medical benefits, making every employee a shareholder, raising wages in certain instances, and delivering financial-wellness training, PayPal set a target to raise the net disposable income of its employees and improve their financial health. In a world where, as McKinsey Global Institute research has shown, a majority of the next generation in advanced economies is “poorer than their parents,” the impact of such initiatives cannot be overstated.
Source : https://www.mckinsey.com/business-functions/organization/our-insights/purpose-shifting-from-why-to-how#