Or… the difference between a PowerPoint exercise and the creation of a Competitive Advantage
July 4th , 2021
The notion of Purpose has become mainstream in many corporations. Its importance and impact on the bottom line have lately been the subject of several studies, and the link seems to be well established. The most significant challenge becomes implementation. In a recent study conducted by Harvard, it is made clear that it is not how deep Purpose is understood by Top Management that has an impact on the financial performance – the impact will only be strong when middle management is able to build, understand and live it. How should then an implementation process, aiming to build a purpose-driven organization look like? Which are its key elements? In one of our Research Notes issued last year we tried to illuminate the discussion with the following seven process steps: a) Commitment from the top As in any relevant project that needs to be embedded in an organization, it starts with a commitment from the leaders of the organization. To build a purposeful company, implementation starts with clear, concise direction from top management and in such a way that the middle and lower layers within the firm will fully buy-in. This internal “full commitment” will then develop the necessary energy to attract and involve other external stakeholders (customers, suppliers, local communities). b) Bottom-Up This is the part of the process where the question “How are we going to involve our people and our stakeholders in developing it” needs to be addressed. Having a commitment from the top is not enough. Internally the process needs to be built with a bottom-up approach where all relevant members of the organization, at all levels, need to be involved. Their buy-in from the beginning is critical - “I am committed because I was part of its definition”. This is especially true at the middle management level and it is of paramount importance to turn managers into purpose-driven leaders. The focus of the discovery process must be internal. Where have we come from? How did we get here? What makes us unique to all stakeholders? Where does our DNA open up future opportunities we believe in? These are the kind of questions that leaders have to ask. The same applies to other stakeholders such as customers. Most leaders think of purpose as a “purpose for”, but what is needed is a purpose with. As companies formulate their purpose, they should not go for what they think it should be. The level of engagement and team cohesion that this phase brings to the organization typically exceeds top management´s highest expectation of the process. c) Stakeholders dialogue Having clear channels of communication with all stakeholders is a crucial part of the process. This is a pivotal part since it is the moment for the Company to understand the “ecosystem” that surrounds it. It is the opportunity to ensure that this is an exercise that understands and incorporates in the strategy all the different stakeholders’ agendas and the trends that are developing in society. A key goal of this stakeholder engagement process is not to try to address the specific issues or interests of each specific stakeholder, but rather try to assess what are the common issues and causes around which all can be aligned. d) Statement of Purpose The Purpose will only become real when a company's board of directors is able to issue a "Statement of Purpose”. The reason this statement needs to come from the board is that it is the body with ultimate responsibility for the corporation and to whom it owes its fiduciary duty. The Statement is a simple one-page document that can be published separately or in a company report, such as the annual report. This is not an onerous exercise, just a question of will and true commitment based on the previous phase of “bottom-up discovery”. A good communication and implementation plan start with a clear Purpose Statement - that is the core of what needs to be communicated and the bone of any forward stakeholder dialogue. The question then becomes: What makes a meaningful purpose statement? We strongly believe that it will need to bring to life the five features of Purpose we outlined: (i) explain the reason for existence, (ii) provide a powerful guide for decision making, (iii) brings the unifying factor (iv) be clear on the sustainable competitive advantage being created and (v) has a clear vision on the ecosystem. e) Champions Another important part of the process is about finding the right “champions” to spread the message. It is about unleashing the positive energizers (credible, different generations, different levels, different functions). This should be a group that really represents “every corner” of the organization, meets regularly and provides constant feedback to the management on “how things are going”. It is especially important that these people feel comfortable voicing inconsistencies where they see them, putting at risk the credibility of the ambition if unattended. They will need to incessantly refer back to the question “How effectively are we embedding our Purpose into all our systems and processes?” f) Measurement “What does not get measured, does not get done” is a golden rule of management, and even more important when it comes to measuring the implementation of a significant number of variables that are not quantitative. This is a crucial moment where the balance between financial and “less-financial” indicators needs to find the right balance, and where the trade-offs short term vs long term need to be agreed upon. How to reconcile the need to make a profit and deliver returns to owners and shareholders with the ambition to do something more significant? This is the moment of truth, where it needs to become crystal clear that for the organization it is not enough to compete in the marketplace – but the goal is to help change the world for something better and more sustainable. g) Link to incentives “Do our systems of recognition and reward promote the behaviors that we say we want to see?”. The way companies incentivize action – meaning how they reward, recognize and reinforce the right behaviors, and thereby celebrate and further embed their purpose and values is key. As an example, having a clear Purpose, long term oriented, and staying with a remuneration policy based on annual variable pay (in many organizations can easily represent more than 25% of the annual salary) is a typical disconnect. In the last decade, in most organizations, a key compensation concern was to align “pay with performance” meaning financial performance. Recent years have seen an increasing number of companies integrating sustainability metrics (ESG metrics) into performance assessment and compensation. As an example, Natura bases its incentive system on the company’s 5-year strategic plan, which includes sustainability KPIs (Natura, 2020). At the end of the day, implementing a Purpose process becomes a cultural change exercise that builds a solid, hard to copy and long-lasting competitive advantage – one that is built on culture. Nuno Moreira da Cruz Executive Director of the Center for Responsible Business & Leadership
