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Rotman Insights Hub | University of Toronto - Rotman School of Management

How to achieve the promise of corporate purpose

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Sarah Kaplan

Even before the COVID-19 pandemic, discussions of corporate social responsibility (CSR) and environmental, social and governance (ESG) issues were becoming commonplace. In 2019, Larry Fink, CEO of BlackRock, famously issued a challenge to CEOs to pursue purpose, not just profit; and in August of that year, nearly 200 CEOs of the U.S. Business Roundtable signed a statement in favour of creating value for all stakeholders. And yet, as the pandemic fades into the rear-view mirror, our planet continues racing towards catastrophe, inequality of all forms is only widening and progress on diversity and inclusion has stalemated.

The reason? Too many firms are talking the talk (making socially desirable claims in order to maintain their legitimacy and social licence to operate) but not walking the walk (taking real action to improve outcomes.) Some are even using social responsibility as a cover for damaging activities. Indeed, many of the signatories of the 2019 roundtable statement lead companies that have aggressively sold addictive drugs such as opioids; offshored profits to avoid taxes; supported politicians who actively undermine women’s rights, transgender people’s rights and civil rights; or sponsored pro-oil and coal ad campaigns.

It has been well established that stakeholders aren’t only motivated by financial gain.

We shouldn’t be surprised by any of this. A long line of research on “decoupling” explains why espoused values around corporate purpose often remain separate from action. These findings are consistent with an emerging stream of research on sustainability and social responsibility reporting, in which firms have been shown to emphasize only the elements where they are making progress — and to omit or obfuscate information that might shed a negative light on their activities.

One reason for the decoupling of talk from action is that achieving social or environmental objectives might simply be seen as too costly, given that it can require major investments and changes to organizational practices. Separating talk from action helps to maintain an organization’s legitimacy while at the same time, avoiding expensive changes.

Journalists have documented these challenges, whether it be Shell selling off polluting oil sites to improve its own environmental performance only to have them scooped up by smaller under-the-radar firms that have engaged in even more polluting practices; Tesco claiming the full recyclability of its plastic bags only for investigators to find that most of them are making their way to be burned in Eastern Europe; or Delta Airlines claiming net zero through the purchase of carbon credits that have not in practice led to any greater conservation of forested lands.

We are at an important inflection point in understanding these kinds of behaviours — and what can be done to truly engage for-profit firms in the quest for a more equitable, sustainable and just society.

The purpose of purpose: Instrumental or moral?

Implicit in this discussion are two different stances on “the purpose of purpose.” The instrumental version aligns with a business-case framing, whereby purpose and profits reinforce each other. The underpinnings of this idea rest in the notion of relational contracts, whereby articulating a purpose motivates stakeholders to trust the firm and work harder for it. In this conceptualization, corporate purpose thus enhances value creation — although there is an unstated assumption that the firm will capture at least as much of the value needed to assure its efforts are profitable.

The second approach — the moral version — suggests that there are tensions and trade-offs between profits and a moral sense of purpose. Here, purpose is considered prosocial and is tied to an organization’s moral values. The focus is not only on maximizing value creation, but also on distributing value across stakeholders.

This is not to say that the moral approach needs to ultimately be unprofitable. The story of Dick’s Sporting Goods and its decision to stop selling guns in some stores (in response to the school shootings in Parkland, Florida) illustrates this point. CEO Ed Stack had reason to believe that his company would lose at least US$250 million by taking this stance but said at the time, “I don’t really care what the financial implication is.” They even destroyed $5 million worth of guns rather than send them back to the gun makers.

Indeed, Dick’s was initially subject to employee resignations and calls for boycotts. Yet, much to Ed Stack’s and others’ surprise, sales actually increased at the stores where guns were discontinued. So, they took guns out of even more stores, and then more. Each time they did, same-store sales went up, as did the stock price. The key here is that Stack didn’t know ahead of time that his action would be a win for shareholders. Indeed, he anticipated the opposite; but he took the action anyway.

Before leaders can commit to a moral approach, they must answer two questions:

1. How do we define value creation? The default definitions are “economic performance of the firm” and “economic gains for the stakeholder.” At the same time, it has been well established that shareholders, managers, workers and other stakeholders aren’t only motivated by financial gain. Investors, for example, might want to realize adequate financial returns but also avoid investing in companies that make guns, contribute disproportionately to greenhouse gas emissions or treat their workers poorly. And workers might want to make a good wage but also to work for a company whose values they believe in.

2. How will we connect our purpose to action? If required actions are not clarified, purpose risks being like most of our New Year’s resolutions — easily made and easily broken. In this approach, purpose creates value for stakeholders and must also have actionable paths to achieving those aims. Research indicates that the only way firms can avoid decoupling and engage in the true pursuit of purpose is by working through trade-offs on a task-by-task basis so that the innovative and transformational solutions that are needed can emerge.

