From profit to purpose and back again

5 March 2020

It is essential for the financial services industry to rediscover its purpose

A context of declining trust

Corporate purpose is nothing more or less than the reason an organisation exists, expressed in terms of the benefits it creates for customers and other stakeholders. It is becoming increasing accepted that profit is not the purpose of the corporation, but that instead profit is the result of a firm pursuing its authentic purpose. 

The financial services industry has been plagued by behaviour that has put profit ahead of the industry’s purpose to help its customers secure their financial future. The litany of failures includes pension mis-selling, PPI, opaque pricing and hidden charges across swathes of its products, commission-based financial advice, LIBOR, loyalty penalties, even before the broader charge of the financial crisis and its terrible legacy is brought to bear. 

The industry is living with a legacy of plummeting levels of trust and burdensome regulation just at the time when the economic context is structurally reducing the profitability of many firms.  Given this economic pressure, a focus on such an idealistic notion of purpose may seem self-indulgent. But the error would be to double down on the focus of making profit. Yes, financial services firms need to be profitable and deliver value for their shareholders, but now more than ever this value must flow from delivering a purpose that benefits particularly customers but also with regard to the interests of wider stakeholders. 

Why so?

The benefits of a purposeful approach to financial services

First, a focus on purpose will help reform an industry that too often shoots itself in the foot in its treatment of customers. Purpose supports a culture of focussing on what the firm is there to do, in terms of benefits to its customers and wider stakeholders, rather than on the benefits that can be extracted from those stakeholders for the firm. This will limit future own goals, which in the past have led to epic destruction of shareholder value, both through direct economic consequences and the vengeance of heavy regulation. 

Second, a growing body of evidence shows that strong stakeholder relationships support long-term value creation,  well summarised in the Gresham College Lecture Purposeful Business: The Evidence and the Implementation by Professor Alex Edmans of London Business School. Treating employees and customers well leads to outperformance. Increasingly ESG considerations are associated with higher long-term returns to shareholders and reduced risk. By encouraging an ‘other-regarding’ rather than ‘self-regarding’ view, purpose can help create a culture of mutuality between a firm and its stakeholders, supporting long-term sustainable value. Importantly, though, the benefits of stakeholder orientation are only realised when the focus is on stakeholders that are material to the business and its success, not when stakeholder activities are pursued in an undiscriminating way.

Third, there is emerging evidence that a sense of the intrinsic purpose fulfilled by a firm’s activity can unleash human creativity and innovation, leading to higher performance and to the creation of products and services that would otherwise not have existed. We have to accept that this evidence for the value of ‘intrinsic purpose’ is embryonic, partly because of the difficulty of defining and isolating purpose as a context. But the academic and practitioner support for the benefits of purpose as something more profound than just enlightened shareholder value continues to grow.

Becoming a purpose-led firm

But how does a firm become purpose-led? I was struck by three main lessons from participants in our working sessions.

Purpose must be discovered not imposed. A firm’s purpose cannot be imposed from the top down. Employees will readily spot any disconnect between what a firm says and does. Authenticity is a pre-condition for effective implementation of purpose. It is important to take time to listen to employees and other stakeholders to draw out the purpose of the firm, perhaps reorienting it here and there, but fundamentally channelling the existing life-force of the firm in a productive direction. PwC spent over a year engaging with our 150,000 employees worldwide to develop its purpose ‘to build trust in society and solve important problems’. Rather than being told what this purpose means, through a series of workshops and other forums employees are encouraged to define and share what it means for them in a process of continual reflection and engagement. 

Purpose must be integral to how the firm creates value. Purpose should not be viewed in the manner of medieval indulgences for the absolution of sins. Too much CSR activity has been seen as ancilliary to the firm’s core activity – a cost centre. If purpose is seen as something in tension with value creation then when the going gets tough, purpose will be the first thing to go. Leading firms ensure detailed understanding of how purpose is integral value creation. In times of stress the purpose becomes more not less important. 

Purpose must be continually reinforced with a devotion that can appear extreme. A successful purpose should be intimately related to a firm’s long-term business success and capable of being understood by employees as a guide to action. But this of itself will not be enough. The realities of the world will create short-term trade-offs between purpose and profit that need to be recognised. Investors may not price in the value of intangible purpose-driven investments for five years or more. Employees may face incentives to take short term actions to hit annual bonus targets. Rather than being considered a set of brakes to a profit maximising culture, purpose needs to be central to the firm’s activity with profit flowing as a consequence. This requires a mindset shift so profound that the necessary interventions can seem hard to sustain. We heard one firm describe how employees reflect weekly in groups on how well they are applying their purpose principles. Management structures, performance management, rewards, and risk management are all carefully aligned with this culture, often in unconventional ways.

Creating and sustaining a truly purpose-driven culture is not easy. It requires authenticity, commitment, and bravery. But it is also needed, if the financial services industry is to be recognised, as it should be, as a vital and productive enabler of our economic well-being.

This article first appeared in the FCA's discussion paper Driving purposeful cultures

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