Bastiaan van der Linden asks why some firms are rethinking business purpose and what it means for IR
In recent years, a significant number of companies have expanded their business purpose beyond profit-making. From mega-brand Unilever to small family-owned companies, chief executives and boards of directors are adopting purposes beyond making money, even committing to tackling social, health and environmental problems to create resilient communities and a sustainable planet.
You’ve probably read about these companies and their CEOs. There’s debate about the effectiveness of a purpose beyond profit, with critics claiming that some companies are going too far to make a social statement. Earlier this year, Terry Smith, founder of Fundsmith Equity Fund, called Unilever’s sustainability focus ‘ludicrous’ and blamed the strategy for weakening the firm's performance.
But there are also all-out fans. Laurence Fink, CEO of BlackRock, the world’s largest equity investor, has been urging global corporate leaders to incorporate ESG goals into their business purpose for years. Politicians are also proponents and French lawmakers recently passed legislation that gives CEOs the legal green light to look beyond quarterly reports and shareholder profits.
Academics like me are also paying attention. A growing body of research shows that including social and environmental objectives in investment decisions enhances financial performance and reduces risks.
ESG as a corporate life preserver?After the 2008 financial crisis, researchers looked at the stock performance of more than 1,000 publicly traded firms with a focus on those that promoted purpose over profit. They found that those with significant ESG programs in place – or ‘high-ESG’ firms – outperformed low-ESG firms on the stock market and that high-ESG firms also witnessed above-average profitability, sales growth and employee productivity, even during a financial downturn.
Researchers hypothesized that shareholder trust had a lot to do with these results: shareholders were willing to take a chance on high-ESG firms even during tumultuous times because they shared a common view regarding current social, environmental and health challenges.
But what works for one firm in one industry doesn’t always work for another in a different industry. This was the finding of another group of researchers on reviewing the SEC filings of more than 10,000 firms across six industries. These researchers created a methodology that could be used to define material ESG issues on a sector-by-sector basis. They argued that this is the only way to develop KPIs, without which none of us will ever truly know whether ESG at the corporate level is working.
Encouraging teamworkIn the world beyond the ivory tower, corporate purpose beyond profit is still viewed by many as the ideal. In addition to Unilever, Patagonia, Novo Nordisk and Philips have all woven different noble ideals into their purpose. These superstar companies appeal to consumers and shareholders alike and attract employees who are committed, even passionate, about working for them.
The leaders of these companies argue that a purpose-driven mission brings people together to pursue a common idea and goal. Teamwork between departments and distant divisions is easier thanks to a unifying ambition that inspires and motivates.
An expanded business purpose can also be beneficial because it can have the opposite effect. Not every customer, employee or investor will fall in love with a company because it has an inspirational mission statement. Some team leaders will dismiss business purpose as a bad idea from the marketing department. And some employees will grumble when a manager reminds them to aim for the greater good when customers are dissatisfied and sales are down.
But I argue that these moments are the perfect time for managers and their teams to have meaningful conversations about the purpose of their work and how best to meet that purpose – even if there are competing objectives.
When a company extends its purpose beyond profit, a natural tension arises. This tension creates space for managers and their teams to imagine greater objectives and better ways to reach them, including new and improved business practices.
In their 2020 book, The Power of And, academics R Edward Freeman, Kirsten Martin and Bidhan Parmar interview dozens of business executives about purpose beyond profit. Many of these leaders told them that their employees were more eager to work together to find solutions when they knew they were striving for something beyond corporate revenue. This resulted in numerous advancements – in packaging, sourcing and waste management, to name a few.
Discussions about improving a product extend beyond managers and employees. They can engage customers, suppliers, subcontractors, stockholders, the public and the news media. Indeed, brands with purpose-driven mission statements make headlines and create a buzz on social media platforms because people generally have strong opinions about them. And it’s in the sharing of these opinions – in the public domain and inside the company – that purpose-driven companies often discover golden nuggets of consumer insight and product strategy.
Having a well-defined purpose beyond profit can also protect a company from the threat of hostile takeovers. For example, in 2017, when Kraft Heinz tried to buy Unilever for $143 bn, there was much talk in business and financial publications about the two giants’ dramatically different corporate cultures. In the end, this is partly what killed the deal. This is an example of how business purpose can help a company find the right partnerships – or, in Unilever’s case, distance itself from a strategically uninteresting one. Unilever’s strong sense of purpose and its ability to communicate that purpose to its stakeholders provided the perfect foil to Kraft Heinz’s acquisition attempt, despite the high dollar figure.
We will likely see more companies expand their business purpose to encompass ESG goals. Many business leaders realize that Milton Friedman’s narrower idea of single-minded profit maximization is outdated and won’t deliver the momentum modern companies and their stakeholders need to survive long term.
This new era of purpose beyond profit means it’s imperative that investors understand what ESG goals a company is trying to tackle and why its corporate leaders want to tackle them. Now more than ever, investors should feel confident about seeking out opportunities to define a company’s purpose, and feel no hesitation about jumping into frenzied discussions about what that purpose should – or shouldn’t – be.
For IR professionals, this new era of purpose beyond profit extends and broadens the horizon substantially because there is so much at stake when a company decides to look beyond revenue. This is an exciting time, one in which you will probably find yourself digging into investors’ ESG expectations and immersing yourself in your own company’s exploration of these new activities. You’ll need this information because it will be your job to explain your company’s ESG activities, why they matter to stakeholders and why this should interest investors.
Communicating and jointly developing the purpose of a business is pivotal to a healthy relationship with investors. Involving investors in business purpose can not only help to explore their reasoning about ESG but also create long-lasting relationships and even help leverage investors’ knowledge and experience in creating thriving companies.
Bastiaan van der Linden is associate professor of CSR at EDHEC Business School and director of the MSc in global and sustainable business
