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Being purposeful is financially responsible

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Being purposeful is financially responsible
By Liam Farnworth, Radley Yeldar and Paulina Lezama 

Delivering wider value beyond profit has never been more important for businesses to stay relevant and viable. We’re seeing a growing demand across stakeholder audiences for companies to demonstrate their wider value creation, not just profits.

That isn’t to say that the two are separate – the evidence to support a link between purpose and profit is growing all the time. Being purposeful is far more financially responsible than only focusing on short-term returns.

Having a purpose is necessary to articulate a company’s long-term commitment to its customers, employees and investors.As BlackRock CEO Larry Fink puts it “without a sense of purpose, no company, either public or private, can achieve its full potential. It will ultimately lose the license to operate from key stakeholders. It will succumb to short-term pressures” and jeopardise its long-term growth[i].

 What is purpose? 

Purpose is actually quite simple. It’s the reason why a company exists, and how it delivers a benefit to individuals, society or the world. Those who are unfamiliar with the concept think it’s part of the CSR or marketing bucket, but that’s not what purpose is about.

A company’s purpose should be embedded into every aspect of the business, aligning the brand story, strategy, employee experience and vision under a central idea. When a company does purpose right, it becomes part of the identity of the business and differentiates why an investor, consumer or job candidate should choose that company over another.

Purpose leads to employee engagement 

Purpose helps crack a big challenge for businesses, employee engagement. This isn’t another woolly concept, there are strong financial incentives for having engaged employees. Being purposeful improves employee engagement by giving them a clear sense of contributing to something more meaningful to the world than shareholder value. And in many ways, having engaged employees contributes to a better financial performance.

A 2013 survey by Deloitte found that 73% of employees working for purpose-driven companies reported being engaged versus 23% at companies that weren’t purpose-driven[ii]. And a 2012 meta-analysis by Gallup of 49,928 business units found that those in the top quartile for engagement were 21% more productive, 22% more profitable and had 37% less absenteeism than those in the bottom quartile[iii].

 The same meta-analysis by Gallup found that business units in the bottom quartile for engagement level had 65% higher turnover than those in the top quartile[iv]. And a 2012 study by the Centre for American Progress puts the cost for replacing employees anywhere between 16% of their annual salary for lower paid workers to 20% for upper-mid-range pay levels, and as high as 213% for the highest paid workers like senior executives and highly skilled specialists[v].

 Millennials and responsible investing are the future of financial services

In the US, millennials now have the most spending power of any demographic and will make up three-quarters of the global workforce by 2025[vi]. Along with that, millennials are twice as likely as the overall investor population to invest in companies with social or environmental goals[vii]. On the other end of the spectrum, institutional investors like pension funds are increasingly demanding Sustainable and responsible investing to bring stability to the financial system and play their role in tackling the sustainability challenges that are now firmly on the agenda.

Many financial services companies are embracing responsible investment, both to remain viable and because they recognise that there’s value in it. Since 1995, the assets under management by responsible investment funds have grown by 1364%, from $639 billion to $8.72 trillion in the US alone[viii]. Responsible investment involves the inclusion of non-financial (environmental and social) data in the investment valuation process and a more active relationship with companies being invested in. Good responsible investors even engage with their investee companies around environmental and social issues to ensure any risks are being managed and opportunities are being seized appropriately. It’s a new way of investing – one which is very purposeful and aims at long-term growth.

Responsible investing is also correlated with better financial performance by pushing investors to consider ESG criteria. A review by Oxford University and Arabesque Asset Management of more than 200 sources found 88% of the research showed solid ESG practices improved operational performance.The review also found that 80% of the studies showed that a company’s stock performance is positively influenced by good sustainability practices[ix]. Investments that consider ESG criteria are naturally more viable long-term because they account for social and environmental impacts, and it protects your reputation from the negative publicity.

How do we know the financial services sector is among the least purposeful?

To help quantify our position on who’s being purposeful, we’ve developed an annual index that measures how well a company’s purpose is integrated across the business. Radley Yeldar’s Fit For Purpose Index assesses some of the largest publicly traded brands on the FTSE and PwC 100, as well as a selection of privately held companies. Our most recent index shows the financial services sector to still be lagging behind the index average.In fact, the only sector to be less purposeful on average is the Oil and Gas sector.

We found that, although the financial services companies in our index have improved, they still have a long way to go to be considered truly purposeful. Of the 5 financial services companies that made the top 100, only 2 actually talk about it in a compelling way. More to the point, none did a very good job of demonstrating purposeful behaviours and outcomes. This was surprising, as the top 2 financial services companies in particular were operating in the responsible investment space. On the other hand, this sector is typically conservative in communications and less transparent than others.

