We’ve come a long way since the 1919 case Dodge vs. Ford Motor Company, where the Michigan Supreme Court declared that “A business corporation is organized and carried on primarily for the profit of the stockholders.” And went on to say that “The powers of the directors are to be employed for that end.”
Now, welcome to the 21st century, more than 100 years later, and we can just about forget everything we thought we knew about corporate success.
Nowadays, it’s not just about the bottom line. Consumers and investors are demanding that businesses step up and demonstrate a real commitment to social and environmental responsibility.
But why would a company willingly take on these extra burdens? Is it just good PR, or is there a deeper, more profitable reason?
To begin with, let’s acknowledge that a fundamental shift in expectations has been underway for at least several decades. There is an increasing demand for companies to demonstrate a genuine commitment to social and environmental responsibility.
This focus isn’t a fleeting trend; it’s a profound redefinition of corporate success.
But why would a company willingly go beyond its traditional profit-making mandate? And what are the inherent challenges and potential rewards of integrating purpose into core business models?
Why Companies Prioritize Purpose Beyond Profit
This topic fundamentally speaks to the question of value. In other words, the term value is often described in terms of money. And fair enough, it is the exchange of money that enables the purchase of things we value.
At the same time, no doubt we could come up with many examples of people we know or situations we have heard about where someone has paid an inordinate amount of money for something that is seemingly nonsense.
While there is definitely a Bell curve, showing that most people like nice things, there are tail ends on this spectrum which paint a very different picture about what it is we value.
All that is to say, value is subjective.
So in this way, embracing social and environmental responsibility is just another way of expressing value preferences among those who enable a company to even exist – that being, the consumers and the investors. Management is part of that as well, and they are the ones who execute the mandate, and they have their own preferences.
There are practical aspects to this non-profit motive as well.
Not the least of these is Enhanced Brand Reputation and Customer Loyalty: Research consistently shows that consumers are willing to pay more for sustainable products and are more likely to support businesses that align with their values.
This effect is not limited to consumers. Employees, and the ability to Attract and Top Talent, is also fundamentally important to the social mandate. The workforce increasingly seeks purpose and social impact in their work. Companies with good CSR initiatives become more attractive employers. Engaged employees feel connected, and are often more motivated, productive, and less likely to leave.
Along with being able to attract talent, doing good also attracts Capital. Investors are increasingly factoring ESG performance into their decision-making. Good CSR signals good risk management, ethical operations (and along with that, lesser risk of ethical problems), and overall greater potential for long-term sustainability.
Another factor which is emerging as relevant is the potential Operational Efficiency and Cost Savings: Many socially responsible practices inherently lead to operational efficiencies and cost reductions. In this way, they are not ESG initiatives, but rather, just good business. For example, reducing waste, improving energy efficiency, or optimizing supply chains not only benefit the environment but also result in tangible cost savings on resources, utilities, and logistics.
There is yet another aspect to this, which brings to a company Innovation and Competitive Advantage: The pursuit of social and environmental objectives often sparks innovation, when companies are forced to do something differently, and under specific constraints. Companies can focus their resources on developing new, eco-friendly products, sustainable materials, and more efficient processes. This innovation creates new market opportunities and differentiation. And in this way, we can see the convergence of building value through ESG, and building value through profit. Ultimately we have come full circle, where the purpose of business is to create value, of which both ESG and financial results are part.
Challenges of Integrating Purpose into Business Models
While the benefits are clear, integrating purpose into business models while still delivering financial returns presents some challenges:
- Balancing Profit with Purpose: In this case, we mean, navigating the tension between profit maximization and social objectives. Initial investments in sustainable practices or social programs may not yield immediate (or ever) financial returns, so they require a long-term strategic vision, and with that, patience.
- Resistance to Cultural Shifts: This includes internal resistance. Employees may be hesitant to change established processes or may not fully understand the “why” behind new initiatives. Leadership commitment is crucial.
- Difficulty in Measuring and Reporting Impact: Quantifying the social and environmental impact of business activities is complex. Metrics and transparent reporting mechanisms is essential, but subjective influences are ever-present.
- Cost Concerns: Implementing new technologies, sustainable materials, or fair labor practices can involve upfront costs. While in some cases ESG implementation can help to save money, however in most cases it is simply a further constraint imposed on business operations, and with constraint, naturally comes additional cost.
