Finding purpose through social innovation

Finding purpose

Most executives are familiar with what (vision) and how (mission) statements. However, why a business exists is a bigger and more complex question. An organization’s purpose is why it exists. Purpose is not only about economic exchanges – it reflects something more aspirational, such as how the people involved with an organization make a difference and take away a sense of meaning. Another common misconception is that purpose must be altruistic. A more balanced view of organizational purpose suggests that purpose should be about how the corporation can be “of service.”

Finding a strategic, differentiating purpose is not an easy task. Although nearly all businesses claim to have purpose, many organizations fail to deliver for a number of reasons. Sometimes, the purpose is too generic – vague purpose is too borderless to defend. Other hurdles include the buy-in and agenda of the C-suite and the implementation of organizational purpose through middle management. Finally, the perception of authenticity (and how it is translated into action) is a critical component. Is your company’s purpose reflected by financial commitments to M&A, technology or R&D? Is your company’s purpose derived from regulatory pressures or simply being driven by “license to operate” motives, such as providing a safe working environment? Other traps to avoid include outsourcing all purpose-driven activities to philanthropic initiatives or, even worse, greenwashing core business activities.

Of course, many organizations already have purpose. Understanding the degree to which purpose permeates throughout a company, in addition to identifying bottlenecks, can offer valuable insights. Some key questions that can help to identify and clarify purpose in your organization are highlighted in Figure 1. 

Lessons from social entrepreneurs

Social entrepreneurs use market-based solutions to address social and environmental problems by creating businesses that negotiate resources for social impact. At a systems level, social entrepreneurs provide goods and services that are neither supplied by the for-profit (for example, the market) or public sectors (such as the government). Since these organizations explicitly embed purpose into their business model from the outset, they offer a number of insights for corporations on how to deliver social innovation.

Social innovation is the process of applying novel market solutions to global social and environmental problems by creating or improving products, services, processes, business models and markets to more effectively and efficiently respond to unmet societal needs. The value created accrues primarily to society as a whole rather than private individuals and focuses on actions that have the potential for systemic transformation.

Social innovation embodies a mindset driven by purpose, openness, partnership, innovation and accountability to develop solutions that allow excluded people to participate in the economy while conserving and replenishing natural capital.

Figure 2: Learnings from lifepreneurs

Take-aways for corporate social innovation

Social entrepreneurs start up their business activities around purpose from inception. By contrast, corporations with long histories face different market expectations and may not have defined a clear purpose from the outset. Rather than trying to solve every social and environmental problem, corporations are better served trying to identify how the core, material issues of their business can be aligned with social and environmental concerns.

Materiality is a concept founded in long-established financial accounting procedures and has been borrowed, adapted and applied to nonfinancial information. The Sustainability Accounting Standards Board (SASB) identifies financial material issues as “the issues that are reasonably likely to impact the financial condition or operating performance of a company and therefore are most important to investors.” Relevant topics include those that can reasonably be considered important in reflecting an organization’s economic, environmental and social impacts, or influencing the decisions of stakeholders.

Corporate social innovation should be embedded in corporate strategy and focuses on material sustainability issues from the perspectives of R&D, employee development, and partnerships. Rather than one-off projects, the focus is on sustainable social change, and developing long-term strategies to address social problems. It is a strategic direction rather than an isolated initiative. Corporate social innovation relies on a participatory, collaborative model that integrates engagement with customers, employees and communities instead of a using a top-down approach.

Rather than treating social and environmental issues as risk and compliance issues, organizations that successfully orient their purpose around material sustainability issues can leapfrog their peers to create business value and a competitive advantage in the marketplace.

Source: The UN Global Compact-Accenture Strategy CEO Study 2016

Figure 3: Value creation and competitive advantage

Purpose and financial performance

Firms that reorient around purpose also stand to reap substantial financial benefits. Recent research indicates that high purpose firms characterized by high comradery between workers and high clarity from top level management have systematically higher future accounting and stock market performance, even after controlling for current performance. This relationship is driven by the perceptions of middle management and professional staff rather than senior executives, hourly or commissioned workers.

Related research indicates that materiality and long-term thinking is paying off financially. Materiality is a methodology to determine the most pressing sustainability issues faced by a company given its sector/industry. It aligns importance for the organization with stakeholder expectations and can help management answer questions such as:

• Which sustainability issues matter the most given our core business?
• Which issues matter the most to our stakeholders?
• How do we align our purpose with sustainability material issues to build our strategy?
• How can we communicate my strategy to stakeholders?

Research by George Serafeim, Mozaffar Khan and Aaron Yoon suggests that companies focusing on material issues outperform their peers by 6% per year in annualized stock returns.

Since 2001, companies whose executives manage for long-term value creation and resist pressure from analysts and investors to focus excessively on meeting Wall Street’s quarterly earnings expectations have delivered superior results.

Figure 4: Research on purpose and financial performance

Conclusion

There is no single recipe for integrating purpose into your organization but thinking about the impact you want to have in the world is a good start. Why does your company exist? Companies will take different paths to examine their impact on the environment and society. However, the writing on the wall is clear: stakeholders are increasingly demanding that firms take social and environmental concerns seriously and embed them into their business models. Firms that are able to successfully reorient around purpose stand to attract higher skilled workers, keep them engaged, attract investment (ESG and impact investment) and deliver a better customer experience to consumers – all while delivering a superior financial performance. These changes may seem risky for well-established firms resistant to change, but, as a participant said: “A ship in the harbor is safe, but that’s not what ships are built for.”