Purpose leads to profit - Business Works
BW brief

Purpose leads to profit

by Alex Edmans, Professor of Finance, London Business School Who should solve the many social problems that the world faces? We typically look to governments - or perhaps NGOs and foundations established by wealthy philanthropists. All play an important role. But perhaps the most important role can be played by an unlikely source - corporations, says Professor Alex Edmans, Professor of Finance at London Business School.

The coronavirus crisis is a devastating and deadly social problem. But, unfortunately, it's far from the only social problem that the world in 2020 faces. Climate change, income inequality, population growth, resource usage, automation - the list is endless.

Is it realistic to think that businesses can solve social problems? Isn't their goal to maximise profit? But, in fact, purpose and profit are much more aligned than often thought. Let's take an example. In 2007, after years of research and development, the UK telecoms giant launched the mobile money service M-Pesa in Kenya. This allowed citizens to transfer money to each other on their mobile phones, without even having a bank account. This seemed a crazy idea at the time - banking without a bank. But it was crucial since many Kenyans didn't have access to banks. It ended up lifting 200,000 Kenyan households out of poverty in the first seven years. Many of these households were headed by women and M-Pesa allowed them to move from agriculture to retail. It thus had many positive knock-on effects in gender equality.

The decision to invest in M-Pesa was driven by a major social problem - financial inclusion - rather than to reap profits. Financial motives would have encouraged Vodafone to focus on the developed world where customers are wealthier. But, it was ultimately able to monetise M-Pesa and benefit from it, even though profits weren't the motivation to launch it.

So is this just a single nice story? Is it wishful thinking to imagine that doing well for society does well for investors? You can find an anecdote to support almost anything - so we need large-scale evidence. That's what I gather in my new book, Grow the Pie: How Great Companies Deliver Both Purpose and Profit. It presents the results of multiple studies - spanning industries, countries and decades - on the long-term performance of companies that deliver value to society. They find that such companies typically outperform - and it's purpose that leads to profit, rather than profit allowing a company to pursue purpose. And purpose is particularly valuable in a downturn - it's not a luxury that should be scrapped when times are hard.

The implications for business are profound. Many leaders run their businesses with the 'pie-splitting mentality'. This views the value that a company creates as a fixed pie. Any slice of the pie given to society reduces the slice taken by shareholders. So they maximise profits by exploiting society - cutting wages, price-gouging customers, or polluting the environment. But the evidence supports a new approach to business - the 'pie-growing mentality'. By having its primary objective as creating social value, a company isn't sacrificing investors' slice, but grows the pie, ultimately benefiting shareholders. Profits remain important, but are generated as a by-product of serving society rather than the end goal in itself.

to reach the land of profit, follow the road of purpose

So how does a company actually 'grow the pie'? The starting point is to define its purpose - the answer to the question, "How is the world a better place by your company being here?" Often, people think that 'purposeful' means 'altruistic'. But 'purposeful' means 'focused' - a purposeful meeting is one with an agenda; if I do something 'on purpose', I do it deliberately. Many companies have broad purpose statements, such as "to serve customers, colleagues, suppliers, the environment and communities while generating returns to investors", because they sound inspiring. But a purpose that's all things to all people offers little practical guidance because it sweeps the harsh reality of trade-offs under the carpet. Leaders need to make tough decisions that benefit some stakeholders at the expense of others. Closing a polluting plant helps the environment but hurts employees. A focused purpose statement highlights which stakeholders are first among equals to guide such a trade-off.

by Grow the Pie by Professor Alex Edmans, London Business School Of course, a purpose statement isn't sufficient - it needs to be put into practice. CVS didn't just rename itself 'CVS Health', but stopped selling cigarettes - even though they were a $2 billion revenue stream - because they were inconsistent with its purpose of "helping people on their path to better health". And here again, a focused purpose statement helps it provides clearer guidance on how to implement it.

Leaders of today's companies are in a privileged position, as technology and their global reach give them more power to create social value than arguably ever before. And they can draw from the highest-quality evidence - not wishful thinking - which reaches this conclusion: To reach the land of profit, follow the road of purpose.

Professor Alex Edmans is Professor of Finance at London Business School and author of Grow the Pie: How Great Companies Deliver Both Purpose and Profit

Tweet article
BW on TwitterBW RSS feed