Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 359

Is it a myth that 'purpose' can drive corporate profits?

We hear that companies must have ‘purpose’. It’s the silence that ensues when we ask how this can be done whilst also growing the bottom line that is troubling. However, there are companies gaining a competitive edge by addressing the right societal issues in the right ways, and the strategic methods they use will become acutely more valuable in our post-COVID world.

I worked for 17 years in senior portfolio management and investment research roles before taking a leap into the unknown to join the gig economy - just before the GFC arrived. My investment work was interesting, challenging and well paid, however I found poor corporate behaviour frustrating because of the impacts on the environment or peoples’ lives, and because there seemed to be no easy fix.

What’s been tried?

At work, I helped my firm integrate environmental,social and governance (ESG) factors into investment processes. It felt good, however the partial naivety of this approach would be exposed down the track when companies like Volkswagen, with high ESG scores, would fall off their perch. Ethical investing seemed to be a niche product play and I struggled with the idea of binary good versus bad classifications.

Philanthropy and corporate social responsibility (CSR) programmes implemented by companies themselves also seemed marginal as they exist for brand and reputation purposes. The major banks incurred the wrath of the Royal Commission because damage was being done in their core business, not because they lacked giving and CSR programs.

To date, we’ve been relying on the stick, not the carrot, and it hasn’t brought about the level of change required to head off major problems like climate change. John Elkington, the inventor of the triple bottom line concept, recently noted:

“Whereas CEOs, CFOs, and other corporate leaders move heaven and earth to ensure that they hit their profit targets, the same is very rarely true of their people and planet targets. Clearly, the Triple Bottom Line has failed to bury the single bottom line paradigm.”

It led me to ask: if ESG, ethical investing, philanthropy and CSR aren’t creating the magnitude of change needed, is there an alternative way of bridging the gap between profit growth and social benefit?

Connecting profit with purpose

A year into my transformation from investment manager to project facilitator and consultant, I came across a Harvard Business Review paper that changed my life. It was called Strategy & Society: The Link Between Competitive Advantage and Corporate Social Responsibility, authored by Michael E. Porter (of Porter’s five competitive forces fame) and Mark R. Kramer, a strategic philanthropist.

Their paper contended that social and environmental problems present three types of opportunities for business:

Firstly, some issues impose costs on companies and they can be reduced through modest investments

Secondly, some present new product and market opportunities and

Thirdly, some can be addressed collaboratively to improve the profitability of entire industries or regions.

When Suncorp partnered with Good Shepherd Microfinance to create insurance products for low income earners - a demographic with few affordable choices - it’s an example of what Porter & Kramer call creating shared value. This is a new lens for innovation that is driven by a business case, tightening the nexus between profit and purpose.

Personally, this discovery was electrifying as I knew that businesses would only bring resources on masse to our biggest problems if there was ‘something in it for them’. As an enthusiast, I received an invitation to Boston in 2013 to work with Mark Kramer and 30 others from around the globe and have since built a career on increasing awareness, education and applying shared value principles. They truly hold the power to make change at scale.

The principles are the perfect vehicle for professionals seeking greater purpose from their work in a way that is congruent with the profit imperative, and they are the subject of my book, Connecting Profit With Purpose.

Australian examples

Australia is advanced in this field, with examples such as Bendigo and Adelaide Bank’s community bank model, NAB’s preemptive approach to financial hardship, IAG organising it’s business around social purpose, Lion growing its mid-strength beer presence or Uncle Toby’s (Nestle) supporting farmers to grow oats locally.

A multi-sector initiative I’ve assisted with in Wagga Wagga has linked unemployed youths in social housing with entry level job opportunities - reducing employment and turnover costs for local industry. It hasn’t required expensive government funding, it’s been achieved by drawing on existing social support services and the commercial incentive of business.

I’ve also documented small to medium sized businesses creating shared value: Battery World, Blantyre Farms and real estate agents in Sydney’s MacArthur area who were instrumental in reducing unnecessary tenancy evictions that often lead to homelessness. In all of these cases, the link to profitability is the catalyst for creating and sustaining win-win outcomes.

A word of warning though, the CEO of AIA Australia, Damien Mu notes that ‘purpose’ sounds pretty cool when you hear it in a TED talk, however it takes a much higher level of care to go ahead and effect positive change.

