Why purpose-driven business makes financial sense

Today’s corporations are experiencing a tidal shift of change. The current pandemic has further accelerated a review of both systems and mindsets. Growing pressure from multiple stakeholders is forcing businesses to take more responsibility for their impact on society.

Yet, the idea of businesses as being instinctually good, is a bit of anathema.

The popular opinion is the private sector is self-serving, irresponsible and inherently evil. After all, doesn’t financial success always come at a price? Low wages, disregard for the environment or corrupt practices?

How true is this viewpoint, though? When we apply a more sober lens, it appears fundamentally flawed. The evidence suggests businesses that take a purposeful approach can be a vital force for good and deliver value to society, without sacrificing the dividends for investors.

In this article, we are going to dive deeper into the importance of purpose-driven business to deliver financial, social and environmental benefits.

The win-lose paradigm

Recently, the press has been littered with business bailout stories. The public response has varied dramatically. For instance, government support to help the airline company EasyJet garnered little opposition compared to the uproar that followed a similar package for Virgin Atlantic. Why? Because Richard Branson’s is deemed successful. And what’s wrong with that you may ask.

According to Alex Edmans, author of ‘Grow the Pie’, the reason for this reaction to the Virgin Atlantic bailout is as a society we believe that other people’s success only happens at the expense of our own. Such thinking, which is ingrained in our psyche, creates a win-lose paradigm.

When applied to business, this mindset is destructive. Because “we only look for win-lose solutions” points out Alex.

“We actually like to put each other down. For instance, we might not want to help another division because we think if we do, then their manager will get promoted over us.”

In reality, this attitude only leads to the whole company doing worse.

“We want workers, investors and customers to work together to create a company which not only delivers a lot of social value, but also makes sure social value is fairly distributed”

Because, by engaging in internal conflict, we only weaken the organisation. So, rather than considering the whole, we become fixated with our slice of the pie. The result is everyone loses out.

The pie splitting mentality

“This is the idea that the value created by a business is a fixed pie” explains Alex. So, when “any slice of the pie goes to one party, e.g. investors, it is subsequently taken away from another party, e.g. workers and the environment”.

This is problematic for a couple of reasons.

On the one hand, if your priority is profits, then as a business leader, you may cut wages or forfeit environmental actions like reducing air pollution. While, on the other hand, if your focus is predominantly societal, then you will protect workers rights by taking the so-called ‘slice of the pie’ away from investors.

Either way, you end up making business and society enemies. The reason being, as much as it’s wrong to mistreat employees, introducing restrictive business practices that reduce competition will also lead to profit loss or worse: bankruptcy.

Growing the pie

In contrast to splitting the pie, Alex argues real success lies in collaboration and togetherness.

“We want workers, investors and customers to work together to create a company which not only delivers a lot of social value, but also makes sure social value is fairly distributed”.

Furthermore, evidence suggests businesses who treat their employees well for reasons other than money, for instance, because they care about them, still manifest healthy profit margins.

And, if the company does well, it’s not just the CEO who benefits—success must filter down to everyone else too. To this end, Alex strongly advocates rewarding all employees with company shares. He believes this helps foster a sense of togetherness, which allows the pie to grow even more.

Purpose is king

To embrace a pie-growing mentality requires courageous and purposeful leadership

To some the idea of purpose-driven business conjures images of a friendly workplace, but one unlikely to make much money or survive long.

But, this could not be further from the truth, argues Alex.

There’s a need to change the language around purpose. For instance, it’s not the same as altruism. And it doesn’t need to be a cliché either. In contrast, having employees love to come to work because they care about the company is a cornerstone of the most successful and influential businesses.

We need to hear leaders talk about work in terms of care and purpose in a way that is authentic and grounded. This makes it easier for “people to accept the evidence-based connection between profitable success for an organisation and the intrinsic motivation towards doing good,” says Alex.

Final thoughts

To embrace a pie-growing mentality requires courageous and purposeful leadership. Leaders must “step away from the comfort of calculations and spreadsheets and go with conviction and principles as it will lead to more value in the long term.”

By putting purpose first and approaching profits as a byproduct, business leaders can drive greater creativity and innovation, delivering social change as well as returns for shareholders. By everybody playing their part, we can achieve a sustainable balance that benefits both stakeholders, investors and society.