Helping financial services companies become more purposeful 

Our three recommendations

Firstly, financial services companies need to focus on getting their purpose story right. This means working it into how you describe yourself, what you do, and your vision for the future. This should go beyond a standalone campaign or siloed section of your website. To get the maximum benefit from purpose, it has to be across everything you do and say. Action without words goes unnoticed, and words without action get exposed as fictions. Getting the story right is critical for focusing your actions, and making sure it doesn’t come across as tokenistic or just another case of purpose-washing.

Second, financial services companies also need to improve on their ability to measure and demonstrate progress on their purpose. We look for companies to set clear short, medium and long-term targets for their purpose because this gives a transparent roadmap for their intentions. Alongside future targets, immediate KPIs are another way to build credibility in the commitment to purpose by framing it as part of the measures for performance.

We’ve always found this to be an area where many companies struggle, regardless of sector. Purpose can seem quite qualitative, leaving companies bewildered as to how it might be measured. A great starting point is to look at the potential relationship between their purpose and sustainability approach and see what kinds of short-term targets are reasonable. From here they can think about setting sustainability goals beyond 2020. Ultimately, performance measures are crucial for credibility because they demonstrate a business is taking actions and shows its purpose is more than just a strapline.

Thirdly, financial services companies need to show they’re taking action to be more purposeful. Whether that’s investing in communities, supporting sustainable initiatives or developing talent in under-represented demographics, they need to be doing more to show their purpose stands for something. Along with that, employees need to be involved in purposeful actions – we don’t advocate throwing money at a problem. To get the engagement value out of the purpose, companies need to give employees opportunities to get involved and be able to see their contribution and impacts towards the purpose.

Finding inspiration nearby 

Financial services companies can look to the banking sector for inspiration. Here, purpose is taking hold as part of a sector-wide trend towards serving society and the consumer. Banks are seeing the battle for millennials’ hearts, minds and wallets intensify alongside the rise of digital-first start-ups aiming to disrupt their market. Financial services face these same considerations, but we’re not seeing them step up to this competition in the same way the banking sector is.

Lloyds Banking Group is a standout example. It isn’t just a leader for purpose amongst its peers, it leads all companies alongside Unilever as a textbook example of doing purpose really well. Since the launch of the Helping Britain Prosper plan in 2014, we’ve seen several other banks begin their own purpose journeys. Banks around the world like Royal Bank of Canada and Santander are following Lloyds Banking Group’s lead in embedding purpose and supporting their customers and communities as part of a double bottom line – valuing profits and people.

What the Lloyds Banking Group example captures perfectly is how purpose can contribute to growth – more prosperous people, communities and business have more money to invest and manage, growing their market share. This is a brand that lives its purpose in almost every communication and has defined targets and performance indicators that prove it’s working towards helping Britain prosper every day.

With a north star like Lloyds Banking Group, banks and financial services companies can follow a path laid out towards long-term profits for themselves and the people and communities they serve.

Bringing it all together

Purpose should be on every company’s agenda. Frankly, not being purposeful should be seen as financially irresponsible given the mounting evidence for its value. Being purposeful is strongly correlated with better performance and sustainable long-term growth.

The demands for purpose are coming from all angles, pushing companies to demonstrate to stakeholders that they’re good corporate citizens. Adapting to these demands will be the only way to maintain licence to operate, especially if the sector as a whole has a reputation for putting profits above people. The risk of bad reputation to share prices can’t be underestimated, and purpose is the perfect inoculation against this risk.

Beyond the just “doing the right thing”, we’re seeing long-term commitment to purpose differentiate companies. More to the point, investing in being purposeful is investing in profits. And if the financial services sector should understand one thing, it’s profits.

[i]https://www.blackrock.com/corporate/investor-relations/larry-fink-ceo-letter

[ii]https://www2.deloitte.com/content/dam/Deloitte/us/Documents/about-deloitte/us-leadership-2014-core-beliefs-culture-survey-040414.pdf

[iii]http://www.gallup.com/file/services/176657/2012%20Q12%20Meta-Analysis%20Summary%20of%20Findings.pdf

[iv]http://www.gallup.com/file/services/176657/2012%20Q12%20Meta-Analysis%20Summary%20of%20Findings.pdf

[v]https://www.americanprogress.org/wp-content/uploads/2012/11/CostofTurnover.pdf

[vi]http://www.catalyst.org/knowledge/generations-demographic-trends-population-and-workforce

[vii]https://www.morganstanley.com/ideas/sustainable-socially-responsible-investing-millennials-drive-growth

[viii]https://www.ussif.org/blog_home.asp?Display=75

[ix]https://arabesque.com/research/From_the_stockholder_to_the_stakeholder_web.pdf

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Deloitte: Middle East organizations need to rethink their workforce in the wake of COVID-19

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Deloitte: Middle East organizations need to rethink their workforce in the wake of COVID-19 1

Organizations in the Middle East have had to take immediate actions in reaction to the COVID-19 pandemic, such as shifting to remote and virtual work, implementing new ways of working and redirecting the workforce on critical activities. According to Deloitte’s 10th annual 2020 Middle East Human Capital Trends report, “The social enterprise at work: Paradox as a path forward,” organizations now need to think about how to sustain these actions by embedding them into their organizational culture.

