Inside Companies that Get the Purpose-Profit Balance Right

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Welcome to the hbr ideacast from harvard business review. I'm alison beard. Purpose has become a corporate buzzword over the past decade. Leaders are embracing the idea that companies can't just do well financially, they also have to do good for society. But how many organizations are really walking the talk? How many get beyond mission statements and publicity stunts to identify and pursue a purpose that will lead to business as well as benefiting a broader set of stakeholders? How many dig deep down into the messy work of making trade offs between those stakeholders when there aren't any win win solutions? How many keep at it day after day, quarter after quarter, year after year? Our guest today has studied companies around the world that do all of the above. He acknowledges that it's not easy, but he's found common principles and themes in the way they operate that he thinks other companies can and should try to emulate. Ranjay Gholati is a professor at Harvard Business School and the author of Deep Purpose, the Heart and Soul of High Performance Companies and the related HBR article the Messy but Essential Pursuit of Purpose and Full Disclosure. He's also one of my favorite collaborators and a friend. Ranjay, I'm so happy to have you on the show.

Alison. Thank you so much.

So why have you chosen to study purpose?

You know, five years ago, Alison, if you told me that I was gonna write a book about purpose, I would have told you you're crazy. No way. To me, purpose was like wallpaper. Purpose was like purpose statements. My observation was no one took those seriously. It was just a checkbox task that people undertook. Once in a while they dusted off but never really did much with. And I had a series of epiphanies that came to me over time. One of them came from my AMP students, the Advanced Management Program, where I was repeatedly being challenged by students saying, you're talking about how to make companies successful through market strategies and other things, but you need to talk about purpose. And we think it's very important today. And then it was a series of conversations I also had with Larry Fink, CEO of BlackRock, and also two of his colleagues. And they gently but firmly interrogated me, saying, you teach business in a business school. What do you teach about purpose? And what do you teach about businesses in the world today? And I honestly was stumped.

So how can a company define or outline their Purpose in a way that doesn't just feel like window dressing, that isn't superficial.

You need to think about purpose as much bigger than a statement. I think it's, it's how you live it. In fact, Satya Nadella, whom I interviewed for the book, CEO of Microsoft, CEO of Microsoft, told me writing a purpose statement was the beginning and the easy part. What came next was much harder. And so how do you go from a purpose statement to actually living it now? There's several paths to a purpose statement. I want to clarify what I found a set of themes across the companies I looked at. This ideal was typically ambitious. So it had a goal component to had an idealistic cast. So it had a kind of a duty component to acknowledged that we are here to serve an array of stakeholders. And it had this kind of vision of long term value. And it was these four elements and then bringing them alive that really were the magical pieces of this story. I realize a lot of companies practice what I came to call superficial or convenient purpose.

What are the flavors of convenient purpose that we commonly see?

Well, the first, lowest level is what you might call disguise. Purpose as disguise. This is what you also call virtue cloaking. You had Theranos, Purdue Pharmaceutical, Enron and a whole range of other companies kind of latching on. This is purpose in disguise. The next level up from that was what I actually came to call purpose as periphery. So you do it as csr. You're doing some social outreach and you make it sound good and you amplify that. That was purpose on the periphery because you're not changing the core of your business, right? You're working on the margins. Then you come to the more complicated one, which was purpose as win, win. Now, this is a big advance, but it also was limiting because it meant that I will only do something good for society if it's good for me. And so even this was to me a very limiting idea. So these were the three levels of what I would call convenient purpose.

Okay, and so the goal then is to move beyond all of that to deep purpose. And how do companies do that?

I think there are several barriers to overcome. First, the first is realizing that purpose is not a tax on business. Purpose is not charity. Purpose is not giving away things for free to stakeholders to get them off your back. Purpose is actually an animating force to enhance the productivity of your business that you can actually do good and do well at the same time. It's a force to do that. And I think you have to realize that it's a Force multiplier because only then are you going to willing to invest in it. Part of my learning was how does purpose operate as a force multiplier? And so there's the what is purpose question, there's the why it is important, or some would say how does it matter? And then there is the how question.

I know that you studied both sort of large existing companies and startups. Is the process of getting to deep purpose different or the same for each type?

