Keynote by Michael E. Porter at #PorterPrize
The concept of purpose has been a very useful topic of discussion because it brings more attention to the fact that a company can and should have a positive impact on society.
At this moment, there is a new focus on the concept of having a corporate purpose as a unifying theme for understanding what companies should be doing to ensure they benefit society. This concept is now very prominent in the U.S. and growing rapidly. It is starting to be discussed in India, and a few Indian companies have started down this path but it has not yet begun to gain momentum.
The concept of purpose has been a very useful topic of discussion because it brings more attention to the fact that a company can and should have a positive impact on society. This is critical today, at a time when capitalism is under attack, particularly in America but elsewhere as well. Many people are now believing that capitalism is enriching a few without benefiting many, and those in business believe that we do benefit many but we have not had an effective way of either thinking or talking about that or actually delivering on that.
The idea of purpose is entering an inflection point. Two or three years ago, it was not a word that was commonly used, but today, it is very common. It is especially important right now because societies all over the world are facing significant social, environmental and economic opportunity challenges, and the means of addressing those challenges are limited.
Our traditional way of dealing with societal problems is government and NGOs. NGOs were invented as a new organizational form to deal with societal issues, but despite the government and NGOs having the best intentions and doing a lot of great work, they have limited capabilities, limited resources, limited money to take on these challenges. These are huge challenges, and they often involve millions of people and the ability to address those at scale has been very limited. We are making some progress against these social challenges but we certainly have not solved them and the progress we are making is not fast enough. This represents the hunger from society of business playing a role because business has the capacity, the resources, the capabilities, and the ability to scale.
The good news is that we in business have been at this for decades. However, despite the fact that many companies are performing activities like this, we are at a period where we are not doing enough, we are not helping business and our societies understand how important this is and how to go about it. So, one of the critical business issues of our time is, how should businesses engage in society? How should they engage in social problems even though they are still businesses and they make a profit?
In order to advance that set of ideas, we need to start with reviewing the history of corporate social impact and its evolution. For decades, companies have been doing things that are meant to make social impact and address social challenges. Its starting point was corporate philanthropy. In America, Target Corporation made a commitment many years ago that they were going to give 5% of their pre-tax profit to social community causes, and they are still doing it today.
While philanthropy is good, we need to understand that there are limits to it. The big problem with philanthropy is getting leverage. Philanthropy is a form of redistribution, but the institutions focused on philanthropy have trouble creating major impact. They have trouble scaling and dealing with the overwhelming number of problems. Nevertheless, when philanthropy initially gained momentum among the business community, it was a big step forward and the greatest single cause of this is the work of economist Milton Friedman. He wrote in an article arguing that the social responsibility of a company is to maximize profits, that the goal of a company was shareholder benefit, not social benefit. He went even further and said that companies spending money on social things is the misuse of corporate resources. So, even getting to corporate philanthropy involved going against this idea of Milton Friedman’s, which was very well entrenched in the investor community and still is in many cases.
A number of years ago, companies started moving beyond philanthropy, partly owing to the realization about the lack of impact that their philanthropy was having. The second stage of how companies thought about social impact was the concept of corporate social responsibility. It is more than just giving money. Corporate social responsibility is about how we behave in business and it usually has a number of characteristics. Companies have to comply with ethical standards, with community standards, have to be good citizens, have to behave sustainably, and prove that they are a good company. There is enormous proliferation of codes of conduct and certifications that companies are getting in order to prove that they care and that they are behaving according to community standards.
Corporate philanthropy is a good thing to do, but its problem is whether it is the most powerful thing to do that would make the most social impact or not? For most companies, doing corporate social responsibility involves focusing on reducing the risk or the harm that they are creating rather than actually doing good. It is rather about building trust and improving the company’s reputation and getting a license to operate. These have been the critical ideas underpinning the whole CSR movement. Hence, like philanthropy, CSR is good and a step forward, but it in itself is not going to solve most of the problems that we are talking about.
Philanthropy is a form of redistribution, but the institutions focused on philanthropy have trouble creating major impact.
