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.
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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.