Why purpose-driven companies can’t lose focus on profits

A growing body of research in recent years suggests that the pursuit of purpose can boost the financial performance of companies. One study of a cohort of public firms embracing a multi-stakeholder approach found that they performed better than the S&P 500 by a factor of eight over the course of a decade. A report by EY and Harvard Business Review found that companies that had most fully pursued a purpose were more likely than other companies to report rapid growth over the previous three years. Research by George Serafeim and his coauthors found that firms whose middle-manager ranks emphasized purpose “have systematically higher accounting and stock market performance.”

But as powerful as purpose is when fully mobilized inside a company, it remains fragile. Operating in a world where commercial logic reigns, leaders can find it difficult to run businesses according to both commercial and social logics. Confronted with the constant need to make painful short- and long-term tradeoffs, many leaders can’t sustain it, and commercial logic wins. Leadership changes, mergers, rapid growth, and other organizational changes can distract leaders and employees from their purpose and dilute the supportive culture that is essential to instilling the reason for being.

My research into purpose-driven companies revealed a few key “purpose-derailers” that, when ignored, can trap even the most beloved deep-purpose companies. One of the most insidious and nonobvious derailers is what I call the Do-Gooder’s Dilemma. And we saw it play out last year with Emmanuel Faber, the former chairman and CEO of the global food Goliath Danone.

In March 2021, news broke that Faber had been ousted after a challenge by activist investors. Faber had become a prominent advocate of both purpose and multi-stakeholder capitalism, galvanizing Danone behind a purpose of “bringing health through food to as many people as possible.” He operated several Danone business units as B Corps, adopted integrated reporting, sought to foster a culture of trust and autonomy, and more. In 2020, Danone became the first public company to be formally designated in France as an Entreprise à Mission, a status (akin to a public benefit corporation in the United States) that obligated it to lay out clear social and environmental goals related to its purpose.

During his tenure, Faber was explicit that pursuing purpose didn’t preclude value creation for shareholders. For instance, he promised that the company would see “strong, profitable, and sustainable growth” and acknowledged that assessments of his performance would ultimately hinge on his ability to move Danone’s stock price higher. Describing the Entreprise à Mission designation to analysts, he noted, “We will not prove our model right until we see that in the share price. It’s not a matter of contradicting the value creation, it’s really about the way we create that value in the short, medium, long term.” Elsewhere, Faber spoke about the need to “balance Danone’s dual economic and social project.” Pursuing social justice would lead, in turn, to “the resilience of this business.”

Despite significant efforts, Faber couldn’t strike the right balance between social impact and economic performance. Danone’s share price plummeted by 25% in 2020, and the company saw a decline in sales for the first time in decades. Since 2014, Danone’s share prices declined in value relative to those of competitors Nestlé and Unilever, and the company also missed profit forecasts on three occasions.

As a representative of Blue Bell Capital, an activist investor who had called for Faber’s ouster, explained, their complaint wasn’t with Faber’s pursuit of purpose and a social logic. Rather, it was what they saw as Faber’s failure to address the firm’s inadequate financial performance: “Faber was trying to use sustainability as part of his defense. But we never called into question Danone’s ESG investments, and we care a lot about these topics. Their competitors like Nestlé and Unilever also make ESG a priority, yet have better financial results. Our issue with Faber was not ideological but operational.” Blue Bell’s cofounder noted that social benefit “can’t come at the expense of shareholder returns. The first duty of a public company is to remunerate shareholders.”

Faber’s downfall doesn’t imply that purpose-driven capitalism can’t work, as some have wondered. Rather, it suggests the importance of managing shareholder expectations adroitly. Set performance expectations too high, and you’ll pay the price when you don’t deliver. Faber’s downfall also points us to that key derailer, the Do-Gooder’s Dilemma, which deep-purpose leaders must anticipate. Leaders who understand the need to pursue both a social and economic logic might still, in their deep-seated commitment to doing good, fail to deliver sufficient growth and profits. They might presume that success at “doing good” somehow gives them a pass from doing as well as their peers. They might feel so confident that their strategies will yield the greatest good for all stakeholders over the long term that they feel no need to attend to shareholders’ short-term needs.

Or, as in Faber’s case, they might simply run up against bad luck or market challenges that make it difficult or impossible to please investors (Faber contended with a pandemic that led its bottled water sales to collapse, and he was also operating in a highly commoditized dairy space). In each of these situations, leaders seeking to do good struggle to understand how precisely to balance commercial and social logics when pursuing purpose.

As Faber’s case suggests, and as research confirms, investors develop even higher expectations of leaders who pursue a social logic. The truth is that nobody gets a pass on short- and long-term financial performance, whether they’ve striven to deliver profits for shareholders or not. And certainly, strong shared-value strategies don’t mean leaders can ever take their eyes off the commercial logic. The leaders who go deepest on purpose aren’t those who push the social logic at all costs. They attend at all times to both the social and commercial logics. Ignoring profits unduly can prove damaging because it might prompt an overreaction that swings the company too far away from its social logic. This is what happened at Boeing during the late 1990s and 2000s, where the drive to reform a company that seemed to neglect the commercial logic led it to place too much emphasis on cost-savings, with disastrous consequences.

Deep purpose companies might make certain decisions that, over the short-term, privilege certain stakeholders and even diminish profits within reasonable bounds. Over the long term, however, they resolve the Do-Gooder’s Dilemma and balance commercial and social logics. As they understand, a business always remains precisely that—a business, one that must generate a reasonable return on investment in order to survive. To circumvent the Do-Gooder’s Dilemma, they take swift action when they judge that the company has swerved too far from its commercial logic.

When the COVID-19 pandemic broke out, the global Indian firm Mahindra stepped up to take a number of ambitious socially oriented moves, providing assistance to employees, local communities, and other stakeholders. As the pandemic wore on and an economic crisis unfolded, leaders realized they would have to take painful steps to keep the company on solid ground, including shutting down certain operations and laying off employees. Such decisions were hardly pleasant, but the company went through with them, behaving as compassionately as possible. Mahindra wasn’t departing from its purpose but rather positioning itself to survive as an enterprise, continuing its challenging walk along the razor’s edge.

Ranjay Gulati is the Paul R. Lawrence MBA Class of 1942 Professor of Business Administration at Harvard Business School. He is the author of Deep Purpose: The Heart and Soul of High-Performance Companies (Harper Business).

This article was adapted from the book Deep Purpose. Copyright 2022 by Ranjay Gulati. Reprinted here with permission from Harper Business, an imprint of HarperCollins Publishers.

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