Behind the profit of a business, there’s always a driving purpose, but does it matter what that purpose is? Karin Lutz, Partner and Global Leader at the Ernst & Young Beacon Institute, here explains to CEO Today the intricacies of purpose finding within a firm.
“Management is doing things right; leadership is doing the right things,” Peter Drucker once observed. But what are the right things for CEOs to do in today’s uncertain and volatile world?
In an effort to explore the answers to this critical question for CEOs, EY recently surveyed almost 1,500 leaders of major businesses in 10 different industries and across a dozen geographies. The survey aimed to explain how volatile, uncertain conditions have redefined the relevance of being purposeful and to uncover what best characterizes an organization’s purpose. When the results came through, it was clear that many executives believe they have a corporate purpose bigger than making a profit — borne out by the fact that only 15% of respondents said their company’s main purpose is to maximize shareholder value.
In the 21st century, companies’ reasons for being have evolved to focus on creating value for a broader set of stakeholders, including employees, society and the environment rather than the narrow confines of servicing shareholders. EY call this “Purpose with a capital P.” However, this is not simply predicated on a business subscribing to an altruistic not-for-profit mentality: the data from our survey also debunks the “purpose versus profit” narrative, which suggests that there is a constant tension between profitability and “doing the right thing.” In fact, 61% of executives surveyed say that integrating purpose creates value in the short-term, as well as over the long run, so purpose and profit clearly aren’t mutually exclusive.
Those who embrace and embed a stakeholder- and society-orientated purpose are better positioned to cope in a disrupted world, which is critical to succeed in today’s volatile business environment. We are now in an age where stakeholders — from employees, to service providers to consumers — have a greater level of knowledge about the companies they work for, the people they partner with and the goods they consume. This is particularly the case with employees. Employees are a company’s best brand ambassadors and bringing them along in the purpose journey, and making sure they understand and embrace purpose should be an essential part of the CEO’s strategy.
In today’s business world, preserving and enhancing brand value and corporate reputation and attracting and retaining top talent are key features of board-level discussions. Because of this, the initiative to clearly articulate and communicate a corporate purpose, beyond making a profit, has tangible and measurable benefits. The commercial reality and business imperative of articulating one’s purpose is clear. And so are the downsides of not doing so over the long term. The most value is at risk when a company articulates its capital P Purpose, but fails to integrate it in all of its operations, which causes a disconnect between what stakeholders expect of the firm and the firm’s reality.
It is the responsibility of CEOs to ensure that disconnect doesn’t happen; CEOs need to make all efforts to ensure that the pursuit of a purpose moves from rhetoric to reality. It is a challenging journey. While it is relatively easy to articulate a purpose, it is much harder to embed that purpose into the strategic planning and decision-making processes at all levels within an organization and to evaluate the progress made. Companies who want to fully embrace purpose need to challenge the extent to which purpose governs strategic decisions and daily actions. One key action after a company articulates its purpose is to help to ensure there is an environment and culture in which middle management — the teams who, in fact, drive change within an organization — feels empowered to use the firm’s purpose as a lens for all decision-making, from choosing suppliers to how success is measured.
I believe that since the financial crisis purpose can no longer be passed off as some kind of new age political correctness. There is a real sense of departure from the short-term view of “How do I maximize my profit?” to the long-term mantra of “How do I create value for others?” There are many ways in which a shared sense of purpose can serve all stakeholders and build a business that is able to navigate uncertain and volatile times. In short, when it’s done well, pursuing and embedding Purpose with a capital P can mean better performance and higher profits.
Some people are still sceptical of the positive effects of purpose and maintain stoically that Milton Friedman’s mantra for economists worldwide — “the business of business is business” — holds true in today’s environment as much as it did in the past. But with the rise of environmental, social and governance investing and the increasing scrutiny from the media and consumers toward those who do not act as responsible corporate citizens, CEOs must start their purpose journey today and commit to embedding purpose into the strategic planning and decision-making processes in their business. Companies must recognize and embrace the sea change, or risk being left behind.
The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.