Defining stakeholders

The next question then becomes, Who counts as a stakeholder? This is a question that both scholars and practitioners have trouble answering. For instance, it is important to recognize that in the case of Indigenous Peoples, they are not simply one set among many stakeholder groups. Many Indigenous People reject the designation of stakeholder, which implies that their interests are being balanced with other interests, rather than affirming their inherent rights. These inherent rights have been recognized in the UN Declaration on the Rights of Indigenous Peoples.

Original stakeholder theory was developed in the 1980s and ‘90s, defining a stakeholder as “any identifiable group or individual who can affect or is affected by the achievement of the organization’s objectives.” What is appealing about this definition is that it accommodates both the material impacts to the company (who can affect) as well as the externalities (external impacts), which could be either positive or negative. The issue is, under this definition it is not easy to figure out who is in and who is out. This is one of the key challenges that New Stakeholder Theory (NST) has taken up as a complement to original stakeholder theory.

NST — as developed by my Rotman School colleague, Anita McGahan, draws from the Team Production Model in Economics as the theoretical underpinning for sorting out “who counts.” In this framework, enfranchised stakeholders are defined as those who assemble to co-create value because their collective efforts will be greater than the sum of the parts. However, this approach does not accommodate stakeholders who do not engage in creating collective value but might be harmed by the firm’s activities.

In addition, this approach does not deal adequately with power imbalances across various stakeholders or the possibility that harm to stakeholders may be difficult to anticipate and only emerge over time. Researchers have addressed this complexity by identifying stakeholders according to the extent to which they make themselves known and felt by the offending firms — be that through protests, Twitter storms or lawsuits. Once an issue is framed by the firm as being salient, then the sets of stakeholders associated with that particular issue come to be identified.

In their research, Sophie Bacq (Indiana University) and Ruth Aguilera (Northeastern) have proposed a framework in which stakeholders have three forms of power, or a combination thereof:

1.           COERCIVE POWER (the ability to impose constraints);

2.           UTILITARIAN POWER (possession of needed resources); and

3.           NORMATIVE POWER (their interests are aligned with the stated purpose of the firm).

In most of existing stakeholder theory, only stakeholders with coercive or utilitarian power get counted. Although this represents progress on the “who counts as a stakeholder?” question, two difficulties remain. First, it is still unclear how less-powerful and uninformed stakeholders get a chance to participate in the deliberation process. And second, such broad definitions of stakeholders could inadvertently legitimize the organization as the mediator of stakeholder claims.

What organizations need to embrace is a definition of stakeholders that is as comprehensive as that of original stakeholder theory (i.e. “who affects and is affected by”) but that also addresses power imbalances — especially for those who might be harmed by a firm’s activities.

If we take purpose seriously…

Despite all the progress being made on New Stakeholder Theory, Friedman-esque beliefs — that the sole purpose of the firm is to make profits — continue to have a grip on business. One hears it in the corporate hallways and even from business students. Yet this view is increasingly problematic in the face of 21st-century challenges.

Friedman made two claims about why and how corporations should focus only on profits: first, that they should only do this within the rules of the game set by governments to assure the functioning of markets; and second, that if managers want to work on social issues, they should accomplish this with their own personal charitable giving.

I would argue that these two conditions are no longer met, if they ever were. Additionally, this has implications for how we conceptualize the firm. Although many would like governments and regulators to constrain the negative impacts of corporations, there is not much evidence that there is sustained political will to change laws and regulations at the pace and scale needed to address important challenges like climate change.

In part, this is because of regulatory capture in which companies have co-opted the political processes of setting the rules of the game. Personal charitable giving (not even with the exception of Bill and Melinda Gates or MacKenzie Scott and other super-wealthy types) will never be able to cope with the complexities associated with the grand challenges we face. This is all the more reason to conceptualize the firm in new ways.

Equally important, firms may have unique capabilities to orchestrate joint value creation across stakeholders. Any particular organization could have a comparative advantage in achieving a specific set of goals. Finding solutions to collective action problems requires context-specific knowledge, much trial and error, and a collaborative willingness to engage. These new conceptions of organizations begin to point to models of organizing that ‘decentre’ the firm.

The vast majority of the literature in management on firm stakeholder relations focuses on how companies can defend themselves or selectively respond to stakeholder pressures. For example, research shows that when companies face tough environmental demands at home, they are more likely to source from their own or other’s operations in countries with lower standards. In another example, Walmart uses low-cost probes to ‘test for protest’ in communities being considered for new store locations, avoiding places where protests might emerge or donating to charities to diffuse the opposition.

