Reshaping the Relationship Between Purpose and Profit with George Serafeim
Harvard Business School Professor, George Serafeim, is known as the rockstar of ESG. He’s the man blazing the trail, measuring, driving and communicating corporate performance and social impact – a passion he developed growing up in Athens, Greece.
“I witnessed the value of meritocracy and what happens when you don’t have meritocracy in a society, in an environment, and why it is extremely important to be able to give opportunities to people that deserve those opportunities.”
Becoming the Rockstar of ESG
Pursuing the path he’s on, says George, hasn’t been an easy decision. Early in his journey people tried to dissuade him from going down the ESG route, telling him it was a personal career risk, but, he says, let this be a clear lesson to other leaders in terms of embarking on their own sustainability journey.
Change is hard, doing something different isn’t easy, going against the tide is always going to draw naysayers, your work will be misunderstood. The differentiation, the newness it exposes will expose you to individual risk.
“But for me, it has been an incredible journey. I have met an amazing number of people, including Reynir. And I have learned a lot I would say throughout the journey. So for me that risk is well worth it. When I look back at it.”
That ESG has become such a focal point globally isn’t a surprise for George. The reason being, he says, is because he has a great privilege in observing where the top talent is going to in the economy.
As a professor at Harvard Business School, he sees the best of the best on a daily basis. He gets to interact with the most talented young people. He observes what drives them from the moment they wake up in the morning, he learns where they want to work and what work they want to do, and year over year, he says, this changes.
“Increasingly, what attracts talent is this idea of finding purpose in the workplace, and being able to have meaningful work.”
In fact, he says, most of what drives value inside organizations is their ability to attract and retain human capital, and their ability to create intellectual capital through innovative capacity of the workforce in the organization. And their ability to create social capital with society in terms of trust in the organization and the brand.
And when you understand this, you can see exactly how ESG issues have become so important.
Purpose and Profit
George’s new book, Purpose and Profit, is 15 years in the writing he says. It’s split into two parts. The first question it asks is, why are we talking about purpose in business and about ESG issues and sustainability more and more? And why now? Why are we talking about purpose in business, about ESG outcomes, and about the role of the corporation in society so much more now?
One part of the answer, says George, is that both consumers and employees have more choice than they’ve ever had before. And that choice has given people a voice about what they’re expecting from organizations around the world.
“And because what drives competitiveness in organizations increasingly is their social, intellectual and human capital, that has created the link between voice and choice into value for organizations.”
The second part of his book is about what this means for you as an individual. What can you do? The book, says George, isn’t for CEOs of Fortune 500 companies, it’s for the young entrepreneurs, the young people joining the workforce who are questioning what they can do, what role they can play in bringing about change.
Because, says George, each of us can have an impact on the global challenges we face.
How purpose and profit go hand in hand
Firstly, what does purpose mean?
“What purpose is for us inside organizations, is for employees to have strong beliefs in the meaning of their work, to have agency, to create better outcomes, and also to have aligned incentives in order for them to be able to empower them and create those outcomes.”
The problem is, says George, once you adopt this definition, it quickly highlights purpose inequality within an organization. When you ask people inside the organization, particularly those further down the chain about purpose, they have much weaker beliefs about it, than middle management, who in turn have weaker beliefs than senior executives.
“One of the things we have found is that organizations that are high performing organizations, they’re able to diffuse that sense of purpose throughout the organization. And not only that, but also they can create clarity about that purpose inside the organization.”
Purpose therefore, isn’t the grand statement a leader makes in a speech. Purpose is the lived experience of the employees in the workforce, and how that purpose is diffused and the clarity that all employees have in terms of it.
“And once you adopt that, then you find, in many ways, a synergistic relationship between purpose and profit for those organizations.”
Finding purpose in a public firm
Another thing George found, during his research, was that publicly listed firms’ employees had a weaker belief in their purpose in comparison to private firms.
In public firms, the sense of purpose is directly related to the ownership commitment in terms of longer term ownership. And stronger commitment to the organization is driven by a stronger leadership commitment.
“And I think a big challenge for publicly listed firms is how to create that sense of commitment inside the organisation.”
So how can big firms show agency in their ownership in order to drive a sense of purpose in public companies?
There are a couple of things, says George:
- Engage with management and assure them that you plan on being owners for the long term, and you would like to keep owning the company for a very long time, because you believe in the business model.
- Ask key questions such as:
- How do employees feel about their own commitment to the organization?
- Do they feel that they have the agency to drive the performance of the organization? The impact of the organization forward?
- And do they have aligned incentives to do the right thing for the long term prosperity of the organization?
What ESG is and what it isn’t
There are two approaches to ESG, says George.
The first one is that ESG is about risks to the organization, how exposed you are, and how well you’re managing those risks.
Within that approach, you can ask: how well is the management team reducing our exposure to those risks and how well are you managing those risks that are coming from environmental developments from social development and so forth?
While this is the approach that George believes in, this is the version of ESG that Elon Musk refers to when he’s debunking ESG. For Elon, he believes ESG necessitates a different approach.
One that asks the same initial question: what is the impact that the organisation is having on the environment, on employees, on customers, on the broader society? But the follow up question is then: how is that impact being internalised by the company? Which then leads to the valuation discussion, and the profitability discussion, and the competitors discussion.
Why does George favour the first approach? Easy, he says. Because the first one asks the question:
“If this company is going to scale up and grow, are we going to have a better environment or a better society or a worse society? Which requires you to measure and value the impact that the organisation is having.”
George’s advice to leaders
“Engage your workforce, engage your employees. There is a tremendous amount of energy inside organizations, among employees to be engaged in the sustainability efforts of the organization. But a lot of people think that they lack agency to really engage and have impact.”
So, what does the world need most right now according to George?
Lots of things, but the main one is to try to keep a positive perspective of what’s going on. There are lots of negatives happening in the world, but we need to remember there are lots of positives too. If we dwell on the negatives, it can drag us down.
And we have to bear in mind that we all have the opportunity to make a difference. Righting everything that’s going wrong in the world isn’t one person’s responsibility, we all have a responsibility to try to bring about good outcomes for society, both environmentally and socially.
“If we all, as employees, as leaders, as owners, focus on those easy main areas: how can we create positive externalities? Then we can all do our part of it little or big.”