Why does your business exist?

20 years ago most businesses would have said it was to make money for shareholders.  Nowadays it’s harder to predict the response.

Businesses create value for their stakeholders. And we’re increasingly recognising that businesses should consider a broader set of stakeholders than just shareholders – and so ‘value’ needs to mean more than financial value and profit.  

Now is a key moment.  There are strong market forces (from consumers, employees and investors) driving companies to become more ‘responsible’ and ‘sustainable’. Governments are increasing regulatory pressure, especially in terms of environmental impact. And there is increasing evidence that the companies which think more holistically and long-term about stakeholders and value creation are the ones which will survive and thrive. Operating in an authentically sustainable way results in better long-term financial performance.  

Whatever is driving you to pursue an inclusive growth strategy, now is the time to change.  

The consumer lens

Source: Edelman Trust Barometer 2021

Source: 2020 Zeno Strength of Purpose study

Consumers expect businesses to play a role in solving social and environmental issues. And they definitely don’t want to see businesses creating problems – regular social media posts, news stories and protests show us that.

What’s been hard for consumers is assessing whether a company is ethical or not. Yet the internet makes this much easier. Transparency is expected and it’s increasingly difficult for companies to fudge their ethical credentials without being found out. 

Yes, unethical behaviour can drive short term returns … but it’s not sustainable – relationships are damaged, the brand is harmed and so the business is unlikely to be financially sustainable in the long term.  Think the stereotypical used car salesman – Roald Dahl’s brilliant characterisation of Mr Wormwood (Matilda’s dad) comes to mind; and he gets his comeuppance.

Image by Quentin Blake

The employee lens

Business success and innovation are driven by employees who feel valued, respected and motivated – everyone is energetically pulling together in the same direction. Unhappy employees create negativity rather than opportunities – and they leave. A huge amount of management time is sucked up and the business is stuck treading water.

So it makes sense to invest in your employees so that they’re with you for the long-term.

Purpose, responsible business practices and inclusivity are all important. In a recent survey by PwC, over 80% of employees said that they were more likely to work for a company that stands up for environmental, social and governance issues. They will vote with their feet.

The investor lens

In reality, change is often driven by where the money is. When investors demand ‘profit at all costs’ then that’s what they get – no matter the collateral damage.

But the investment market is changing as investors recognise that, whilst unethical behaviour can create short-term profit spikes, long-term value is created by companies that take a more sustainable approach.  Sustainable in terms of:

• People – their relationships with customers, employees, suppliers and the communities in which they operate; and
• Planet – their impact on the environment across the whole value chain.

Source: UN News – COP25

Larry Fink, CEO of BlackRock, has been a vocal driver of change.  Other investors are increasingly following suit.  The more that money flows away from activities that cause harm to people and the planet (e.g. investment in fossil fuels) and into activities that are helping to solve the world’s problems (e.g. innovation in zero-carbon energy or transportation), the more we will see an acceleration of change within businesses.  Otherwise they’ll struggle to attract investment. 

Increasing regulatory requirements

As well as the pull of market forces, regulatory requirements are increasingly forcing businesses to operate in a more responsible way, especially in the environmental space.  Countries across the world are starting to bring net-zero targets into law.  And other more specific legislation will force change in the most damaging sectors – for example, the UK’s ban on the sale of new petrol and diesel cars from 2030. 

Regulation will drive more innovation, forcing companies to re-evaluate the way they operate and their core products or services.

Better financial performance

“We can show how being more responsible actually makes you more resilient, more sustainable – and actually can make you even more profitable as you go forward.”

— Jay Jakub, Chief Advocacy Officer at Economics of Mutuality

In a recent PwC survey, the biggest barrier that executives identified to progressing on environmental, social and governance (ESG) issues was ‘balancing ESG with growth targets’.

In certain industries, significant short-term investment is needed, especially where there’s a heavy R&D requirement because new solutions don’t yet exist. Diverting investment into  R&D and innovation could have a negative short-term impact – but this is vital to long-term survival, just like any other innovation investment.

There’s increasing evidence that businesses that take a long-term view, focusing on sustainability in its broadest sense, outperform the market.

Source: Willis Tower Watson, 2020 ESG survey of board members and senior executives

A McKinsey study of 615 large- and mid-cap US publicly listed companies from 2001–15, concluded that those which take a long term view outperformed the rest in earnings (+36%), revenue (+47%), market capitalisation and return to shareholders and job creation.

The poster child here is Patagonia which has shown that a company can grow into a global $1bn revenue company in an inclusive and purposeful way.

Unilever has also shown that focusing on purpose and sustainability makes financial sense.

Source: Unilever

It’s the right thing to do

You’ve seen the logical argument for change.  Now let’s leave the numbers behind and get personal.  

As a business leader or owner, you have the power to make a difference in the world. What do you want that difference to be?  

What legacy do you want to leave? 

Now is the time to change.

Get in touch to discuss how we can help your organisation innovate to become more sustainable!

This article was originally posted on https://keartland.co/