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When global leaders congregate in Davos for the World Economic Forum meeting next week, they will be focused on a collective concern: the rising economic inequality that is making an already fractured world order even worse.
While there is no easy solution to this challenge, there is much to learn from the enduring success of organisations that have pioneered and nurtured the idea of inclusive capitalism. While these companies focus on profits, they are also driven by a higher purpose â€“ whether it is to â€śpreserve and improve human life,â€ť â€śpromote womenâ€™s empowermentâ€ť or â€śkeep people happy.â€ť
Given the intuitive appeal of this proposition, most organisations have now embarked on the â€śpurposeâ€ť journey. According to a recent EY study, 95 percent of the nearly 1,500 global business leaders surveyed said they have a corporate purpose. However, only in 40 percent cases did the purpose aspire to contribute towards society at-large. 21 percent of these cases represented truly purposeful enterprises â€“ where the aspiration to make meaningful societal contributions was deeply ingrained into the organisational ethos and fabric.
What makes these purposeful companies tick is their ability to align their organisationâ€™s purpose with its risk strategy â€“ which involves making bets that can help capture opportunities while mitigating losses.
For instance, when the board of a leading global pharmaceutical company approved sales of a tuberculosis medicine in Japan â€“ which at the time was suffering from a severe outbreak of the disease â€“ the company did not immediately make profits. Doing the right thing, however, enabled the company to establish itself as the dominant player in the Japanese market. This companyâ€™s risk strategy was guided by its larger purpose of promoting healthy living.
Sometimes, a purpose-led risk strategy may call for sacrificing revenues in the short-term. Consider the example of a healthcare products retailer that decided to stop selling tobacco as this contradicted with its purpose of helping people get healthy. The company lost over a billion dollars in revenue on account of this decision.Â However, over the long-term, this strategy helped cement its market-leadership position as a company that truly cared about the health of its customers.
The defining characteristic of purposeful organisations is that the alignment of purpose and risk strategy is entrenched and pervasive in the organisation. Consequently, employees across the board are excited about â€ślivingâ€ť the purpose. It helps them find greater meaning in their work and serves as a compass for making key decisions.
For instance, in the case of an e-commerce job portal company, the founders articulated its purpose as improving peopleâ€™s lives through better employment.Â The companyâ€™s mojo stemmed from this empathy for jobseekers. However, after the founders departed, the new management announced that its sole focus was to increase the stock price. The organisationâ€™s purpose took a back seat and morale plummeted. The company rapidly lost key employees and market share. It was eventually acquired.
Given the risks associated with building purposeful enterprises, what can business leaders do to make such an ideology thrive?
First, boards must ensure that their companyâ€™s purpose is authentic. This means that purpose goes beyond delivering to the narrow brand-building or corporate social responsibility agendas. Once a purpose has been adopted, it must be embraced with utmost sincerity and deep-rooted passion. This could mean revisiting the companyâ€™s risk appetite, making tough commercial calls and convincing investors that the realization of organisational purpose can even mean foregoing profits in the near term.
Second, CEOs and executives should introspect if the organisational purpose aligns with their market offerings and risk culture. Doing so can help leaders reassess the companyâ€™s strategic positioning and spur innovation to develop products and services that better support the companyâ€™s purpose. In order to enable this, perverse organisational policies, controls and incentives should be identified and dismantled. Guarding against anti-purpose behavior is especially critical â€“ as this can destroy corporate reputation built over many years of hard work.
Third, managers should regularly communicate the importance of purpose to drive employee engagement, especially when the company encounters and manages new operational risks.
Purpose can serve as a catalyst in transforming companies as they compete in todayâ€™s complex and increasingly disruptive business environment. Purposeful companies can in turn help build sustainable communities, inclusive economies, and indeed, a better working world.
- By Nitin Bhatt, Global Leader of EYâ€™s Risk Transformation Advisory Practice. Views are personal.