Company Purpose and Shareholder Value: Two Sides of the Same Coin
For decades, the focus of many businesses has been increasing value for shareholders. We are moving into a more conscientious time with companies focusing more on sustainability and purpose. While company purpose and shareholder value may seem at odds with each other, they can be achieved simultaneously. One recent study showed that consumers are 4 times as likely to purchase from a company that has a strong stated purpose.
Many companies promote ESG goals to attract new investors and draw in socially-conscience consumers as part of their company purpose.
To understand the connection between company purpose and shareholder value, keep reading.
- Company purpose is the reason your business exists.
- The focus on shareholder value has transitioned over time from the sole priority to one of many considerations for businesses.
- Many businesses complement their purpose with ESG goals.
What Is Company Purpose?
In simplest terms, your company’s purpose is the reason it exists. Many businesses distill their purpose into a purpose statement. This is different than a mission statement.
A purpose statement shows how your business and its products and services benefit or impact your primary audience or customer base. On the other hand, a mission statement uses more actionable steps and lays out the path you need to take to fulfill your purpose.
Your company’s purpose is your ongoing pursuit towards the future. It can set internal and external expectations for what people can expect from your company. Many businesses use their purpose statement to guide every decision they make.
An example of an excellent purpose statement comes from the insurance company Allstate:
“We empower customers with protection to help them achieve their hopes and dreams. We provide affordable, simple, and connected protection solutions. We create opportunity for our team, economic value for our shareholders, and improve communities.”
The Evolution of Shareholder Value
In a 1962 article published in Fortune magazine, the CEO of Indian Head Mills described the purpose of business as:
If a business made a public statement like this today, it would likely have difficulty finding investors or customers. The idea of being solely dedicated to increasing value for shareholders has become anathema to most people and businesses.
A singular focus on shareholder value can lead to acute business and societal problems, like the following:
- Wealth inequality
- Focus on short-term instead of long-term growth
- Lack of innovation
Since the 1960s, the business world has evolved to recognize the value of customer happiness, diversity, and protecting our environment.
In 2019, the Business Roundtable group issued a bold statement on the purpose of a corporation. In sharp contrast to the quote from 1962, more than 100 leaders from large companies dedicated themselves to:
- Delivering value to customers
- Investing in employees
- Being fair and ethical in business partnerships
- Supporting local communities
- Creating long-term value for shareholders
In this video, Lynn Stout from Cornell University further discusses the change in perspective regarding shareholder value.
How Does Purpose Increase Shareholder Value?
As the interest in social consciousness grows, businesses need to learn how to incorporate those principles into their purpose. Consumers are becoming more conscious of how and where they spend their money.
Many people want the companies they do business with to reflect their values. One report shows that an average of 77% of people prefer purchasing from socially conscious companies.
Businesses with a strong purpose statement and proof of socially conscious programs are more likely to attract these customers. This means it pays to have a purpose. Purpose supports the goal of increasing shareholder value.
Expand Your Purpose with ESG Goals
Many businesses tie their purpose statements into ESG goals. ESG stands for environmental, social, and governance. ESG factors are a primary consideration for many investment groups.
- Environmental: Environmental factors are how a business affects the natural environment through pollution, climate control, waste, and energy use.
- Social: A business’s social impact includes how it treats its employees and customers. Factors to consider include human rights, safety, labor standards, privacy, and customer care.
- Governance: The governance factor examines how a business is run. This considers the board’s composition, corruption, political contributions, and executive compensation.
Setting ESG goals can help you fulfill your business purpose. If you have trouble setting or meeting ESG, consider adjusting your mindset.
1. Change Your Business Perspective
Running your business is likely second nature for you. It is easy to come to work and do the same thing every day. When you see your business from a new perspective, you might notice inefficiencies or problems that you couldn’t see before.
To get that new perspective, you can:
- Talk with employees
- Survey customers
- Create a new management team
- Look at businesses outside your industry
These new ideas can help you create ESG goals that will help your business fulfill its purpose.
2. Solve a Problem
Create a list of “problems” you have within your company. Perhaps you are spending more on energy consumption than you would like or putting a lot of resources into dealing with waste. Create an ESG goal to work towards solving these sustainability problems.
Creating more sustainable products can even help your bottom line. McKinsey & Company reports that products marketed as sustainable attract five to six times as many customers as the average product. Consumers are even willing to pay more for sustainably produced products.
3. Take Risks with New Frontiers
Tackling new projects and setting challenging goals might make you feel uneasy, especially when your business is on the line. However, you need to take smart risks and not jump blindly into the unknown.
Do your research and choose calculated risks that have the potential to benefit your business. Prepare for setbacks along the way but keep your focus on your ESG goals and business purpose.
Share Your New Balance Between Company Purpose and Shareholder Value
With a new understanding of the importance of company purpose, it is time to share your new goals with your customers. Focusing on ESG goals and other positive changes, you should attract new clients and business prospects who share the same values.
To learn more about how to build a business case for purpose at your company, read this article.
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