You know, startups in some ways are luckier that they are able to do this earlier from the formative stages, like in embedding DNA. And I looked at a number of them. I mean, I think I found it fascinating to look at Gotham Green, which is an agro farming, urban agro farming company that has now grown massively doing urban farming on rooftops in cities around the country. I looked at Warby Parker and how they have expanded their footprint. I looked at a whole range of ventures, small to large, where the founder and the team had bought into the idea that we need to, from the ground up, have a purpose, which should animate our thinking. It gets harder as you get better, bigger. A there is a purpose decay over time. And you can see that with founders coming back. You know, when Howard Schultz came back to Starbucks, he said, oh, Starbucks has lost its soul. Phil Knight said something similar when he came back to Nike. So you see this kind of boomerang effect of founders returning, talking about this, something spiritual that has been lost. And I think recovering it is challenging, but possible. Another company I looked at, a large company was Lego. And how Lego had to rediscover its essence in the process because many companies who are large, who think about purpose are typically when they're facing kind of serious existential crises. But the process is different. One is embedding it from the get go. One is rediscovering, reminding. But there are some common themes as well across them. I mean, the idea is how do you make purpose part of your daily operating rhythm of all the things you do as a business?

Yeah. And so how do you do that?

Well, let's start from the beginning. First of all, how do you hire? How do you fire, how do you promote? How do you, what are the, what's your culture like? So your people and culture piece needs to connect into your purpose. And one of the fascinating cases I got to write was a case on Pete Carroll, the coach of the Seattle Seahawks football team in Seattle, for those who are international. And Pete Carroll talks about how he worked the purpose and culture to create a high performing organization that how do you get people to show up differently to work? We all know that people, when they experience a sense of pride, are much more energized by the place they work. And this is even more important today. So the first piece was getting the people and culture side right? Once you get that piece locked in, then you start to think about the structure and processes in an organization. So you start to think about how do I empower, how do I think about collaboration in the organization? And once you create this culture of trust and responsibility, which are the two common themes I saw in these organizations, it changes the way you get to organize your business and how you think about structure and process in the organization. It also gets you to think about metrics. How are we going to measure ourselves? But I have to say it all starts with belief.

But of course, we do live in the real world, you know, so you're not always going to be in situations where every decision you make ticks all of those boxes. You know, there are not a ton of win wins in the world or equal win wins. So when companies haven't thought deeply about their purpose, what tends to happen in those cases?

I think when you don't have a clear understanding of your purpose, what you typically start to see is unfocused strategies. First of all, strategies are opportunistic. You see lack of focus over there, right? You see an organization where you live up to what economists have described organizations as a nexus of contracts. People show up to work as a job and you end up defaulting towards shareholder maximization as kind of the only metric you understand. And so you create this kind of self fulfilling loop where that's the organization you're in. We create kind of inert, alienated work environments where people come to work as a job and everyone is focused on looking at only one key metric. And it plays into what cynics like to say. That's the only way.

It's like people have a purpose in mind, but when the going gets tough, they default to all right, but we do have to get this business going and secure our profits and make sure we have a robust P and L and please our shareholders.

True, but the other extreme also is kind of problematic, right? Where you say, I'm only here. Purpose is anything but profit. And one of the cases I wrote was on Etsy, where for a period of time Etsy had this idea that we're a social impact company. They were a B corporation, but they made no money and then they went public also and then they still said we're not going to make any money. And finally there was a little bit of a shareholder revolt and there were some people hovering to take them private again. And then they woke up and they got a new CEO. And when he said, look, we got to make money while doing social impact, they were like, oh my God, the dark side of capitalism. And I think it's a great story because what they did in the process was find a way to do both. The term I like to use for these leaders is practical idealists. They're not mindless, they're not kind of idealists in the sense of like we have to do good for society and shareholders. All of you sit on the sidelines, but they're not also saying, I'm going to hit win win. Everything I do is going to make everybody happy. They understand the art of trade offs, that you have to make calculated choices. So let me go back to Gotham Green. So here's a company that is deeply committed to environment, sustainability. They're doing sustainable farming. You know, they have reduced their water footprint, usage of water, all that stuff. But they had a huge issue, packaging and customers don't want to buy, you know, lettuce and herbs that are not in a packet. They tried every recyclable packaging they could and ultimately they came to the painful realization that pet plastic was the only way to have packaging that keeps produce fresh longer and spoilage was a huge issue. And so how do you say, okay, I'm going to do that, but I'm going to keep an eye looking for other possibilities in the future. So holding ourselves to realistic standards but also being idealistic and understanding this. And I think win win is a very powerful phrase. I think all of us should aspire to. But I think it leads us into a boxes, into a corner where we say I'm only going to do things there. Some things are going to have social impact, not economic and some are going to have economic impact and not social. And how do we manage that or stay in that place of contradiction is a challenge for leaders today.

So just walk me through. You know, I'm trying to lead a purpose driven company. You know, I don't even have to be the CEO. I'm maybe leading a project at a purpose driven company. And I'm faced with this really tricky dilemma in that I can't satisfy both goals. So how do I think about what is important and what I should prioritize in that moment?