That is our challenge as employees, advisers or investors.

Post-COVID outlook

Business prosperity depends on the health of the society it operates within – coronavirus has made that link abundantly clear. Up until now, too many businesses have acted as if they are independent of society: running down natural resources, exploiting people, arbitraging rules and regulations or promulgating dubious sales and marketing practices because they’ve been putting shareholder returns first.

With government budgets under extreme strain, the days of businesses externalising costs to society appear numbered. It means that corporate executives and leaders must craft new business models that will likely involve partnerships with nonprofits, government and communities of interest. Gary Cohen of medical products maker Becton Dickinson notes that it is much harder to copy a business model and the relationships that go with it than it is to copy a product.

Competitive advantage can be created and sustained using shared value principles. Not only does it feed the bottom line, it improves the sustainability of future earnings.

If approached in the right way, purpose drives corporate profit growth. Myth busted.

 

Phil Preston is an expert in aligning profit with social purpose and the author of Connecting Profit With Purpose: How to create a world-changing business. He can be contacted at phil@philpreston.com.au.

 


 

Leave a Comment:

     

RELATED ARTICLES

Are Australian bank boards fit for purpose?

What do top ESG companies look like?

11 ASX dividend stocks for the next decade

banner

Most viewed in recent weeks

11 ASX dividend stocks for the next decade

What are the best stocks to own that can pay regular dividends and beat indices on a total return basis in the long-term? Here is our list of 11 ASX-listed companies that could help investors achieve these goals.

2024/25 super thresholds – key changes and implications

The ATO has released all the superannuation rates and thresholds that will apply from 1 July 2024. Here's what’s changing and what’s not, and some key considerations and opportunities in the lead up to 30 June and beyond.

Time to smash the retirement nest egg - but how?

For decades, governments told people to save for retirement, then hold onto their nest eggs. Now, they're concerned that retirees aren't spending enough. How can we encourage reasonable spending patterns in retirement?

The greatest investor you’ve never heard of

Jim Simons has achieved breathtaking returns of 62% p.a. over 33 years, a track record like no other, yet he remains little known to the public. Here’s how he’s done it, and the lessons that can be applied to our own investing.

Five months on from cancer diagnosis

Life has radically shifted with my brain cancer, and I don’t know if it will ever be the same again. After decades of writing and a dozen years with Firstlinks, I still want to contribute, but exactly how and when I do that is unclear.

Welcome to Firstlinks Edition 552 with weekend update

Being rich is having a high-paying job and accumulating fancy houses and cars, while being wealthy is owning assets that provide passive income, as well as freedom and flexibility. Knowing the difference can reframe your life.

  • 21 March 2024

Latest Updates

Retirement

The challenges of retirement aren’t just financial

Debates about retirement tend to focus on the financial aspects: income, tax, estates, wills, and the like. Less attention is paid to the psychological challenges of retirement, which can often be more demanding.

Strategy

Is Australia ready for its population growth over the next decade?

Australia will have 3.7 million more people in a decade's time, though the growth won't be evenly distributed. Over 85s will see the fastest growth, while the number of younger people will barely rise. 

Taxation

The mixed fortunes of tax reform in Australia, part 1

While there have been numerous tax reviews at the Commonwealth and state levels, most have not resulted directly in substantive tax reforms. This two-part series looks at that history and explores the pathway forward. 

Investment strategies

America, the world's new energy superpower

The US has become the world's new energy superpower, combining production, technology and capital in a way never previously achieved – a development sure to have global implications for decades to come.

Investment strategies

Could Korean corporate reform trigger a Japan-style market rally?

Corporate governance reforms in Japan have helped spur a 45% rise in the share market over the past 12 months. Korea looks set to follow the Japanese reform playbook, and may be poised for a similar bounce.

Property

How AI will transform the real estate sector

The real estate industry, traditionally characterised by its cautious adoption of new technologies, is now at a pivotal juncture. The emergence of AI promises to fundamentally change the way we live, work, and play.

Investment strategies

Charitable giving and tax deductions

With impending Stage 3 tax cuts incentivising taxpayers to bring forward future tax deductions while tax rates are higher, it’s a good time to explore how to bolster your tax savings and community impact through structured giving.

Sponsors

Alliances

© 2024 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.