Strategies for Profitable Social Objectives
While we can say that profit and social objectives are different sides of the same value coin, these different sides must be integrated to enable overall success. And it must be acknowledged that these two are rarely complementary value-builders. In other words, while they may be synergistic with respect to overall value, achieving one comes frequently at SOME cost to the other.
Much like a well-balanced diet, where some food is for vitamins and health, some food is for energy, but both together create a dinner which is satisfying. Whether vitamins is the profit or the social well-being in this analogy, that’s up to you. The point is, reaching satisfaction requires a combination that is well-balanced to our end-objective.
So how do we find that balance? There are a few steps that senior business leaders can undertake.
- The first is, to Integrate CSR into Core Business Strategy: Social and environmental responsibility should not be a separate add-on, but rather, they must be both woven into the fundamental mission, vision, and strategic goals of the company. This ensures that purpose is central to decision-making and to the company’s innovation for long-term sustainable results.
- The second is to Identify Material Issues, that are most relevant to the business’s operations and industry. This allows for more impactful and authentic initiatives. It is about focusing on the right priorities, and making as straight a line as possible between what really matters in terms of achieving the end result.
- The third step is to Innovate: Invest in research and development to create products, services, and processes that are inherently sustainable and address social challenges. Here is where the company begins its pivot towards triple bottom line sustainability, and here is where new market opportunities open up, and where the management team creates a larger competitive advantage.
- Along the way, the company must Engage Stakeholders: Involve employees, customers, suppliers, and communities in the development and implementation of initiatives, in other words, initiatives which aim to generate profit (including cost cutting) as well as ESG results.
- There must be Transparent Communication and Reporting: Management must clearly communicate social and environmental goals, progress, and challenges to stakeholders, and must be authentic and transparent in reporting, to build trust and enhance rapport.
- Another key part of this process will be Employee Engagement and Training: Provide training on sustainable practices and encourage their participation in CSR initiatives.
- Enhance the Long-Term Vision: All of these activities will involve learning along the way. This is the chance Understand that integrating purpose is a marathon, not a sprint. Focus on long-term value creation rather than immediate financial returns. This patient approach allows for deeper integration and more sustainable impact.
Ultimately, the objective is to find the right balance between profitability and social/environmental impact.
Here’s how balance is key:
- Too much focus on profit generation (at the expense of social/environmental investment): may imply a short-term focus and immediate profit, achieved by cutting corners exploiting labor, or ignoring community needs. However, this approach, we know, is bad for society, but it can also be bad for business, leading to reputational damage, consumer backlash, loss of top talent, increased regulatory scrutiny, and eventually, declining sales and investor confidence.
- Too much focus on social/environmental investment (without sufficient profit generation): implies the risk of focusing on social and environmental initiatives without a viable business model to actually support social and environmental objectives. Without financial stability, any positive impact becomes fleeting, and society cedes financial control of the market demand to another company which may have no ESG conscience at all.
- The solution is to find the Right Balance: The maximum long-term business sustainability and impact are achieved when a company strategically integrates social and environmental investments in a way that also supports and enhances its core business model and profitability.
It’s about creating shared value, where doing good is intrinsically linked to doing well financially, allowing the company to thrive and continuously amplify its positive impact.
Is your company headed in the right direction?
Here are 3 questions to consider. Bring the management team into a casual Friday afternoon session, and don’t let them go to happy hour until there is at least a high-level answer to the following questions:
- A. Which social and environmental issues are most relevant to our core
B. What are we doing to turn these into a competitive advantage?
This question helps to identify areas where purpose aligns with business strengths and can lead to innovation or cost savings, rather than just perceived “add-ons” in the ESG category. - How can we engineer a business culture where every employee, from leadership to frontline staff, understands and is empowered to contribute to our balanced objectives?
This question focuses on the internal aspect of transformation, recognizing that cultural buy-in will be essential. - What metrics can we track to measure the social/environmental impact and corresponding financial benefits?
The answer may include cost savings, increased revenue, talent retention, but must also include results of purpose-driven initiatives, emphasizing the benefits or ROI of social objectives.
In conclusion, the increasing demand for businesses to demonstrate social and environmental responsibility is a significant force in business.
While challenges exist, the strategic integration of purpose into business models offers many benefits, such as enhanced brand reputation and talent attraction, operational efficiencies and long-term resilience.
By embracing a holistic approach that balances profit with purpose, businesses can not only meet evolving stakeholder expectations but also unlock new avenues for innovation, growth, and sustainable success.