So let's take a stylized example here. So let's Say there's two forms of impact, social impact and economic impact. And I'm trying to decide and I'm finding a situation where I'm hitting one and not the other. And so let's look at, say I'm hitting social impact but not commercial impact. And this is a real example of that is the CEO of Walmart came to HBS almost a decade ago, the former CEO and he said that after Hurricane Katrina he was convinced that global warming was real and we needed to do something about it. And he was going to. He mandated that they were going to have solar panels on the rooftops of Walmart stores and this was going to be real. And it was commercially not viable. But he made the commitment to doing it and said, you know what, we're Walmart, we'll find a way in the future to make it viable, but we gotta do it now. We're not gonna wait till it's win win. And he did it. And guess what? They did a few years later. They found a way to make it commercially viable, but he wasn't gonna wait.

That's easy. When you're the CEO of Walmart though I know piles of money at your disposal.

That's true. So now the question is, how can we? Do we have the wherewithal? Does my organization allow this kind of possibility? Now you have the other side too, Alison, that where you have economic impact but no social impact. Now that may look like a slam dunk decision, but there are so many examples of companies. One is called Recruit, a Japanese company where they say economic impact is not enough for us as a threshold to invest in a new idea. We have to understand how it fits into our purpose and their purpose has woven into it commercial and social objectives. And so it's. So you can start to say, okay, the economic imperative is there. How is it going to align with our purpose? How is it going to. Also can we find a way so maybe we don't have anything today. I'm not saying you shy away from that. Take it on and then say, okay, I want to keep looking. This is the Gotham Green example. We are going to do something that is economically beneficial for us. Pet Plastic. But you know what? We commit that we are going to keep looking for a way to, to make this much more socially acceptable in terms of just environmental impact. So I think it's the ability to live in the off diagonal space where you get one and not the other. And how much of one. And this is very painful for companies that have legacy businesses that may not be that great. And they're trying to get out of them. And so how much Runway do we give them to get out of them? And I think we all need to recognize that business is messy, but leaders need to articulate a purpose. Now, how does purpose play into this? I think purpose gives you a framework. It gives you a lens to understand these trade offs and choices.

Yeah. And the goal, if you're finding that you're either pursuing sort of profits before purpose strategy or a purpose before profit strategy, eventually you're trying to move into that profits with purpose. But you make that decision in the short term and then you constantly work on it. You invest in pushing into that win win category at some point in the future. But that takes investment. You can't just rest on your laurels in that question.

There's a bit of a logical, let me take it apart. People always ask this question, performance with purpose, profit with purpose. The moment we ask is it profit or purpose? We are implying that purpose is anything but profit. Even logically, the moment we separate the two out. And I'm saying purpose is bigger than profit. Purpose enables profit. In fact, one of the people I interviewed is Thomas Toon Anderson, the chairman of Orsted, which is this company that's completely turned green in about a decade or so. And he said, I asked him about this performance purpose question and he said, I pity those who think of purpose coming at the expense of performance. Pretty harsh words, but very alliterative. Yeah.

I think though, you know what we're talking about. The fact is that's obviously the goal, you know, having purpose drive performance. But in the short term it's not always going to do that for you. So that's why you have to make these trade offs.

Yeah, that's a great point. Now I must say, you know, Alison, one thing that I've found is that there is a holy grail right now of people on the hunt to empirically demonstrate that purpose and performance are correlated. At least people are trying to measure purpose and index it and say, oh, let me show you how it's correlated or not. I thought maybe what I'll do is since I'm inside these companies and I did interview almost two hundred and fifty people, I said, let me try to understand the pathways by which. Let somebody else try to look at correlations. I want to understand the pathways by which purpose can activate or energize performance. So I went down the pathways and there are four very discrete pathways by which purpose enables performance. The first one is what I call directional. Having a Purpose clarifies direction for you. We all teach strategy saying, focus, focus, focus. While purpose creates an anchor, it also gives you a lens to think more narrowly, but also more broadly. And it's that being able to understand your direction, just like human beings. The other part of it is motivational. How does purpose motivate. Motivate people or inspire them, make them feel inspired about what they're doing. And, you know, in this context, I found a number of organizations that were getting people to the employees to talk about their personal purpose because, you know, purpose is a layered construct. There is life purpose, there is career purpose, and there's job purpose. And the feeling among some of these organizations was that until you can get people to think about their own life purpose, you can't get them to engage with some company's purpose. In fact, the chro of Microsoft, Kathleen Hogan, said to me that one thing she says often is you don't really work for Microsoft until Microsoft works for you. So there's this motivational piece. How do I get people inspired to show up at work? The good old NASA. I'm here, Mr. President. I'm here to put a man on.

The moon right by the janitor.

