Purpose could add an extra £130bn to the value of British business

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Purpose beyond profit is not just a recipe for social value. At The House, we’ve long known the commercial power of putting visionary purpose at the heart of a business. We’ve seen how purpose-led visions drive brands’ growth and profitability, at the same time as making them a more potent force for good. And now, a new piece of evidence adds serious weight to the commercial case for purpose.

Last month saw the publication of a new report co-authored by some of the most respected figures in business and finance. It’s unequivocal about the link between purpose and economic success. The taskforce behind the research, brought together by the Big Innovation Centre, includes FTSE CEOs, investment houses, leading business schools and consultancy firms, supported by the Bank of England.

The report identifies the key to corporate greatness as ‘the pursuit of a clearly defined visionary corporate purpose, which sets out how the company will better peoples’ lives’. It concludes that if purpose is put at the heart of British business, it could increase the value of British firms to the tune of £130 billion a year.

The challenge of achieving purpose

Getting there, however, will not be easy: the road to purposeful business culture is fraught with challenges. Having cited purpose as pivotal to corporate success, the report goes on to describe how our current British business ecosystem works against the creation of purposeful companies.

Systemic issues present hefty obstacles to companies’ creating a purpose beyond profit – among them a often fragmented, diversified shareholder base, and a legal and regulatory system that promotes short-term profit maximisation. The economic cost of this is huge, potentially exceeding £130 billion each year.

Another blocker identified by the report is the persistent undervaluing of ‘intangibles’. It’s in the nature of purposeful companies to invest in know-how, R&D and skills, yet these assets are consistently and systematically underestimated by financial markets.

Alex Edmans, Professor of Finance at the London Business School, and a co-author of the report, explains:

“Traditional companies will only invest if they can calculate a tangible benefit. But, in the modern firm, the most important assets are intangible, such as corporate culture, brand strength, and innovation. Only purposeful companies, freed from the exclusive focus on short-term profit maximisation, will make the long-term investments required to succeed in today’s economy. In the long-run, there is no trade-off between purpose and profit.”

The report pulls no punches when it comes to forecasting the consequences of a continued fixation on short-term profit, stating that ‘Britain risks becoming an economic backwater if it does not foster purposeful companies’.

Building a consensus for change

So what can be done? Will Hutton, Chair of Big Innovation Centre Steering Group, believes that a new, progressive culture of business is possible ‘if a consensus can be built for change’. He hopes that the new report itself will act as a stepping-stone.

Reform is undoubtedly needed, and the next step for the taskforce is to investigate possible avenues. They’re currently gathering feedback on 20 different policy options – ranging from changes to corporate law and governance, to shareholder engagement and taxation – and the results will inform their Final Report, scheduled to be released in autumn 2016.

Andy Haldane, Chief Economist of the Bank of England, summed up the potential clout of the report thus: “the evidence… points the way to rethinking and re-orienting the very purpose of a modern day company, so laying the foundation for a new wave of investment and innovation”.

The future of British business

It’s hugely encouraging to see Britain’s economic heavyweights endorsing the purpose movement. That purpose creates the conditions for extraordinary commercial success is something that we’ve borne witness to for years, in our work to help business leaders build their purpose-led visions. CEOs who understand the power of purpose can inspire deep-rooted confidence in their brand, and it’s this confidence that drives them to sustainable success. Why? Because confidence fuels investment, fosters innovation and bolsters long-term performance.

While it’s true that short-term thinking and a focus on shareholder returns continue to hinder progress, there are many signs that change is afoot. For example, we’re seeing a rise in the number of socially minded investors with a broader definition of the value business can create. Far from looking to make a fast buck, their aim is to drive social and environmental impact alongside sustainable profit.

According to a 2014 US Trust survey, two-thirds of millennial-aged investors with at least $3 million view their investment decisions as “a way to express my social, political or environmental values”. The recent spate of fossil fuel divestment is another symptom of this values-driven new wave. The Bill and Melinda Gates Foundation are one of the latest, and certainly the highest-profile organisation to divest, joining the Guardian Media Group, Rockefeller Brothers Fund and British Medical Association.

We were also happy to see that the Big Innovation Centre’s report found that a greater sense of purpose leaves companies better placed to innovate. This chimes with our own experience of working with brands.

Purpose-driven organisations are not locked-in to a set product formula (what they sell) because they prioritise the purpose behind the product (the why). Letting go of your tight grip on the ‘what’ frees you to look at problems in a new light, and pursue new, fruitful avenues of product and service development.

With big players like the Bank of England and London Business School backing purposeful business, these are exciting times for the purpose movement. It seems that visionary corporate purpose has well and truly entered the mainstream.

Steve Fuller is Creative Head of The House, a purpose-driven business, culture and brand consultancy. To find out more, please visit www.thehouse.co.uk

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