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From cost centre to growth driver

woman standing in front of neon wall

I grew up in the 1980s. It really was the glory days, even if part of it was spent living in Ashburton.

In a nutshell

  1. In the 1980s there was a clear business mindset around social responsibility as a necessary cost to ensure the organisation could continue to make money. 
  2. Today, new expectations are being placed on organisations to act in the best interests of their customers and New Zealanders as a whole, driven by wider culture. However, only some businesses have responded, and many haven’t.
  3. A key question to ask is whether being a good business leads to commercial success. The short answer is, yes. 
  4. If an organisation is genuinely living to a social purpose, it can expect to make more money. Toms is a proof point where this approach did deliver superior returns before a shift to the old world of social responsibility appeasement didn’t.

The world was a much less complicated place. Summers were spent riding the roads on Raleigh 20s. Of my five mates, four of us had exactly the same pair of black Adidas three-stripe track pants. The fifth had a blue pair. We’d all seen Back to the Future at least three times.

Our Dads all drank the same beer. In fact, it was the same beer across the country, just with a different sticker on the outside, depending on where you lived.

In commercial terms, businesses largely made money. And they sponsored stuff to legitimise their making of money. Cigarettes sponsored the cricket, beer sponsored the rugby.

While this may be an over simplification of the time, it does reflect a consumer mindset where conformity was valued and low expectations were held of businesses. Driven by this, there was a clear business mindset around social responsibility – a necessary cost to ensure the organisation could continue to make money.

In this context a business had simple questions. What causes or properties should we support? What is the CEO’s personal passion? What percentage of our sales should we allocate to social responsibility? How do we determine the return we’re getting from our spend on sponsorship and supporting the community? These questions were purely about how to get the most from the investment in social responsibility. Optimising the cost centre.

While this philosophy may have peaked in the 1980s, like the mullet and tight jeans, we still see signals of this mindset popping up today. There are, however, increasing signals of a new way taking hold. Rather than social responsibility being seen as a cost of doing business, more and more organisations are viewing social purpose as a growth driver.

diagram

 

The big question that arises as we see businesses like Toms, Warby Parker or Eat My Lunch take centre stage is:

What has driven this change?

"The drivers of this change are consumers and culture, not corporates and commerce."

To answer this question, we don’t have to explore the minutes of board meetings over the last 40 years. Instead we need to observe the comings and goings at the kitchen tables in Kiwi homes over these years. The drivers of this change are consumers and culture, not corporates and commerce.

Clearly, conformity is no longer a central consumer desire with cultural drivers shaping the desire for distinctiveness. Building off this, there has been a huge shift around the idea of social responsibility.

Amidst global cultural shifts, new expectations are being placed on organisations to act in the best interests of their customers and New Zealanders as a whole. From a consumer perspective, there is a clear change in what they’re looking for from the organisations they pay money to. Rather than trying to appease through social responsibility, consumers are looking to businesses that are genuinely purpose driven.

With so many businesses talking about being customer-centric, you’d think reorienting your business to this view would be a no brainer. However, only some businesses have responded, and many haven’t. All businesses exist to earn a return for their shareholders so the big question to answer is:

Does being a better company lead to more money?

Even a brief investigation will answer this question:

An absolute and unequivocal yes.

"Where commerce observes the signals from culture and acts, there is growth to be found."

This is not an argument for purpose-washing, green-washing, woke-washing or any other sort of washing. Very quickly it becomes clear that if an organisation is genuinely living to a social purpose, it can expect to make more money in several key areas. Where commerce observes the signals from culture and acts, there is growth to be found.

American shoe brand Toms is often held up as an example of the financial returns possible from being purpose-led. Digging into this case study, Toms proves the model, twice. It really was a game of two halves for Toms.

The first part was all purpose-led good times:

colourful 123

  1. Sales growth outstripped its industry and competitive benchmarks, as consumers connected with the ‘buy one, give one’ proposition. Sales doubled between 2008 and 2011.
  2. An internal culture delivered incremental value through acquisition, retention and productivity benefits.
  3. In 2014, Toms scored a $313 million investment from private equity giant Bain Capital. Valued at more than $800 million, Toms was seen by Wall Street as a rising star.

The third proof point is also the turning point. “Toms is synonymous with social responsibility and corporate impact and has demonstrated the power of being an authentic, mission-driven organisation”, said Bain at the time. As part of the deal, Toms’ founder Blake Mycoskie was replaced as head of the company. In his place, Bain installed Jim Alling, an experienced corporate operator who streamlined operations, cutting some of Mycoskie’s more creative and socially-led initiatives.

While the business continued it's 'one for one' programme, the business had made a fundamental change. Rather than continuing to live as a business with a genuine social purpose, Alling’s broader approach to social responsibility was a step back to a familiar but old world – doing stuff to legitimise their making of money.

Subsequently, sales stalled and financial performance has been under pressure for some time. “We are not sure that the company benefited from Bain ownership”, Standard and Poors commented of Toms.

So what does all this mean?

Does being a better company lead to more money? Absolutely. There is clear evidence that there are demand, supply and funding advantages available to those companies who genuinely make a social purpose core to their business. Toms is a proof point where this approach did deliver superior returns before a shift to the old world of social responsibility appeasement didn’t.

Connon Bray
Partner at TRA

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