“COVID-19 has created a clarifying moment for work and the workforce. Organizations that expand their focus on worker well-being, from programs adjacent to work to designing well-being into the work itself, will help their workers not only feel their best but perform at their best. Doing so will strengthen the tie between well-being and organizational outcomes, drive meaningful work, and foster a greater sense of belonging overall,” said Ghassan Turqieh, Consulting Partner, Human Capital, Deloitte Middle East.

According to the Deloitte report, many organizations in the Middle East made quick arrangements to engage with employees in the wake of the pandemic through frequent communications, multiple webinars where senior leaders addressed employee concerns, virtual employee events, manager check-ins, periodic calls and other targeted interactions with the workforce.

The report also discussed how UAE and KSA governments have reexamined work policies and practices, amended regulations and introduced COVID-19 initiatives to support companies and the workforce in the public and private sectors. Flexible and remote working, team-building and engagement activities, well-ness programs, recognition awards and modern workspaces are among the many things that are now adding to the employee experience.

Key findings from the Deloitte global report include:

  • Only 17% of respondents are making significant investments in reskilling to support their AI strategy with only 12% using AI primarily to replace workers;
  • 27% of respondents have clear policies and practices to manage the ethical challenges resulting from the future of work despite 85% of respondents saying the future of work raises ethical challenges;
  • Three-quarters of leaders are expecting to source new skills and capabilities through reskilling, but only 45% are rewarding workers for the development of new skills; and
  • Only 45% of respondents are prepared or very prepared to take advantage of the alternative workforce to access key capabilities despite gig workers being likely to comprise 43% of the U.S. workforce this year according to the Bureau of Labor Statistics.

“Worker well-being is a top priority today, and similarly to the rest of the world, companies in the Middle East are focusing their efforts to redesign work around well-being by understanding workforce well-being needs,” said Rania Abu Shukur, Director, Human Capital, Consulting, Deloitte Middle East.

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One in five insurance customers saw an improvement in customer service over lockdown, research shows

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One in five insurance customers saw an improvement in customer service over lockdown, research shows 2

SAS research reveals that insurers improved their customer experience during lockdown

One in five insurance customers noted an improvement in their customer experience over lockdown, according to research conducted by SAS, the leader in analytics. This far outweighed the 11% of customers who felt it had deteriorated over the same period.

This is positive news for insurers during such challenging times, with 59% of customers also saying that they would pay more to buy or use products and services from any company that provided them with a good customer experience over lockdown.

The improvement in customer experience also coincides with a rise in the number of digital customers. Since the pandemic started, the number of insurance customers using a digital service or app has grown by 10%. Three-fifths (60%) of new users plan to continue using these digital services moving forward.

However, while the number of digital users grew over lockdown, half of the insurance customer base has not yet chosen to move to digital insurance apps or services.

Paul Ridge, Head of Insurance at SAS UK & Ireland, said:

“It’s impressive that there was a net improvement in customer experience during lockdown, despite the challenges the industry was facing with a transition to remote working and increased claims for things like cancelled holidays. While many were forced to wait on customer help lines for long periods, part of the improvement may be explained by even a small (10%) increase in the number of digital users.

“However, it’s clear that a huge number of customers are still yet to make the move online. It’s vital that insurers provide the most accurate, timely and relevant offerings to customers, and this is best achieved by having additional insight into online customer journeys so they can understand them better. Using analytics and AI, insurers can seize this opportunity to digitalise their customer experience and offer a more personalised approach.”

Meanwhile, for insurers that fail to offer a consistently satisfactory customer experience, the price could be severe. A third (33%) of customers claimed that they would ditch a company after just one poor experience. This number jumps to 90% for between one and five poor examples of customer service.

For more insight into how other industries across EMEA performed during lockdown, download the full report: Experience 2030: Has COVID-19 created a new kind of customer? 

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The power of superstar firms amid the pandemic: should regulators intervene?

