This is a summary from the Keynote Address by the same title by Alex Edman, Finance Professor, London Business School, at the Future of Electrification 2023 conference. Watch the full session here:
During his keynote address, Professor Alex Edmans, drawing on 15 years of experience in sustainable finance, discussed the concept of purpose-driven companies. He suggested that they have greater potential for success in comparison with their profit-driven counterparts, especially in sectors with growth opportunities, such as electrification. Throughout the presentation, Edmans emphasized that being purposeful is not just about being altruistic; it’s about finding a focus and creating value for society. A well-defined purpose guides a company's existence, defines its role in the world, and identifies the stakeholders it serves. By aligning their goals with solving specific challenges efficiently and innovatively, purpose-driven companies can create value for both their businesses and society.
To illustrate the impact of purpose-driven initiatives, Edmans shared an example from another industry. In the early 2000s, Vodafone, a UK-based telecom company, noticed that in Kenya customers were using their phones to transfer mobile minutes to each other as a form of currency. This gave Vodafone the idea to use their technology to allow people to transfer, not just minutes, but money. At that time 15 million Kenyans were without a bank. They had to rely on cash, which could be forged, stolen, or lost. This led Vodafone to launch Za, a mobile money service in Kenya that allows customers to transfer money as easily as sending a text message without a bank account. The launch of this service had a huge societal impact. Za, which was driven by the purpose of solving financial inclusion, not only transformed lives by lifting people out of poverty but also became a profitable venture for the company.
Edmans urged those in the electrification industry to find a similar sense of purpose in order to spark innovation and effectively address the global challenge of climate change. He asked, “If we see electrification as a solution to this big global problem, can it inspire us, can it spur us, can it lead us to be more innovative, and more committed to excellence than we might already be?”
Referencing his book "Grow the Pie," Edmans introduced the analogy of the value a company creates being akin to a pie, divided between profits for investors and societal value for the broader community. He explained that the common approach of pursuing profits by taking from society might lead to short-term gains for companies, but could ultimately shrink the pie. When companies prioritize societal value, they can ultimately reap higher profits and become more resilient to adverse conditions, such as economic recessions.
Edmans supported his arguments with evidence, citing a study of the hundred best companies to work for in America. The research demonstrated that companies prioritizing employee satisfaction consistently outperformed their peers in shareholder returns over a 28-year period, even during challenging economic conditions.
To operationalize purpose, Edmans explained that companies need to avoid the trap of trying to solve every problem in the world and spreading themselves thin. Instead, they should identify a few key issues where they can excel and make a significant impact. He also emphasized recognizing and communicating the purpose behind everyday tasks within a company. By understanding how their work contributes to a broader objective, employees can find the motivation to excel and embrace innovation. He further suggested an alternative approach, encouraging companies to continue to perform tasks in a routine manner but to ensure a distinct purpose is instilled. A familiar analogy illustrates this concept: envision three individuals engaged in identical activities. One says, "I'm laying bricks," the second expresses, "I'm making a living," and the third declares, "I'm building a legacy." While all three are involved in the same task, one of them recognizes the greater purpose.
While purpose-driven companies can bring about positive change, Edmans acknowledged that there may be side effects. For example, electrification technology may lead to job losses in some areas. However, the responsibility to address these side effects does not solely rest on the shoulders of individual companies. It is a collective effort that involves governments, other companies, and society as a whole.
For companies aiming to embrace a purpose-driven approach, Edmans suggested the following starting points.
- Utilization of data and evidence to debunk the misconception that purpose is just about being "woke" or idealistic. By highlighting the measurable impact of purpose on long-term success, companies can cultivate a mindset that extends beyond altruism.
- Implementation of long-term incentives within the corporate structure. Tying CEO pay to long-term performance encourages company leaders to prioritize sustainable growth over short-term gains. This ensures corporate decisions and innovations are driven by a commitment to long-term societal and environmental well-being.
- Identification of a company’s unique strengths and resources. Companies should creatively leverage their resources to address specific societal needs. This ensures that purpose-driven initiatives are not only impactful but also capitalize on the company's core competencies.
- Reallocation of resources to support purpose-driven goals. Critically evaluate activities, ceasing those that don’t support goals, to make room for initiatives that best align with the company's overarching purpose.
To tackle the pressing issue of climate change and propel electrification into the mainstream, Edmans advised conference attendees “Your goal is to be as innovative, creative, and bold as possible with electrification technology.” He urged, “Ask these questions: What is in your hand? What are the resources? What is the expertise that your company has? And how can you use these resources and this expertise to serve society if you think more creatively?” Companies that prioritize solutions that serve both society and the company's goals, can “grow their pie,” achieving success that extends beyond financial gains. By taking this approach they position themselves as leaders in sustainable practices and contribute to a brighter future for all.