Lately, many CEOs have promised to shift their business models to focus on the purpose of their organizations. It’s not enough for leaders to just talk about purpose; it needs to be embedded in every fiber of the company. During a McKinsey Live webinar, senior partners Dame Vivian Hunt and Bruce Simpson discussed the importance of organizational purpose, particularly as it relates to COVID-19, explained its implementation, and shared examples of organizations that have done this successfully.
Why is purpose important?
When companies are created, they typically have a purpose, a guiding lens for business decisions that reflect the company’s core reason for being. Purpose answers the tough question “What would the world lose if the company disappeared?” It also anchors a company’s environmental, social, and governance (ESG) priorities, which measure societal impact and external risks. However, for some it can be surprisingly difficult to articulate their company’s exact purpose in society. Others may lose sight of their original purpose, requiring a reset or reinvigoration to redefine themselves. CEOs tell us that they are spending a significant amount of their time on that very question. The good news is that companies that have activated their purpose see the benefits. In fact, purpose can unlock five sources of value: top-line growth and portfolio shifts; cost reduction; mitigation of climate-transition risks; greater employee engagement, well-being, and productivity; and lower capital costs.
Even before the pandemic began, businesses were starting to realize that stakeholders’ expectations were making it necessary to focus on organizational purpose. Now, with the crisis affecting health, the economy, climate change, and social justice, there’s an even greater need to make purpose much more than a mission statement. To create an authentic purpose narrative, a company must take the following steps:
- Explore and engage with the world by determining your company’s heritage (what made you great?) and how its ESG achievements compare with those of its peers.
- Define your company’s contribution by developing a credible purpose narrative that takes into account your company’s unique “superpower” (where a company’s strengths intersect with societal needs) and vulnerabilities and is backed by specific ESG commitments.
- Embed the purpose in the company, so that it’s central to decision making throughout the organization, particularly at lower levels, and is reflected in its products and services.
- Publicly commit to the purpose, along with specific targets and metrics. This enhances authenticity by making progress measurable and embedding it in core operations.
What are the essential elements to embedding a purpose narrative into your company?
Hunt and Simpson have found that embedding organizational purpose in these five elements (referred to as the “five Ps”) is critical to embedding purpose in a company, and they provide examples to illustrate each:
- Portfolio strategy and products
- People and culture
- Processes and systems
- Performance metrics (including targets and a link between purpose and business initiatives)
- Positions and engagement
Embedding organizational purpose is far from easy. However, rebuilding a company after the COVID-19 crisis will be easier for businesses that are centered on their purpose. It will require a company to take an emotional journey, engaging employees and linking personal purpose to organizational purpose. It also requires a rational journey that includes benchmarking, goal setting, and measurement. It can take two to four years to build the competencies and business capabilities that are necessary and sustainable. A clear purpose narrative and an authentic purpose infused throughout the organization can provide a company with resilience, competitive advantage, and a solid foundation for recovery during challenging times.
Q&A from the ‘Purpose vs PR’ webinar
- What are companies getting wrong? What are some common challenges to the implementation of organizational purpose?
- Leaning into “superpowers” without addressing vulnerabilities. Addressing vulnerabilities builds credibility. For example, stopping sales of a product (e.g., cigarettes) with a negative ESG impact. This shores up the company’s reputation and avoids a sense of “purpose washing.”
- Spending insufficient time tailoring purpose to team and employee aspirations. Purpose needs to be role-modeled at the top-levels of management. A purpose journey also needs to frequently engage the entire organization and employees in order to link personal purpose to team and organizational purpose.
- Treating purpose as a PR rather than a business exercise. When purpose is embedded in the DNA of the core business, it influences strategic trade-offs, processes, and product decisions, and specific key performance indicators. When embedded, purpose can help guide actions in challenging times.
- Robbing Peter to pay Paul. Companies that dial back environmental initiatives to finance social or governance initiatives during COVID-19 will be criticized for not sustaining existing commitments. This undermines credibility.
- Lacking substantial short-term commitments alongside long-term goals. Commit to long-term purpose/ESG goals with measurable short-term milestones (e.g., the year 2022) to external reporting structures (e.g., the Sustainability Accounting Standards Board) to increase credibility. Companies that have made 2050 commitments on carbon neutrality without short-term milestones are criticized.
- Cooking purpose in an internal kitchen without engaging external stakeholders. Purpose is about integrating a multi-stakeholder view. Stakeholders need to feel part of the purpose journey from the beginning.
- Are ESG and purpose synonymous? If not, what would you say is the difference between the two?
A useful framing, we find, is to compare the breadth of ESG with the uniqueness of purpose.
- What can we do to reconcile tensions when needs driven by purpose or ESG priorities contradict commercial needs?
When leaders actively seek to embed purpose throughout their organizations, ESG feels less like a cost of doing business and more like a source of competitive advantage. That comes from a purpose that is embedded and authentic rather than forced or tacked on. Some ESG-oriented initiatives, such as increasing frontline pay, training, and benefits, carry short-term costs that affect profitably. In the long run, however, benefits from lower attrition, greater loyalty, and increased engagement deliver returns. (The webinar includes a wide range of examples of how companies have successfully done this.)
Purpose defines a company's core reason for being. It is often explained using ESG terms, and it should anchor ESG priorities. ESG encompasses different expectations that stakeholders have about the impact of business on the environment, society (e.g., labor practices, community impact, and diversity and inclusion), and a company’s areas of accountability. It also provides a structured framework to link to measures of progress.
Purpose, on the other hand, helps the company prioritize the few areas where its unique strengths intersect with the broader ESG targets, which guides the company toward areas where it wants to “win” as opposed to the areas where, at least for now, it just wants to “play.”
Once you’ve determined which ESG initiatives are musts, the next step is to embed them in the organization. The five Ps listed above can serve as a practical checklist.
For more on this topic, please watch the webinar recording and Dame Vivian’s TED talk and read the McKinsey Quarterly articles “More than a mission statement: How the 5Ps embed purpose to deliver value” and “The case for stakeholder capitalism.”