In India, there is a public policy in the law since the year 2014 that requires companies to develop a CSR policy and spend 2% of their profits every year. Given the history, it was a step forward for India, but today we have learned that it is not enough to address the incredible problems that our societies face. Many parts of the world have gone well beyond CSR, and this next step in the history is the so-called ESG or GRI Reporting. Essentially, the demand was created among investors because the investors’ clients wanted some way of directing their money to companies that were good companies, that were behaving in the right ways and setting the right standards for their activity and their behaviour.
ESG stands for environmental, social, and governance. There is a whole set of indicators and standards to assess the extent to which companies are meeting environmental, social, and government standards. The GRI Reporting Initiative is another set of measures. Many companies today are working on both. They are reporting both kinds of measures even though these measures tend to be quite high-level, and are often self-reported. They are not based on rigorous independent data in most cases and they cover many areas.
Again, these efforts are well intended efforts and have probably created a lot of positive movement on the part of companies, but these are so diverse and disparate that it is hard to see these making huge impacts on what companies are actually doing. They are not really moving the needle, and in most cases, we find little relationship between these standards and actual corporate performance. Ultimately, this is not going to transform the social impact of business.
We need to go further. At the end of the day, the growing perception has been that what is being done is not enough and it is not working. Businesses are not changing the world, and we are not getting the support and enthusiasm from our citizens for capitalism. This is where the corporate social purpose movement started. It really got off to the races when there was a letter sent from Larry Fink who was the CEO of BlackRock, a massive financial firm. In 2018, he wrote a letter to all of the CEOs that BlackRock owned a share of and introduced the idea of purpose. Larry Fink’s ideas was to focus on license to operate that sounds a bit like CSR but he has a broader view, that a sense of purpose will make companies longer-term. If companies are not longer-term, they are going to be vulnerable to activists and ultimately, unless they can do better, they are not going to be supported by the key stakeholders including citizens. Thus, sense of purpose is critical to achieving the full potential.
Larry Fink wrote a second letter in 2019. It was very important, because the second letter took a very general idea of purpose and pushed it forward, made it more specific and more concrete. Purpose is not a tagline in a marketing campaign anymore, but a fundamental reason for being. Purpose is not solely pursuing profits, but it is a broader idea and views that we need to be profitable, that profits are not inconsistent with purpose. Larry’s letter emphasized that profits and purpose are inextricably linked. The combination of these two letters got purpose on the racetrack of companies adopting it.
However, this is not a new idea. In fact, Jamsetji Tata, the founder of the Tata Group was a pioneer. He said that in a free enterprise system, the community is not just another stakeholder in business but is the very purpose of its existence. Essentially, he said that the purpose of a company is to address all these stakeholders, and this idea has been developed and nurtured by the Tata Group ever since.
It is important to define purpose, outline the framework for a good purpose and understand how to achieve that. Companies now have many purpose statements, and that discussion has been a good one. It has allowed a lot of management teams to look hard at their purpose of existence and think about what they can do that would matter in a substantial way, but a lot of the companies’ purpose statements are not powerful enough. What began with Larry Fink’s letter was stuck at this juncture.
On 19th August 2019, the Business Roundtable issued a statement on corporate social purpose or the purpose of a corporation. The basic idea of the statement was that companies had to go beyond the sole focus on shareholder value that had been the mantra for business for so long, and move towards serving all of their other key stakeholders and create value for them as well. This statement created a lot of controversy, particularly among investors, but the corporate sector pushed on anyway. They realized that they have to re-engineer how they think about capitalism, how they think about a company and how a company competes if they are going to deal with both the problems faced in society and the perception business has in the community and other interested parties in business. Now, the question is, how to do it in a way that moves the needle on something important for society?
Historically, people thought that profit was inconsistent with social impact, that there is some kind of a trade-off between profit and social impact. The idea of creating shared value is that there is no inconsistency between profit and positive social impact. In fact, the most advanced form of capitalism is where we integrate social impact into our core strategy. It is not just a thing on the side as it has been until today in most companies. Instead, the business can impact society in a variety of ways that actually make the business more successful. This is the concept of shared value, and it has been bubbling around the world now.
