A purpose statement is meaningless unless it translates into action. For that reason, let’s explore five channels through which purpose can be embedded in an enterprise – strategy, operating model, culture, internal reporting and governance.
Let’s start with strategy. A company’s purpose should shape the activities it’s involved in. Outdoor clothing company Patagonia’s purpose is environmental renewal, as highlighted by its statement ‘Patagonia is in business to save our home planet’. These aren’t just aspirational words. On Black Friday – the biggest shopping day – in 2011, it placed a full-page ad in the New York Times which pictured a Patagonia fleece with the headline ‘Don’t Buy This Jacket’. The ad highlighted its Common Threads Initiative, encouraging customers to repair and reuse their clothes rather than buy new ones. The initiative repaired over 30,000 items in eighteen months–and ended up not being at the expense of sales, which rose 30% in 2012. In 2017, Patagonia created its Worn Wear online marketplace for used clothing, even though this would reduce its sales of new items. Similarly, CVS didn’t simply rename itself CVS Health, but made the strategic decision to stop selling cigarettes while Barclays closed its tax avoidance division.
The potential to build credibility through strategy is another advantage of the focused purpose. It’s easier for stakeholders to verify whether a focused purpose statement is being put into practice than a vague one that tries to do everything, and so almost any strategy might be consistent with it.
A second way to embed purpose is to align the operating model – how an enterprise runs its core operations – with it. For example, when the UK supermarket Tesco defined its core purpose as ‘to create value for customers to earn their lifetime loyalty’, it needed to ensure that its processes were uncompromisingly geared towards customers. For example, it already had over 90% efficiency in getting products onto store shelves, but this wasn’t enough for an aspirational purpose such as ‘lifetime loyalty’. Thus, it redesigned its processes to ensure customers could always buy the products they wanted when they wanted them. Similarly, it made a promise that all stores would have ‘a manager who helped me’, but didn’t yet have a management or training system to deliver this promise. So it simplified its store routines and de-layered its hierarchies to give managers freedom to serve customers rather than spending time in unnecessary upwards reporting. It also launched a major program of leadership development.
You might think that an operating model with efficient processes and management training should be a feature of any good company, not just a purposeful one. Certainly every organization would advocate improving processes and upskilling managers if the benefits can be roughly estimated. But all enterprises face trade-offs. Even in the best companies, many dimensions of their operating model can be enhanced. Operating model alignment involves prioritizing the dimensions that most urgently need to be improved to put purpose into practice – which again highlights the need for purpose to be focused.
Third, a CEO should ensure that integrated reporting occurs inside the enterprise as well as outside. This involves gathering a rich set of information on how employees, teams and projects are performing on purpose-related dimensions. One use for this information is performance evaluation. Sometimes a CEO gives a rallying speech about purpose, only for senior management just below the C-suite to tell their team to ignore her and focus on their division’s financial targets. An executive described this senior management layer to me as the ‘clay’, which blocks purpose from flowing throughout the enterprise just as clay blocks water flow. Such blockage isn’t deliberate sabotage, but arises from the reality of how senior managers are evaluated. One firm invited me to speak at a purpose offsite, but in their briefing admitted that their most important metric remained short-term profit per partner. In contrast, when Marks & Spencer launched Plan A, it evaluated business unit and store managers using a ‘balanced scorecard’. This combined traditional financial metrics with several non-financial measures tailored to the Plan A goals most under their control.
In addition to allowing bosses to evaluate them, integrated internal reporting also allows employees to evaluate themselves, so that they know how they’re performing and can make more informed decisions. This requires breaking down company-wide targets into sufficient granularity that workers can affect them. Marks & Spencer reports its overall greenhouse gas emissions and breaks them down by region, activity (e.g. refrigeration vs heating) and department (e.g. food vs clothing). However, even that’s not granular enough to guide an individual colleague, who may manage a single store rather than a region. So Marks & Spencer internally tracks information at an individual store level. It also measures the emitting activity (e.g. electricity, gas and refrigeration) rather than the emissions generated, because it’s the former that employees have direct control over.
A fourth way to embed purpose is by aligning the enterprise’s culture with it. While purpose concerns why an enterprise exists and who it serves, culture captures how it operates – in simple terms, it’s ‘the way we do things around here’. Culture is critical to ensure that a purpose permeates throughout the company. Recall the study by Claudia Gartenberg, Andrea Prat and George Serafeim, which documents strong performance of companies perceived by their employees as having a clear purpose. This link was driven by the perceptions of middle managers rather than senior leaders, likely because the former are particularly important for ensuring that purpose translates into day to-day actions. This highlights a further benefit of a focused purpose statement – the simpler it is, the less likely it will be lost in translation when passed down the organization.
