For anyone who thinks that corporate purpose and stakeholder perspectives are at odds with the interests of shareholders, think again, says Greg Milano, CEO of Fortuna Advisors LLC, and author of Curing Corporate Short-Termism.
A report released on Oct. 21 by CECP’s CEO Investor Forum and Fortuna Advisors conclusively shows that companies perceived as having higher purpose deliver higher returns on capital, attract higher valuation multiples, and generate much higher total shareholder return (TSR).
For companies with higher purpose, annualized TSRs are 20% higher, return on capital is 6 percentage points higher, and valuation multiples are 4 times EBITDA higher, according to the report, “The Return on Purpose: Before and During a Crisis,” written by CEO Investor Forum’s Brian Tomlinson and Alexa Testerman Yiğit and Fortuna’s Milano and Riley Whatley.
The 13-page paper analyzes the impact of corporate purpose on performance through a new dataset, developed by BERA Brand Management, based on consumer perceptions of corporate purpose for 13 different attributes across more than 200 brands. (See Exhibit: BERA Purpose Framework.)
The paper also reviews the state of play in the debate on corporate purpose and draws on the results of a survey of CEOs of large-cap US companies. The results of the CEO survey, conducted between June 9 and July 21, 2020, indicate that CEOs increasingly see corporate purpose as a key element in competitive differentiation and strategy development.
The study’s authors reached three main conclusions, while acknowledging the skepticism that the dialogue around corporate purpose generates:
1. Corporate purpose is a dynamic and complex concept with significant implications for chief executives, investors, policy makers and consumers. An authentic corporate purpose, experienced through the brand and lived through the strategy, can help create shareholder value.
2. Corporate purpose has the potential to create value across stakeholder groups, though the stakeholder value paradigm is not a world free of trade-offs. Quite the opposite — it requires a clear strategic vision to decide who and what to invest in and why.
3. Corporations should continue to demonstrate that they have an authentic purpose, how it was arrived at, how it impacts the way the business is managed and overseen, and how the company interacts with key stakeholder groups. Corporations that develop and demonstrate a clear corporate purpose appear well-positioned to realize a return on purpose over the long term and through the uncertainty of crises.
“This is not merely good corporate citizenship. Smart CEOs recognize suppliers can serve as important centers of efficiency, innovation and growth,” the authors argue. “Though value can be won in the short-term at the expense of suppliers, CEOs can achieve much greater long-term value creation through effective reinvestment in the supplier ecosystem, especially during periods of crisis.”