Welcome to the tipping point of capitalism.
At a time defined by political scandals, nuclear threats, and turbulence on Wall Street, business is society’s unlikeliest hero. A series of watershed statements, reports and initiatives from some of the world’s most well-known capitalists is heralding a new zeitgeist, during which businesses are expected to exist to benefit society — not just shareholders.
We call this approach social purpose: a company’s aspirational reason for being beyond profits, grounded in humanity. Social purpose is no longer nice-to-have, but must-have. It’s long-term, embedded in operations, results-driven, and people-first. That’s a historic change.
Over time, companies shifted their approach to include corporate citizenship, sustainability, and shared value. Companies saw the benefits of operationalizing these philosophies, as societal engagement began to penetrate product sourcing, operations, employee and community welfare.
A new approach to business ...
Join us as we dig deeper into the implications of the Business Roundtable's redefinition of the Purpose of a Corporation — and how it could inform the future of capitalism — at New Metrics '19, November 18-20.
During the last decade, those at the vanguard placed purpose firmly at the center of their organizations. Yet they were in the minority.
Now, a growing chorus of voices is calling for companies to embed social purpose into their operating models. It’s not a request. It’s a demand to boost societal impact in lockstep with bottom line growth.
This is heralded by the Larry Fink letter; the Just Capital JUST 100; the Bloomberg Gender Equality Index; Millennials demanding a new way to work; E&Y’s Business Case for Purpose; the Imperative Global Purpose Index; the B Team; and others.
Capitalism is changing. Dramatically.
BlackRock: Social purpose must be sustainable
It’s the letter that shook the business world: BlackRock CEO Laurence Fink’s January 2018 memo to CEOs, not-so-subtly titled “A Sense of Purpose,” challenged companies to adopt a greater sense of responsibility or “lose their license to operate.”
Even as we may coast into a bear market, Wall Street’s extraordinary performance over the past two years offers companies a pivotal choice: “…succumb to short-term pressure to distribute earnings, or make investments in employee development, innovation, and capital expenditures necessary for long-term growth,” says Fink.
E&Y’s Business Case for Purpose report affirms Fink’s theory that companies with a clear reason for being, supported by social purpose, can accelerate bottom line growth. Fifty-eight percent of companies that prioritize purpose gained more than 10 percent growth in revenues over three years. In that time, purpose resulted in companies making significant changes in their approach to strategy development, business operating models, as they more deeply integrated and delivered social purpose.
Yet, E&Y found that the biggest hurdle to embedding purpose in an organization is short-term shareholder pressure, underlining Fink’s point that social purpose requires a long-term strategic and financial commitment to be sustainable in both bull and bear markets.
Just 100: Employees must come first
Another unlikely leader is heralding capitalism’s new zeitgeist.
In 2013, billionaire hedge fund manager Paul Tudor Jones II founded Just Capital, a nonprofit challenging companies to operate in a way that “reflects the true priorities of the American people.” Just Capital is in the second year of releasing its JUST 100 list, which indexes America’s 1,000 largest publicly-traded corporations based on the “issues Americans care most about.”
Both years, the American public pegged “workers” as the most important issue, topping customers, products, environment, communities, job creation, and shareholders, in descending order. Providing a living wage, health benefits, safe working conditions, work-life balance, and career development resources signify the most “just” companies — underscoring the call for people before profit.
We concur with the public: Employees are a company’s most significant asset.
Bloomberg Gender Equality Index: Women are the new power players
The future is female, and we’re not just talking about the Women’s March and #metoo. With women making up nearly 47 percent of the U.S. workforce, many of the world’s largest companies have realized how critical it is to have female representation on boards and in the C-suite.
Bloomberg’s newly-introduced Gender Equality Index (GEI) shines a spotlight on the top 104 global companies leading in gender equality. An evolution of the Bloomberg Financial Services Gender Equality Index (BFGEI), the GEI is industry-agnostic and measures gender equality across 53 data points including internal statistics, employee policies, community support, and gender-aware products of companies in 24 countries and regions.
