Why an authentic, purpose-driven approach is good for business

Companies that demonstrate an authentic commitment to their purpose and values perform better. It's more about organisational culture than mere marketing.

For almost 50 years, US rock climber and businessman Yvon Chouinard, founder of Patagonia, has put his values before profit. His original company, Chouinard Equipment, was the largest supplier of climbing hardware in the US, built on the sale of reusable steel pitons he had designed himself. The spikes were made to be hammered in and left in the rock face, but when Chouinard saw the environmental harm this was doing, he put his business at risk by switching to less-damaging aluminium chocks. That decision turned out to be good for business as Chouinard inspired the clean climbing movement.

Chouinard’s purpose-driven approach was ahead of its time and led to even more success at his next venture. Patagonia is now a global retailer of outdoor clothing and gear and, according to Forbes, has revenues of more than $US800m and employs more than 2300 people. The company repairs, recycles and resells its gear, and pledges at least one per cent of its sales to grassroots environmental groups and funds activists to protect habitat, wilderness and biodiversity. Its mission and purpose statement has been honed to: “We’re in business to save our home planet”. This is underpinned by four values: “Build the best product; Cause no unnecessary harm; Use business to protect nature; Don’t be bound by convention”.

“One lesson I’ve learned — and that the pandemic is also teaching us — is that we’re not in isolation,” says Chouinard. “The problems we’re facing now have to be solved on a global basis and can only be solved by people working together — and staying tough together.”

Patagonia has become renowned for embodying the ethos of its founder. It puts its mission-led success down to the authenticity of its purpose. “You can’t reverse into a mission and values through marketing. The organisations that are struggling with this are probably the ones that are thinking about marketing first. The role of marketing is to authentically elevate that mission and purpose, and engage people in it — but the purpose needs to be the business,” says Alex Weller, marketing director for Patagonia.

Michelle Bloom, director of consulting and leadership at The Ethics Centre, agrees. “Every organisation in Australia has been affected by COVID-19 and most have re-evaluated their business models, how they connect with customers and, more significantly, how they live their purpose and values in a positive way,” says Bloom. “However, there have also been cases where the crisis has highlighted a gap — or sometimes a crevasse — between what is a genuine, enduring and long-term lived purpose as opposed to the shallow, transactional marketing spin and positioning.”

Boards must look to define an authentic purpose for their organisation that resonates with staff, customers, shareholders, donors and other stakeholders. “Consideration of purpose will typically involve consultation between directors, staff, volunteers, members and other stakeholders such as clients and donors. It is important for an organisation’s stakeholders to understand and support its purpose if it is to be successful in pursuing it,” the AICD’s Not-for-Profit Governance Principles states. Defining purpose provides guardrails for decision-making and a guide for the organisation’s strategic direction.

“A compelling purpose clarifies what a company stands for, provides an impetus for action and is aspirational,” write Thomas Malnight, Ivy Buche and Charles Dhanaraj in Put Purpose at the Core of Your Strategy in Harvard Business Review.

Boards can seize the changing times to engage more deeply with management to embed corporate purpose in the enterprise, a role that sits squarely within a board’s obligation to enhance the company’s long-term performance.

In The Board’s Role in Embedding Corporate Purpose: Five actions directors can take today, McKinsey and Co outlined how applying a purpose lens to a board’s engagement with management in several key areas of board oversight can help directors ensure management decisions are guided by the company’s purpose.

As part of its responsibility to challenge and approve the corporate strategy, the board should confirm that the long-term business vision aligns with the company’s societal purpose.

The board should consider the impact of major investments, and mergers and acquisitions, from ESG (environmental, social, and governance) and stakeholder perspectives. These should also be consistent with multi-year value-creation commitments. The board can broaden the definition of risk to include ESG considerations when defining a risk culture that embeds both compliance and the pursuit of profitable risk.

In the area of HR oversight, the board can monitor that management is also investing in employees as a stakeholder group (through compensation, training and diversity, equity and inclusion initiatives). This also applies when approving executive succession plans and ensuring talent plans and culture are consistent with overall strategy.

The board should tie executive compensation to ESG commitments as part of its monitoring of long-term KPIs, earnings, capital allocation performance and non-financial measures linked to value creation.

Finally, in overseeing external communications and reviewing reporting, compliance and policies, the board should stress the importance of societal issues and reinforce the need for ESG accountability.

In 2021, purpose-driven profit is “creating strong links to an individual purpose that benefits individuals and companies alike — and could be vital in managing the post-pandemic uncertainties that lie ahead,” according to McKinsey & Co’s August 2020 research Igniting Individual Purpose in Times of Crisis. The research notes the importance of understanding intrinsic motivators for individuals.

Purpose and profit

In 2019, Deloitte research noted that purpose-driven companies see higher market share gains and grow three times faster on average than their competitors, while achieving higher workforce and customer satisfaction.

Evidence is building that a clear purpose can improve the bottom line. Ethisphere, a global company that defines and advances the standards of ethical business practices, found that the listed organisations named among the 2020 World’s Most Ethical Companies outperformed the large cap sector by 13.5 per cent over five years.

“Purpose is good for business. Purpose-driven companies are more ambitious, they attract the best talent, inspire richer innovation, make faster decisions, are more trusted, have greater loyalty, and attract more investment,” writes business futurist Peter Fisk in People Planet Profit.