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The power of superstar firms amid the pandemic: should regulators intervene? 3

By Professor Anton Korinek, Darden School of Business and Research Associate at the Oxford Future of Humanity Institute. Gosia Glinska, associate director of research impact, Batten Institute for Entrepreneurship and Innovation, Darden School of Business

Recent news that Apple hit a market cap of USD2 trillion highlights an extraordinary success story: A once struggling computer-maker on the verge of bankruptcy innovates its way to becoming the most valuable publicly traded company in the United States.

Apple’s 13-figure valuation is indicative of a larger trend that is not entirely benign — the rise of a handful of superstar firms that dominate the economy. Over the past three decades, advances in information technology, mainly the Internet, have supercharged the superstar phenomenon, allowing a small number of entrepreneurs and firms to serve a large market and reap outsize rewards. And COVID-19 has greatly accelerated the phenomenon by pushing us all into a more virtual world.

Apple — along with Amazon, Facebook, Google, Microsoft and Netflix — is a case in point. The combined market value of those six companies exceeds USD7 trillion, which accounts for more than a quarter of the entire S&P 500 index. Even amid the pandemic’s economic wreckage, these megacompanies continue to prosper. The combined share price for Apple and its five peers was up more than 43 percent this year, while the rest of the companies in the S&P 500 collectively lost about 4 percent.[1]

Superstar firms can be found in almost every sector of the economy, including tech, management, finance, sports and the music industry. They command increasing market power, which has consequences for technological, social and economic progress. It is, therefore, critical to understand how their advantages arose in the first place.

THE FORCES BEHIND THE SUPERSTAR PHENOMENON

The “economics of superstars” was first studied by the late University of Chicago economist Sherwin Rosen. Forty years ago, Rosen argued that certain new technologies would significantly enhance the productivity of talented workers, enabling superstars in any industry to greatly expand the scope of their market, while reducing market opportunities for everyone else.[2] Digital innovations, including advances in the collection, processing and transmission of information, is what Rosen envisioned would lead to the superstar phenomenon.

Digital technologies are information goods, which are different from the traditional, physical goods in the economy. What it means is that fundamentally different economic considerations apply. Unlike physical goods — a loaf of bread or a car — information goods have two key properties: They are non-rival and excludable. Non-rival means that something can be used without being used up. Excludability means that an owner of digital innovation can prevent others from using it, by protecting it with patents, for example. These two fundamental properties of information goods are what give rise to the superstar phenomenon.

In a working paper I co-authored with Professor Ding Xuan Ng at Johns Hopkins University[3], we described superstars as arising from digital innovations that require upfront fixed costs that allow firms to reduce the marginal costs of serving additional customers.[4] For example, once an online travel agency has programmed its website at a fixed cost, it can easily displace thousands of traditional travel agents without much additional effort, scaling at near-zero cost.

Because a firm can exclude others from using its digital innovation, it automatically gains market power. The innovator then uses that power to charge a mark-up and earn a monopoly rent — basically, a price superstars charge in excess of what it costs them to provide the good — which we call the ‘superstar profit share’.

THE POLICYMAKER’S DILEMMA

In a vibrant free market economy, businesses compete for customers by innovating and improving their offerings while keeping prices low; otherwise, they are displaced by more innovative rivals entering the market. Unfortunately, the increasing monopolization of the economy by technology superstars is weakening the competitive environment around the world.

Monopoly power is the main inefficiency from the emergence of superstar firms, because superstars can exclude others from using the innovation that they have developed.

So, what policy measures can be employed to mitigate the inefficiencies arising from the superstar phenomenon?

We do have antitrust policies designed to promote competition and hence economic efficiency. Authorities could take a drastic measure and break up monopolies. Or they could tax all those excess profits megacompanies make.

Another policy to consider involves giving consumers control rights over their data. Right now, only companies have that data, and they are selling it. If you free it up and don’t allow them to sell it anymore, it reduces their monopoly profits. And if you give consumers more freedom over their data, they could, for example, share it with the latest start-up and create a more competitive landscape.

However, such policy remedies can be a double-edged sword. On the one hand, they reduce monopoly rents. On the other hand, they can also reduce innovation.

Innovation requires investments in R&D, which represent a significant sunk cost that only large firms can afford. Government regulations can easily backfire, discouraging large firms from making long-term R&D investments.

What, then, is the best policy intervention? Professor Ding Xuan Ng and I believe that basic research should be public. Digital innovations should be financed by public investments and should be provided as free public goods to all. This would make the superstar phenomenon disappear, and the effects of digital innovation would simply show up as productivity increases.[5]

We live in a brave new world that is increasingly based on information. Because the information economy is different from the traditional economy, antitrust policy should be revamped to reflect that. Instead of worrying about the economy being eaten up by these gigantic monopolies, policymakers need to focus on the question ‘What specific actions can we pursue to make the economy more competitive and efficient?’

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