Companies on the Index have 26.2 percent female representation on boards, compared to the average 12.7 percent in the ESG universe. Women in GEI-indexed companies hold 26 percent of senior leadership positions, and 19 percent of executive officer positions.
The Index serves not just as a barometer for gender equality in the workplace, but a set of rigorous standards that companies — such as early adopter L’Oreal — can embed in operations. This isn’t just a feel-good movement. For further proof, women-led Fortune 1000 companies outperform the S&P 500 with three times the returns of male-run businesses, according to a 2015 Quantopian study. Putting women in power pays.
Millennials: Business must be accountable to society
More than 75 million-strong, Millennials continue to shape consumer and societal trends in a profound way. They are consumers, professionals, community members, and activists making up two-fifths of the U.S. working population. They hold close to 20 percent of leadership positions in the U.S., and by 2020, they will make up half of the world’s total workforce.
Businesses of all sectors need Millennial talent, and one of the best ways to attract them is through a values-based culture that emphasizes the confluence of business and society — 76 percent of Millennials consider a company’s social commitments when deciding where to work, with 75 percent willing to take a pay cut to work for a “responsible company.”
Solving social or environmental challenges is the second most important career goal to Millennials surveyed by IBM, following the ability to make a positive impact on their organization. Achieving financial security falls second to last.
Channeling Fink, 87 percent of Millennials believe the success of a business should be measured in more than just financial terms, and that success relies on long-term sustainability rather than short-term profit maximization. Perhaps a surprising insight from a generation known for flicking from one trend to the next.
Yet there is an “impact gap” between the potential and actual impact Millennials believe companies are driving. And they want to be the ones to help close it.
Tax Cuts and Job Acts Bill: An opportunity to invest in society
U.S. corporations are facing a tremendous opportunity thanks to the Tax Cuts and Job Acts bill.
Analysts believe the majority of companies will use their tax reform benefit to increase dividends and spur buybacks, or fund acquisitions and pay down debt. Some companies are already going beyond, announcing extra year-end bonuses to employees, increases in wages, new training programs, and accelerated hiring plans. The New York Times is encouraging accountability by tracking these commitments, noting that while more than 40 S&P 500 companies have increased bonuses or wages, only 9 have publicly announced increases to their charitable giving at time of publication.
This is also a pivotal moment for businesses to increase their social impact commitments, as analysts forecast steep drops in both government and charitable funding as a result of the bill. Nonprofits are facing a reduction of $12 billion to $20 billion of charitable giving, as reported by the Tax Policy Center, and will increasingly look to the private sector to fill critical gaps.
How companies use their tax reform benefit is up to them, but given that investments in corporate responsibility can increase shareholder value by up to $1.28 billion over a 15-year period, it would be a wise use of some of those funds.
What the new zeitgeist will look like
Business and social purpose are now one and the same. This is the new way to operate, lead, innovate, hire, collaborate, and profit. It’s capitalism’s moment: the opportunity for companies to address relevant social issues and benefit their business by deepening current commitments or creating a bold new vision and the innovative strategies to match.
Paul Polman led the way with his commitment to embedding sustainable living into the core of Unilever’s business and brands, to remarkable success. In 2016, Sustainable Living products delivered 60 percent of Unilever’s overall growth and grew 50 percent faster than the rest of the business — a direct result of Polman’s long-term, steadfast commitment to the power of purpose.
Creating a business that operates for society and with society demands long-term vision and a flexible framework to support it. To do this, we believe that companies must embrace the following critical principles:
- Lead from the C-Suite to set the social purpose vision as organizational business strategy. This leadership is critical to embed a company’s reason for being, beyond profits, into culture and behaviors.
- Operationalize and embed social purpose to align with the competencies and priorities of the business and its employees. This is more scalable and sustainable as stated by Peter F. Drucker, “Every single social and global issue of our day is a business opportunity in disguise.”
- Put employees front, center, and first in the development and delivery of social purpose. This engenders trust and affirms authenticity internally and externally.
I’ve made the advancement of social purpose my mission for more than three decades, and have never seen such a seismic shift. The more companies serve society, the more society will respond and business can grow.
It’s a capital idea, and its time has come.