Contributed By: Dominic Barbato, Director of Strategy at Schneider Electric Energy & Sustainability Services
In late 2019, the Business Roundtable made a statement on the purpose of a corporation, superseding previous statements, and the traditional notion, that corporations exist principally to serve their shareholders. 181 CEOs signed the statement, which seeks to expand upon the purpose of a corporation as an entity that has a fundamental commitment to all stakeholders—customers, employees, suppliers, communities—in addition to shareholders.
Meanwhile, corporations continue to make more audacious commitments to broader, multi-stakeholder initiatives than ever before, including renewable energy, carbon neutrality, sustainable communities, and social equity, among others. Pair that with recent headlines suggesting sustainable indices outperformed their mainstream peers during the COVID-19 crisis, and there’s mounting evidence to suggest for-profit corporations that, to the greatest extent possible, act in the best interest of all stakeholders, will deliver higher and more sustainable returns to the shareholders over time.
Amid a global pandemic, entering what is sure to be an extended period of economic recovery, purpose-driven corporations find themselves better positioned to access and use tools that bolster resilience and operational viability in the long run. As a result, there is a growing spotlight on the role of “purpose” in corporations. Let’s explore why.
How leading with purpose can drive corporate success
When it comes down to it, corporations remain beholden to shareholder interests following a long-standing precedent of maximizing shareholder primacy. After all, why else would corporations exist if not to serve the interests of their shareholders who seek returns on the resources they deploy at their own risk?
But the deeper question at hand is whether corporations can maximize shareholder economic return while also advancing the environmental and social interests favored by other stakeholders. Central to this question is a discussion of tradeoffs, most notably, how best to balance the delivery of short-term financial results so often coveted by today’s investors with strategies that enable a business to deliver long-term, sustainable growth.
The evaluation of such tradeoffs is a key function of management, who as employees of the shareholders, are charged with operating the business in accordance with shareholder objectives. However, management also provides an intelligence function to the shareholders—a responsibility to interpret and navigate changing market dynamics driven by the interplay of other corporate stakeholders such as customers, suppliers, employees, communities, and the like.
Shareholders cannot succeed, at least not for very long, when customers, suppliers, employees, and others cannot also succeed.
At times, management serves as a counterbalance to challenge shareholder thinking regarding what objectives to pursue across various time horizons. When operating properly, this oversimplified feedback loop between management and shareholders helps ensure short-term results do not come at the expense of longer-term corporate viability by reconciling the best interests of all corporate stakeholders in a symbiotic manner. Said differently, shareholders cannot succeed, at least not for very long, when customers, suppliers, employees, and others cannot also succeed (and vice versa).
Watch this video by BlackRock Bottom Line on why investors are looking to sustainability during the economic downturn from COVID-19
Corporations that cultivate a strong sense of purpose, through a multi-stakeholder lens, have an opportunity to drive positive outcomes for all parties while also delivering incremental and more sustainable returns for shareholders above those generated in the normal course of business. Investing in longer-focused and higher-minded principles like corporate responsibility can deliver powerful results—monetary and otherwise—in a business environment where customers increasingly value, buy from, and identify with, purpose-driven brands.
Take outdoor clothing manufacturer Patagonia, for example. The company is, by all measures, one of the most successful outdoor gear brands in the world and is a long-time champion of sustainable business. It is well known for its commitments to the environment, fair trade, and other purposeful values, and it has built the success of its brand on this purpose-driven reputation. It even eschews more traditional marketing and operating models in favor of socially responsible ones. The core value of purpose-first has helped them strengthen their brand and create greater short- and long-term profit even beyond what would otherwise be attributed to the high quality of their products.
Shifting towards a vision of long-term success
A short-term mindset can only work for so long. A business that wants to be around in 100 years must inherently think long-term. But the decades-long emphasis on short-term results can be a powerful limiting factor in future-proofing success. Such short-term thinking can create blind spots to larger, systemic, more damaging threats such as climate change, resource scarcity, technology disruption, and even transfer of wealth and shifting consumer preferences.
When businesses embrace a long-term mindset, social and environmental considerations come into view more clearly alongside economic opportunities as the value of sustainable initiatives grows, and companies become more likely to act on or adapt to these broader opportunities.
Companies should be in the business of creating positive returns for shareholders. But there is a distinction between short- and long-term thinking that can have a material impact on the strategy and lifespan of a company. Sustainability does not necessitate shareholders accept lower returns—it’s about creating greater, more sustainable returns in a way that drives incremental value to all stakeholders, including shareholders. Investments in communities, employees, and the environment can enable both short- and long-term profit maximization as businesses increase goodwill with all stakeholders. The new triple bottom line, to drive long-term success and profitability, just might be People + Planet + Purpose.
The new triple bottom line, to drive long-term success and profitability, just might be People + Planet + Purpose.
How can companies lead with purpose despite uncertainty?
The significant organizational and operational changes needed to achieve the ambitious energy and sustainability goals being set by CEOs will require more than a superficial commitment. And in times of disruption and uncertainty, it can be understandably difficult to turn attention away from the immediate turmoil and hold fast to longer-term strategies.
The COVID-19 pandemic is not the first time businesses have faced seemingly insurmountable obstacles. Interestingly, coming out of the global recession in 2009, author Andrew Winston shared a particularly poignant observation, applicable to today’s circumstances: “In tough times, it is hard to prioritize anything but staying alive. But survival and sustainability are truly not at odds. In fact, sustainability is at the very core of survival.” He further advocates that a green recovery from economic recession can be a source of cost savings and innovation for businesses that make an intentional effort to embed sustainable practices into the organization by doing more with less.
We think companies can take this idea a step further. A sustainable and resilient recovery is possible—daresay required—to tackle today’s greatest business challenges. By investing in purpose-driven strategies and adopting a longer-term mindset, companies become more prepared for any number of scenarios that may play out in the future. When all else fails, purpose-driven companies will always have something to fall back on, a common set of values to guide their decision-making and goals in the face of business disruptions. As Unilever CEO Alan Jope put it in a recent interview with Bloomberg about the company’s approach to ‘good business’ coming out of the pandemic, “brands with purpose grow, companies with purpose last, and people with purpose thrive.”
Forward-thinking corporations who embrace a purpose-driven mindset and integrate sustainability into their businesses have an opportunity to differentiate themselves from their peers, and in the process create greater returns for all stakeholders, including shareholders. How will you lead with purpose to drive change in your business?
Looking for a first step to embed purpose into your organization’s DNA? Check out our guide to goal-setting to find out which energy & sustainability goals your organization can use to drive change.