Today we met with 25 investors and corporate leaders in Davos to discuss the changes needed to get more investors to allocate resources to shared value companies.
As highlighted by Michael Porter at the May 2018 Shared Leadership Value Summit, adoption of shared value strategies may be at an inflection point: major investors like Blackrock are focusing on purpose-driven companies because they are both good investments and can help restore faith in business as they create the long-term conditions for a more inclusive, stable and prosperous society.
Yet, as raised in the roundtable, enormous confusion reigns around how investing practices should change; specifically, or conversely, what shared value companies should do to illustrate how their purpose-driven strategies create value for business and society.
George Serafeim, Mark Kramer and Michael Porter of Harvard Business School shared new research and thinking on the subject while Barbara Novick, Blackrock Vice Chair, and Laurent Freixe, EVP Nestlé and Head of Zone Americas matched these comments with a description of new practices emerging in their companies.
Two major themes emerged —
First, purpose needs substance to lead and be linked to shared value creation: an authentic purpose is specific, calling for a differentiated value proposition to society, not a generic tag-line. Purpose that creates value guides strategy and choices throughout the company, and that linkage is widely shared and understood throughout the corporation and beyond. Purpose will lead to value creation when it is believed to be meaningful by all levels of the organization, not just the top. Employees’ beliefs about their company’s purpose are becoming material information for purpose-driven investors.
Second, there’s a great need to reduce the noise on what is communicated about the company’s societal impacts and focus on what matters most. What are its major societal risks and which ESG (environmental, social and governance) measures address these? Where is impact material to the specific industry in which the company is operating and how is it doing versus peers? Most importantly, what differentiated purpose-driven strategies is the company pursuing and how much shared value is created? What is not sufficiently understood is how ESG measures operate on these three levels: some relevant to all companies, some material to specific industries and some strategic for individual companies.
New research by George Serafeim highlights why such nuance is important: companies that adopt common industry ESG practices are perceived as lower risk with higher valuations, while companies that have strategic and differentiated approaches to ESG also have higher return in capital, indicating that when ESG is linked to strategy it creates competitive advantage and superior profitability.
Both the investors and companies need to move into “standard” ways to communicate such nuanced information to help accelerate a positive alliance between purpose-driven, long-term investors, and equally purpose-driven, long-term shared value creating companies.