For purpose to live in the enterprise, the right culture needs to be promoted. For example, a purpose that prioritizes innovation, such as Reckitt Benckiser’s (‘to create healthier lives and happier homes through our product innovations’), is best supported by a culture that emphasizes autonomy, rewards risk-taking and tolerates constructive failure. In contrast, a purpose that emphasizes cost (such as Wal-Mart’s, ‘to save people money so they can live better’) should be accompanied by a culture that emphasizes efficiency and clearly defines job roles.
Leaders shape culture through their strategic choices and own behaviors, but they can’t do everything themselves. Some companies thus task selected employees with ground-level culture change. Danish biotech firm Novo Nordisk has developed a set of cultural principles, known as the ‘Novo Nordisk Way’, to support its purpose to ‘drive change to defeat diabetes and other serious chronic diseases’. It has a team of ‘facilitators’ that visits business units to help them implement the Novo Nordisk Way. The team observes a unit in action, interviews managers and employees, examines its policies, and then reports overall findings and trends to company leadership. French personal care company L’Oréal has developed four ethical principles to support its purpose of‘ cosmetic innovation for all’, and has a network of seventy-five ethics correspondents to embed them across the company and in every country. They adapt these principles to local customs, ensure that employees are trained on ethical behavior and know how to raise ethics concerns, and act as a sounding board for ethics queries.
Another way to shape culture is by hiring colleagues with a strong cultural fit. Recall Patagonia’s purpose is to ‘save our home planet’. As founder and CEO Yvon Chouinard explains: ‘whenever we have a job opening, all things being equal, hire the person who’s committed to saving the planet no matter what the job is’. The shoe manufacturer Zappos gives new hires a month-long training program, which includes an induction on the company’s values, and offers them $2,000 to leave if they don’t share them. (A similar program has since been adopted by Amazon, which bought Zappos in 2009.) Herb Kelleher, the co-founder of Southwest, placed cultural fit over experience and education when recruiting – as exemplified by his motto ‘Hire for attitude, train for skill’.
Finally, embedding purpose often requires changes not only below the CEO, but also at the board above her. A 2014 Harvard Business Review article reported that only 10% of US public firms had a board committee dedicated to corporate responsibility, and advocated that this practice become more widespread. But purpose should be a formal duty of the entire board – it’s fundamental to a company’s core business, rather than an ancillary activity that can be delegated to a subcommittee. The board shouldn’t approve an M&A deal, strategic initiative or capital expenditure proposal without first verifying that it’s consistent with the firm’s purpose. Similarly, a board typically devotes two days per year to discussing and agreeing strategy; these sessions should be anchored to purpose. The board can also ensure that the company’s non-financial targets are both appropriate and aspirational given its purpose, and monitor whether it’s achieving these targets.
Since purpose can’t be assessed purely with quantitative metrics, the UK’s Financial Reporting Council recommends that non-executive directors “walk the shop floor” to truly understand an enterprise. At present, there are proposals in the UK and US to put workers in the boardroom, and some European countries already do. But a more effective approach is to bring the boardroom into the workforce – for it to spend time in the business and hear from colleagues first-hand, through structured site visits. I serve on London Business School’s Governing Body (the equivalent of our board) as an elected faculty representative – loosely analogous to a worker director. Even though I try to talk to non-Finance faculty and non-academic staff, I’m unable to represent their views as accurately as I can those of other Finance faculty. At a Governing Body Away Day, a colleague thus challenged the external governors to spend time on campus and understand the “smell” of London Business School, to hear the voice of the broader workforce.
While purpose should be the responsibility of the full board, committees can be useful for monitoring specific dimensions of purpose. Most board structures focus exclusively on shareholder value, and thus have committees dedicated to remuneration, director nominations, risk and audit. The last two are geared towards downside protection. But Pieconomics stresses the importance of upside value creation, and so an Innovation Committee may be valuable for some firms. In addition, after an enterprise has decided on the who, it can create committees responsible for key stakeholders, such as a Human Capital Committee or an Environment Committee – or, alternatively, these issues should be major agenda items for the full board. Setting the tone at the top helps ensure that purpose flows throughout the organization.
Contributed to Branding Strategy Insider by: Alex Edmans. Excerpted from his book Grow the Pie, How Great Companies Deliver Both Purpose and Profit.
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