Increasingly, scholars are documenting new models of stakeholder engagement in which all parties work together to create common ground for action in cycles that often involve conflict and innovation. Ecological, feminist and Indigenous ways of knowing — long neglected in mainstream management thinking — can provide support for advancing these ideas. They point us to conceptualizations of purpose as made of reciprocal processes in which actions and outcomes are jointly determined amongst all stakeholders who exist in a web of relations. Here, the firm is not at the centre, nor even the first among equals — but simply one contributor among many.

Originators of stakeholder theory suggest that stakeholder analysis starts with identifying a focal organization and putting it at the centre with “primary” and then “secondary” stakeholders surrounding it. However, when considering the scope of the challenges that face our planet, taking such a firm-centred view is not likely to produce useful insights or practical impact on solving problems.

Even as we explore more collaborative forms of engagement in which the firm moves away from the centre, we will want to be attuned to the potential for conflict. Marginalized stakeholders cannot simply be brought into collaboration without reconsidering the rules of engagement such that those with the most power, skills and resources do not dominate or predetermine the outcome.

Increasingly, innovation is being seen as central to the pursuit of purpose and corresponding efforts to address diverse and often conflicting stakeholder interests. Research indicates that the link between purpose and profits is strongest for the most innovative firms and that a strong organizational purpose creates a shared identity that encourages employees to take more risks, which thus contributes to more innovative outcomes.

The emergence of novel solutions depends on how the joint pursuit of purpose and profits is organized, and the development of sustainable products is more successful when organizations embed purpose in their culture. More importantly, this innovation is seen to emerge through co-creation where stakeholders share information that leads to more innovative insights. As I argued in my book, The 360º Corporation, innovation may be seen as the primary tool for breaking out of trade-offs, whether those are between profits and purpose or between various conflicting stakeholder interests.

Instead of seeing trade-offs as problematic or irreconcilable, an innovation lens offers the opportunity to examine the ways that organizations might thrive when tensions are most evident. Rather than defending against stakeholder pressures, organizations can co-create with them to find acceptable solutions. Given that addressing stakeholder trade-offs is not easy, learning how innovative experiments might enable organizations to move forward, even if somewhat imperfectly, may advance our understanding of how to enact corporate purpose.

Moving forward

The predominant corporate governance systems for publicly traded firms may never fully enable the pursuit of social purpose. Fair value distribution, decentering the organization and co-creation may risk falling victim to the quarterly earnings call and the corresponding pursuit of the business case for action.

There is likely not one governance approach that will work, as different problems and circumstances will require different solutions. Benefit corporations — for-profit entities that include some social objectives in their legally defined goals — are touted as a means to reimagine capitalism. Yet, it is unclear whether they will be the ultimate solution that many have hoped. Benefit corporations can be subject to mission drift; there is little accountability for the supposed goals they set; and as recently evidenced by companies like Etsy, companies can drop their certification whenever they feel it is impinging on profits. To be successful, such approaches involve bowing before the dual gods of profits and purpose to sustain some form of organizational hybridity.

Models of polycentric governance respond more closely to the stakeholder imperative, where firms invest in a pool of resources that are available to communities beyond the firms’ direct exchange partners and help to manage the trade-offs between the interests of different parties.

Cooperatives, in which the owners are the employees, producers or customers, are also — by design — oriented to (at least some) stakeholders and have been shown to create community and regional economic resilience better than shareholder value-oriented firms. Indigenous corporate governance models also highlight the need for longer time horizons (and the elimination of short-termism) and new approaches to voting rights and ownership rules to reflect Indigenous themes of equality, inclusivity, respect and sustainability.

Many in the corporate trenches, such as former Unilever CEO Paul Polman, have called for courageous leaders who can deal with the discomfort that comes with assuring a purpose-driven organization: “It is uncomfortable to take responsibility for the total handprint you have in society. It is uncomfortable to work with other people when you’re not totally in charge and can’t set the agenda or might have to hear some inconvenient truths. That takes courage.”

This kind of co-creation is not for the faint of heart. How does one lead when they are not totally in charge? This requires living with, or even revelling in, paradoxes at the firm, occupational and individual levels where no immediate solutions are evident. It also requires moral imagination.

There are many open questions about whether purpose should have instrumental or moral foundations, how to put boundaries around who counts as a stakeholder and how engagement can lead to the fair distribution of value. We are in the midst of a great burgeoning of experimentation in both research and practice to continue to answer these questions. The agenda is ambitious — and necessarily so.

Purpose-driven leadership is not just for CEOs. It is going to take each and every one of us — in our roles as practitioners, stakeholders and academics — to transform our own practices and seek the radical transformations that have the potential to save our society and our planet. Make no mistake: Progress depends upon it.

This is an abridged version of an article that was published in Strategy Science’s special issue on corporate purpose. 

Sarah Kaplan is a professor of gender and the economy and professor of strategic management at the Rotman School of Management.