The Long-Term Business Case for Corporate Purpose

His article, published in the journal Strategy Science, finds a link between a corporate purpose that emphasizes harmony among a wider set of stakeholders—customers, suppliers, communities, and government—and longer-term value creation. These stronger “relational contracts” lead stakeholders to contribute more to the firm’s success because they see their contributions as worthwhile and likely to be rewarded fairly, according to the paper.

“One of the biggest risks is that, if executives can greenwash, and everybody believes their cheap talk, we will default back to shareholder primacy, neglecting other stakeholders and focusing on short-term thinking,” Henisz says. “So, it’s important for stakeholders to work together and ensure that ESG reporting becomes more reliable and comparable, so we can identify and expose deceptive messaging.”

Additionally, Henisz says that business leaders should focus less on stakeholders that are acting in their own self-interest, opportunistically, because this hampers progress toward wider goals. “For example, they might demand too good of a deal, in which case the firm can cut them out and receive support from other stakeholders for doing so,” he says.

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That said, harmonizing varied stakeholder interests can take substantial time and effort, though Henisz insists that it’s well worth it. “By spending upfront to nurture these relationships, you fix all the problems early on, so you have less disputes down the road. We need firms to think about stakeholder relationships as an investment instead of a cost to be managed.”

He warned, however, that addressing every stakeholder concern can spread resources too thinly, undermining the ability to achieve organizational goals. Reflecting this, a working paper co-authored by Henisz finds that when companies focus on issues that are relevant to stakeholders but also financially material to the firm, there’s a boost to revenue growth and productivity, more than offsetting margin loss. In contrast, less-targeted resource allocation to ESG issues creates stakeholder support but no net financial gain, the study shows.

Lastly, Henisz says that managers themselves can be their own worst enemy when it comes to delivering on their wider corporate purpose, given that virtue-claiming or “greenwashing” is a significant problem. Another white paper co-authored by Henisz shows that when an organization “walks the talk” and addresses key stakeholder concerns, they invest more in research and development (seeding innovation) and enjoy higher and more stable return on invested capital, while also reporting higher sales growth over 10 years, based on a sample of firms in the MSCI ACWI stock market index.

Management

The Long-Term Business Case for Corporate Purpose

Business leaders don’t have to choose between their values and creating value

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Consistent with this view, a white paper written by Henisz about his work with activist hedge fund investor Engine No. 1 demonstrates that an investment portfolio containing a larger percentage of S&P 500 firms with higher “total” vs. shareholder value, and fewer companies with lower such ratios, substantially outperforms benchmarks.

Corporate purpose and harmonizing stakeholder interests

Published: Tuesday, August 15, 2023 – 12:02

“There’s been a big debate about whether firms should maximize shareholder value or focus on a broader purpose, but those two aims are not necessarily in conflict,” says Henisz, the vice dean and faculty director of Wharton’s ESG Initiative. “Managers don’t have to choose between value and values.”

“That means they’re going to work harder and chip in that little bit more,” Henisz says. “And then when it comes to value distribution, they’re not fighting so much about who collects the rents. That means the company is around for the longer term. Everyone ends up better off, even shareholders.”

Setting a clear and credible corporate purpose beyond short-term wealth generation can speed the process up. A good place to start is having an open dialogue with stakeholders; Henisz says executives can’t define their wider mission in an ivory tower. “Spend time talking to stakeholders and treating them as part of the value-creation process. Ask them about their goals and try to find some that overlap—this is your area of win-win.”

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It is a phenomenon known as the “war on woke”: the political backlash against investments in companies with a corporate purpose beyond profit maximization. Some U.S. lawmakers have argued that environmental, social, and governance (ESG) investing undermines financial returns. However, a new paper by Wharton management professor Witold Henisz sets out the long-term business case for managers to pursue a wider purpose that contributes to societal goals, even as they face pushback from some in Washington.

‘Spend time talking to stakeholders and treating them as part of the value-creation process. Ask them about their goals and try to find some that overlap—this is your area of win-win.’
— Witold Henisz

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“Many people will want you to fix climate change or cure poverty, but no one company can do this alone. So, you need to prioritize issues,” says Henisz. “The best place to contribute is in areas that relate to your business. If you’re a food company, you’ll have a bigger impact on hunger or water scarcity than on education or healthcare. Stakeholders will understand this if you frame it in terms of maximizing impact and avoiding distractions.”

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First published July 11, 2023, by Knowledge at Wharton.