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Organizational Change
The Leo Effect:
In a Post-CSR World, Can Purpose Really Co-Exist with Profit?

When Leonardo DiCaprio channeled his long-awaited Oscars acceptance speech last weekend into an urgent call to climate action, it represented something of a defining moment. In just 60 seconds, he effortlessly pushed the emerging concept of ‘society as stakeholder’ into the media spotlight, forcing more than 34 million viewers to take note.

Factoring society into mainstream business decision-making cuts to the heart of what a post-CSR world looks like. But many companies are wrestling with how to define social impact, not least measure it. Having purpose is all well and good, but at what point does it interfere with short-term profit pressures? And how can the risk factor of ‘doing good’ — those unintended consequences that might result from well-meaning intentions — be best managed?

Speaking at a social-value-themed event in London, UK, last month hosted by The Crowd, corporate finance expert Professor Alex Edmans posed a fundamental question to the audience: “Why do businesses exist? Is it to earn a profit or is it to serve a purpose?”

The conventional view — to earn profit — is not as narrow-minded as it sounds, he pointed out. “To earn profit a company is forced to care about society. It has to make high quality products, or customers will stop buying. It has to treat its workers well, or they’ll leave. And it can’t pollute the environment, or its brand will be hurt.”

But can you just serve up purpose and hope the profits will follow? Edmans undertook an extensive evidence-gathering exercise in an attempt to test this theory. Metrics for social responsibility are thin on the ground, but there are some nascent yardsticks out there. He chose to focus on employee wellbeing and used Fortune magazine’s 100 best companies to work for list as a reference point – the list dates back to 1984, and provided a wealth of data. The study itself took four years to complete, and the results were striking.

“I found that the 100 best companies to work for in America beat their peers by 2-3 percent per year over a 28-year period, from 1984 to 2011. In short, companies that treat their workers better, do better … treating your workers ethically pays off in terms of high returns,” Edmans said.

He had a special message for investors: Ditch the focus on quarterly balance sheets; instead, think long-term value.

“Some of the most important dimensions of a company’s value — its corporate culture, its customer loyalty, its innovative capability — they are simply not captured in these short-term numbers.

“I find it takes the market four to five years before it incorporates the benefits of employee wellbeing into the stock price,” he said. “So you could buy the best companies three years too late and still earn high returns.”

According to Goldman Sachs executive director Charlotte Keenan, placing society centre stage of any corporate strategy makes for smart economics.

“For us, it’s our commitment to society, it’s our commitment to the major markets in which we work … we look at it that, if we are creating opportunity, we are growing jobs. That’s a good thing for society and that’s a good thing for us.”

For Starbucks’ vice president of corporate affairs, Simon Redfern, it’s about being performance-driven, but “through the lens of humanity.” Rolling out programs that benefit employees’ cost of living — whether it’s free healthcare insurance or college tuition in the US or housing rent deposit schemes in the UK — can deliver transformative results.

“These things have a massive flywheel effect on the reputation of the business outside of your own partner base,” he told delegates.

As appetite for business-led ethics grows, so does the need for trust. Companies are starting to realize that token gestures don’t cut it anymore.

“If the trust metrics are going in the wrong direction, very quickly other things start to change that, over time, limit your ability to operate, your ability to grow,” noted Anna Swaithes, SABMiller’s director of sustainable development.

She said the company has shifted its approach to ensure any social innovation is more deeply connected to the business.

“A great example would be when we establish a new brewery, one of the first things we look at is where are we going to source our raw materials from, what can we source locally, how can we buy from local farmers, create a local supply chain that creates a new source of income in many of our markets.”

She added: “The shift we’ve made is to not just allocate a pot of money and put it into something that feels good, [but to] understand the connection between our business, the people who live around it, the people in our value chain, and direct those same dollars to have a far greater impact.”