Yes, exactly. The third one is reputational. And there's plenty of work in marketing right now. There's a booming area on purpose branding that customers actually care about companies that seem to have a purpose. It makes them trust the companies more, whether they. Makes them think they're more virtuous. It signals that they care about us. So there's this purpose around, you know, reputational. And there's a fourth one, which is purpose is relational. It changes the way companies interact with other stakeholders in their community, the suppliers, the ecosystem of partners in their community, nonprofits. In fact, one of the leaders I interviewed said, when you have purpose, it allows you to make demands of your stakeholders rather than reacting to their demands of you. So I think of four benefits there are. And logically I found, and I looked at them empirically, I found this was true. Directional, motivational, reputational, and relational.

Yeah, it seems like communication is hugely important in bringing employees on board, making sure that they feel connected to the corporate purpose and it has some relevance to their own personal purpose. What about in these situations where the company, the higher ups do have to make decisions that might hurt employees, that might not be best for communities. How do leaders communicate why they're doing what they're doing?

It's a great question, and I'll just give you an example over here of one of my former Amp students. Niren Chowdhury, who is the CEO of Panera. And in the middle of COVID when sales basically collapsed to zero in a matter of a week, you know, you have to painful decisions around how am I going to lay off people? I mean, we can't afford it. And so either we go bankrupt or we have to do that. So how do you do that? So one is communicating it with compassion and empathy. But what did they do? They recognized that there were other employers, I.e. cVS and Walgreens, CVS and others who were looking to hire. They were short of people. So they called them and said, listen, we're about to lay off people who are very good. Would you be open to giving them a direct chance to apply to you for a job? How can we help you? How can we offer food? So at Panera what they did was say, we're going to offer food to all of you so you can come in with your family once or twice a week. I forget the exact amount, frequency and eat at a Panera for free. So how are we going to soften that? So one is explaining it clearly with compassion. The other one is that how do we make it so that ultimately we are all human beings trying to do the best we can in a constrained environment. There's a humanity to this, which I think is very important. Even Pete Carroll, the coach of the Seattle Seahawks, I mean, he has to trade players and he's got them thinking, I'm in and I'm committed to you and you to me. But unfortunately, if you're not performing, I'm going to have to let you go. So these are very hard. And I think in purpose organizations it is felt even more because you've committed yourself so deeply to the organization, you're expecting only good things back.

What about investors? How do investors feel about all this?

That I think is a very interesting question and I think is investors. If you look at investors, I think the one view is investors only care about one thing and that is returns. And at some level that's true. You can't say I'm doing purpose, so I'm not delivering returns. I think the message to investors. So if you look at Larry Fink's letters, his first letter was really saying, I want to see some long term vision of you. You don't just tell me your short term performance, show me your long term vision. So long term value is a part of what you see. Many investors have a long time horizons, so they want to understand. So purpose can be a proxy for Talking about your long term vision while delivering short term results. It's also recognizing that an investor who's looking long term also understands that business today is a different place and you have to deliver social impact as well as commercial economic returns. They understand that. But the idea that I'm doing one so I'm going to shortchange you investor, I think it's the answer is and not or and if you think of purpose as a generative force, one that elevates your game, allows you to be more strategic, allows you to have a more powerful brand, allows you to be a talent magnet, be connected to your communities, purpose and performance go hand in hand.

What about communicating those decisions though where you will take a hit in the short term for investing in something that will have greater social impact like Walmart solar panels. You know, if you're not Walmart, if you're a company that is, you know, really working hard to attract strong long term shareholders who believe in you but also really want to see returns, how do you communicate that trade off that you're making?

I will use one word and that is courage. Those are not easy conversations but I'm looking at leaders who are making those trade offs. I'll give you one is Corey Baring at Best Buy and a few others. I mean they are willing to look in the face of investors and say we are doing this because it's the right thing to do. And if you look at the recycling program at Best Buy, they're not making money doing that. Right. But they feel it's the right thing to do.

They're recycling old equipment that people bring in.

Yeah, and they charge customers for it too. They're doing it because they think it's the right thing to do. Now how do you communicate this to investors and say, look, let me help you understand why this is beneficial for us short term and definitely long term. And this is part of a portfolio of things that we as businesses are expected to do. And I think it is an act of courage, I think something that leaders need to do more of.

I think that's a great note to end on. We all need a little bit more courage. Ranjay, thank you so much for being on the show.

Thank you Alison, as always it's a pleasure to talk to you.

That's Ranjay Gulati, professor at Harvard Business School. He's the author of the book Deep Purpose, the Heart and Soul of High Performance Companies and the HBR article the Messy but Essential Pursuit of Purpose. Listeners, we want to hear from you this spring, we'll be airing a special series with Marcus Buckingham on how to find joy in your work. Head to hbr.org loveandwork to answer some questions about your own job and you might just be featured in the show. This episode was produced by Mary Dew. We get technical help from Rob Eckart. Ian Fox is our audio product manager. Thanks for listening to the HBR IdeaCast. I'm Alison Beard.