The profit of purpose: Introducing the concept of “intentionality”

‘The best way to maximise profits over the long term is not to make profits a primary goal.’ So said John Mackey, CEO and founder of Whole Foods Market.

As impact investors, a company’s stated corporate purpose can tell us about its intentionality to effect positive environmental or social change. This is at odds with the traditional perspective that companies should simply aim to maximise profits and as a result shareholder value (Friedman 1961), Yet, research suggests that where corporate purpose is associated with better stockmarket performance when it:

  • is carefully defined
  • is clearly articulated
  • has sufficient resources
  • is especially held within the middle ranks of an organisation.

Purpose and loyalty

It’s also especially the case for the sorts of knowledge-based, intangible-heavy businesses that we typically invest in. A shared purpose creates a sense of belonging. Something over and above compensation, which binds employees together and means they are more likely to stay loyal – which keeps the tacit, intangible capital at the firm. When your greatest assets go home every night, purpose can help to ensure they come back tomorrow.

However, to be genuine, purpose needs to be embedded in both a company’s strategy (its products and services) and culture (its practices). The latter reflects how a company operates. Difficult to measure and quantify, culture is only really ever conveyed via a context-specific narrative. It also tends to manifest itself over periods of years. But it is exactly because it is so hard to define and establish that it can yield competitive advantages which are powerful.

ESG as a competitive advantage?

If you frame ESG only in the context of a company’s operational practices (which we believe most investors still do), research shows (and we would agree) that culture is the only ESG consideration that can offer a competitive advantage over the longer-term. Yes, the business case for companies to undertake more sustainable practices across their organisations is now well established. And, yes, as investors we need to protect the value of our portfolio by giving careful consideration to how companies operate. However, rarely do sustainability practices (ex-culture) offer any long-term competitive advantage for corporates.

Why is this? As the saying goes, ‘imitation is the sincerest form of flattery’. Over time, sustainability best practice becomes sustainability common practice. Companies simply imitate their peers. And this convergence is quickest in sectors where those practices are most material.

Moving past the herd

Ironically, this process might also have been accelerated by investors and ESG rating agencies all seeking the same things from the companies that they invest in! Third-party ESG ratings, with their typical focus on company disclosure offer relatively little insight into corporate culture or in turn which companies might be the most successful over the long term.

Yes talk is cheap. We have all read purpose statements which reference serving customers, colleagues, suppliers, the environment, communities and shareholders. A generic corporate purpose serves nobody. However, where it is focused, selective and embedded in a company’s strategy and culture, research suggests that corporate purpose can offer powerful and sustainable competitive advantages.

- Corporate Purpose and Financial Performance – Claudine Gartenberg, Andrea Prat, George Serafeim
- Capitalism without Capital: The rise of the Intangible Economy – Jonathan Haskel
- Corporate sustainability – A strategy? - Ioannis Ioannou and George Serafeim
- Obliquity –

Ryan Smith is co-manager of the recently-launched Artemis Positive Future Fund.

Find out more about the Artemis Positive Future Fund