Thousands of companies have taken this course because it provides a comprehensive rigorous way in which companies can think about what social impact could that make that would be the most powerful, because it would be self-sustaining. If you can make a social impact and also make a profit at the same time, you can scale it. If reducing your resource footprint is actually saving you money which it is, then you can spend all the energy that you can muster to reduce resources. It benefits both the society and the company. This is the concept of shared value.
The basic idea is that there is no trade-off between business success and social success. Instead, there is a fundamental synergy, and the underlying reason is that societal problems and adverse environmental impacts create economic costs for companies. Societal problems like lack of education can lead to lack of well-trained workers that companies can hire, which will further lead to reduction in productivity and profitability of the company. Similarly, if the community in which the company is operating does not have good roads, it will reduce their profitability because it means the infrastructure and logistical costs are too high.
For many years, we have been shackled by the idea that there is some separation between social success and business success, but now, there is overwhelming evidence that the two are synergistic. If we can figure out how to make positive social impact in almost any area and do that in a unique and powerful way, we can not only improve our business results, but also make a tremendous impact on society. Shared value is the definition of corporate purpose, because if we can benefit the society in the course of our business, that makes us scalable and powerful. If we are just giving away money or doing some philanthropy, it is not going to ultimately give the same results.
The playbook for shared value has three different components. First, the company’s products and services are the first opportunity to create shared value. Products can be engineered and developed in ways that benefit societal needs and social problems. For example, if a food company’s food is more nutritious, if it is reaching children in India that are malnourished or stunted, that is a huge social impact, but if companies can do that with a business model and do that for every kid at a reasonable cost, there they make a difference. This is product-based shared value.
Second, a company can run their business in a shared value way, and that means paying new attention to the value chain to utilize resources really well, to not have too much packaging, to recycle rather than throw things away and conserve the energy use. Conserving energy is saving money, and it can be applied all throughout the value chain. For instance, helping the employees become more effective and better trained is going to make them more productive. This will benefit the company and create retention of employees. So, there are many ways to operate and compete that can be regarded as shared value.
For many years, we have been shackled by the idea that there is some separation between social success and business success, but now, there is overwhelming evidence that the two are synergistic.
Third part of shared value says that it is in the interest of the company and its profit to improve the communities and the business environment in which the company operates. It is not somebody else’s problem. If companies help improve the capability of suppliers, support efforts to build the infrastructure in their communities, attract supporting companies they can work with to their community, it will make them more competitive, help sustain returns and grow the business over time. Thus, investing outside the company in something that is shared is still very powerful in driving economic value.
Historically, we did not truly understand the power of capitalism. We saw it only in terms of profit, in the narrow sense of the word. We did not see it in terms of its incredible leverage in almost all aspects of what a company does, and companies have not taken advantage of that possibility to really move the needle on many social issues.
In order to create shared value, the first thing to start with is to figure out what societal issues does the business touch. Every business is going to have different touches to society and societal issues. To have a good shared value strategy, companies need to figure out where their touches are. The key rule of shared value is not only doing good, but doing good in ways so that the company stands apart because of their business and capabilities. It is only then that the company can become more competitive
Shared value is fundamentally a critical part of strategy now. It is one of the key ways for companies to differentiate themselves from their rivals, and the challenge is not just having a great aspiration but turning that aspiration into a strategy that generates profit in the process of making a difference. One of the examples of such companies is Mahindra & Mahindra. They are bound by a purpose which they call “Rise”, and they have already been on this path for some time. Walmart was a company in America that was not respected. They were criticized for a lot of reasons, but they saw a new way forward based on shared value. Now, they are actively pursuing all three levels of shared value, that is, products, value chain, and the local business environment.
Fortune Change the World list is a new list by the Fortune magazine that includes companies that do well by doing good. It is a simple way of saying that are creating shared value. We need a lot of Indian companies every year on the list. That is going to be a reflection that we have gone beyond CSR and are thinking very deeply about the impact we can have in business.
To conclude, the way to define the purpose of business is to create economic value in a way that also creates shared value for society. Our most powerful role in business is to act as a business, not as a charitable giver. If we act as a business and think about it using the shared value concept, it is our most powerful tool to address many of society’s pressing issues and people in business can have a tremendous impact. If more and more companies start moving in this direction, we can transform the whole image business has in society and do a tremendous amount of good for everybody in a reasonable amount of time.