Corporate purpose also gives clarity to an organisation’s decision-making. In 2014, US pharmacy giant CVS Health stopped selling cigarettes — incurring a loss of US$2b in annual sales. The unprecedented move contributed to a drop in tobacco purchases for all retailers and had a marked and beneficial impact on American public health.

“After the tobacco removal, household- and population-level cigarette purchasing declined significantly,” reported a CVS study published in the American Journal of Public Health.

The organisation’s purpose of “helping people on their path to better health” provided a guide to decision-making. “Going tobacco-free was a bold, purpose-led action that significantly impacted our bottom line, but it was the right decision for our brand, our business and the health of the country,” said CVS CEO Larry Merlo in 2019.

“This balance of purpose and profit represents a winning proposition for us all. It can lead to better companies that are motivated to do what is right for all stakeholders — customers, employees, suppliers, communities and, yes, shareholders.”

The 2018 Edelman Earned Brand study found that “nearly two-thirds (64 per cent) of consumers around the world will buy or boycott a brand solely because of its position on a social or political issue”.

The purpose gap

Purpose is closely tied to an organisation’s values. Usually the organisation’s purpose — or its vision and mission, statement — will be drafted with its values, and intended to be read together. They form a commitment to the organisation’s stakeholders, which if not lived, will damage trust.

Rio Tinto is a memorable example of Bloom’s “purpose gap”. The CEO of Reconciliation Australia once described the company as one of “an elite group of organisations that have taken reconciliation beyond ‘business as usual’ and embedded it in the delivery of core business practices and decision-making at the highest level”. However, the recent majority bipartisan interim report published by the Joint Standing Committee of Northern Australia into Rio Tinto’s destruction of 46,000-year-old rock shelters in Juukan Gorge accused the company of putting profits above all else. Rio knew the value of what they were destroying but blew it up anyway, the report said. “This corporate culture belied Rio Tinto’s public rhetoric of working in partnership with First Nations people, as reflected in the company’s (now disendorsed) Reconciliation Action Plan.”

Strictly speaking, the destruction of Juukan Gorge didn’t violate Rio’s mission statement — “to produce materials essential to human progress” — which established the organisation as a leader in raising industry standards and enhancing business performance. But it undermined its claims to being purpose-driven when it pursued growth at the expense of its stated values. To avoid situations such as Juukan Gorge, boards must do more than issue vision and mission statements. They must make sure purpose is embedded in the culture.

Next-gen focus

A new generation of entrepreneurs is building companies around purpose rather than profit.

Andonis Sakatis founded Zenify with the intention of selling everyday products for purpose, then donating a portion of the items produced to charitable Australian causes aligned with their brands. “As we build Zenify from the ground up, we can test all of our decisions against our purpose, and this has led us along a different path from many other startups,” he says.

“For instance, when it comes to raising funds, people tend to think money is money and any shareholder is good. We can see that as most investors are looking to monetise quickly, outside investment has the potential to steer us away from our purpose. As a result, we’ve decided to focus on organic growth until we can attract investors who share our long-term values.”

In his former career, Sakatis applied technology to financial markets. “I had the benefit of seeing those markets transformed,” he says. “Over 20 years, we moved from a trading floor driven by people shouting down telephones, to data-driven decision-making. Consumers could access information more easily and this triggered demand for greater transparency and accountability in terms of how companies behaved and what they stood for.”

“Consumers have infinitely more choice than when they had to shop at local bricks-and-mortar stores,” says Sakatis. “They can also research a company’s purpose and behaviour, and incorporate these in their decision-making when they make a purchase.” The challenge is to convince a cynical community you’re doing the right thing. “You can’t expect anyone to take you at your word,” says Darren Woolley, CEO of global marketing consultants TrinityP3 G. “You must demonstrate genuine commitment to your purpose.”

Vision, mission, purpose

Organisations use vision, mission and purpose frequently but what do they really mean in the corporate context? The lines can become blurry as organisations use different terms, writes David Burkus in Leading from Anywhere: The Essential Guide to Managing Remote Teams.

The board needs to confirm the vision, purpose and objectives of an organisation. These set the boundaries for the planning activity and strategic intent. Strategy must be consistent with the organisation’s vision, purpose and values.

A vision statement is a compelling future description or future state of the organisation. The purpose — which may also be referred to as the mission statement — clearly defines the organisation’s fundamental reason for existence and its core business. Organisations that are described as “purpose-led” tend to ascribe a broader social purpose.

Values are the core priorities of an organisation’s culture. They should be easily observable in the workplace and the board plays a strong role in setting “the tone from the top”.

The Washington Post found that some of the 181 American CEOs who signed the 2019 Business Roundtable Statement — and had pledged to balance the needs of shareholders with other stakeholders, including employees — had actually cut back on staff and used the profits to boost shareholder wealth. Lucian Bebchuk and Roberto Tallarita of Harvard Law School suspect that, for the large part, the statement was never anything more than a public relations move. They argue that if the CEOs had taken the pledge seriously they would have needed approval from the board. Of the 48 signatories who responded when asked whether that had been the case, 47 said the board hadn’t been involved.

However, it would be dangerous to judge the impact of a new purpose statement too quickly.

“It’s hard for even a deeply committed company to change its leadership culture, harder still to drive culture down through the organisation,” says Darren Woolley, CEO of TrinityP3 Global Marketing Management Consultants. “This is particularly true for big multinationals with years of habit and practice that need to be realigned. And even those with the best of intentions are bound to make mistakes along the way.”

AICD course materials emphasise the most important challenge is to ensure values are clear and easily understood within the organisation and externally.