Leadership: How companies can put purpose on par with profit

Business is changing. A powerful mix of forces—employee activism, enhanced media transparency, government gridlock, and proliferating global problems such as the COVID-19 pandemic, rising inequality, and climate change—have led an ever-growing group of corporate leaders to recognize that a focus on profit is not enough. Purpose beyond profit has become a necessary ingredient for exceptional business success.

But how do you inject purpose into a business? And how do you distinguish true purpose from “purpose-washing”—a public relations veneer rather than a fundamental change in culture and operations?

To try and answer these questions, and to begin to create a playbook for others interested in following a similar purpose path, Fortune and McKinsey & Co. convened 45 of the world’s leading CEOs for four virtual working sessions over the past six months. Our goal was to extract lessons that would help others embrace a model of business that leads to better results both for their companies and for society.

Seven clear themes emerged from the conversations, which we have summarized below:

In the long run, there is no tradeoff between profit and purpose

To a person, the CEOs we convened were passionate about having a positive societal impact and serving all stakeholders, while recognizing that in the long run this would also be good for shareholders. As IBM CEO Arvind Krishna put it: “Purpose and profit go together, reinforcing each other.” PayPal CEO Dan Schulman took it one step further: “I’d actually argue if you don’t have a purpose as a company, you will be less successful from a results perspective.” Over the past year, PayPal has lowered the cost of benefits, increased salaries, given stock, and increased financial education to reduce economic fragility among its frontline workers. This contributed to drops in attrition and absenteeism.

In the short term, of course, tradeoffs clearly occur. McKinsey research shows 61% of executives and directors said they would cut discretionary spending on positive-net-present-value projects, including investments in employees and other stakeholders, to avoid an earnings “miss.” But purposeful leaders, who deliver against a broader set of stakeholder interests, will tend to keep their eye on the longer term and create more value through time. In the long term, shareholder interests and stakeholder interests tend to converge.

“If you stay true to your purpose and it is very clear to every person that is working in this company, then there is a very clear direction, there is a compass, there is a star that is telling you this is where we all go,” said Pfizer CEO Albert Bourla. “That unites the organization, creates cohesiveness, and brings results.” Levi Strauss CEO Chip Bergh put it this way: “By doing right and doing the right thing, you are going to reward your shareholders over the long term.”

Purpose begins with your employees

In an economy where human capital drives business value, an employee-first approach has become essential. Research from Aon PLC and the Ponemon Institute shows that four decades ago, hard assets accounted for 80% of a company’s value, while today it’s intangibles—“soft assets” that include reputation, brand equity, patents, and R&D—that account for 85%. The focus on employees as the source of value was further reinforced by the pandemic.

“Purpose starts with supporting your own teams and front lines. They in turn support our customers, which takes care of business,” said Best Buy CEO Corie Barry, commenting on her company’s transformation, underpinned by increased employee discounts, training, and broad engagement of frontline staff. Recent McKinsey research found that frontline employees who “feel purpose” at work are up to four times as engaged as those at organizations where purpose is not activated and aligned to that of individual employees, and twice as likely to stay in the job.

XPO Logistics CEO Brad Jacobs told us how the pandemic “actually brought a purpose to our drivers, warehouse workers, people on a cross dock…They suddenly had a big purpose in getting people’s toilet paper delivered, getting people’s Purell delivered, getting medicines delivered. That was the prime thing that led to our employee satisfaction figures going up 5%.”

Purpose drives innovation

All the CEOs gave strong testament to the power of purpose in unleashing creativity and innovation. A recent Gallup survey shows that 70% of the workforce in North America and Europe is “not actively engaged,” which means that while they may be bringing discipline, rigor, and obedience to work, they’re leaving creativity, collaboration, and initiative at home.

“As leaders we always need to find a way to fundamentally attach what we are doing to that greater purpose,” said Johnson & Johnson CEO Alex Gorsky. “I think it frees up a sense of energy, of ambition, of desire, and, frankly, a pride and accomplishment in our employees…The impact that can have, and the power that has more broadly on our organization, can’t be understated.”

Honeywell CEO Darius Adamczyk said he had “never seen such a level of excitement, of pride on the part of employees” as when his company turned to making masks for the pandemic. “I think it’s been transformative.”

A company’s purpose must be authentic and embedded in corporate DNA

In an age of social media transparency, employees and others will be quick to call a company out if its words don’t match its actions. We now have numerous examples of companies whose credibility has been undermined by their own employees who became “whistleblowers” on social media.

“It’s important to talk about the values you want to speak out on internally [and explain] why it is core to your business,” said John Donahoe, CEO of Nike. “Nike has a strong history of fighting for racial and social justice. [That’s] core to our mission and purpose as a company. When the George Floyd events occurred, we ran the ‘Don’t Do It’ campaign and made a $140 million commitment on racial and social justice.”

Stan Bergman, CEO of Henry Schein, put it this way: “Social media is testing us to make sure we are authentic…I think that’s great.”

‘Proof points’ along the way will help create credibility

In an age of skepticism, it’s not enough to merely state your purpose. You need to demonstrate it on a consistent and regular basis. “[You need to] take the purpose and demonstrate it with real proof points,” said Lynn Good, CEO of Duke Energy. “When I say employee safety is important, I need to demonstrate it with unequivocal safety protocols. When I say climate is important, I back up my climate plan with investments to show we are making progress.”

Other proof points can include tying executive compensation to delivering on purpose. This is the case for Danone CEO Emmanuel Faber, whose company links compensation to metrics on its contributions to health, the planet, its people, and inclusive growth—as well as financial returns to shareholders.

Decisions to stop doing something you were previously doing—like the CVS decision to stop selling cigarettes, or the Dick’s Sporting Goods decision to limit gun sales, or IBM’s decision to stop selling facial recognition software—also can be powerful in building necessary credibility.

A strong commitment to purpose helps you make decisions when times turn tough

Many of the CEOs talked about purpose being especially valuable when times are rocky. “When the shit hits the fan—whether it is COVID or social injustice—we look to our purpose to figure out what to do,” said Intel CEO Bob Swan. Ulta Beauty’s Mary Dillon said that “you can’t take for granted the notion of purpose, of putting that trust in the bank, so that at a time when you really need your employees, they feel good about stepping up and doing more.”

Millennials and Generation Z are driving change

While purpose helps drive performance across all generations, it is younger workers who seem most motivated by it. “In my career, I’ve never seen a generation who are more influential now in driving this change,” said John Seifert, CEO of Ogilvy. “Millennials are motivated by their ‘why,’ and they’re demanding that we build purpose within our organizations today,” said Penny Pennington, managing partner of Edward Jones.

The younger generation is expressing itself not only in the workplace but also as consumers. In one sign of that generation’s growing influence, some 70% of consumers overall now claim they buy or boycott products or services based on the social stances of the companies that make or sell them. And it’s not just about being supportive of social causes but also proactively working to solve underlying problems.

For all of these reasons, the CEOs who participated in these sessions agree that a genuine commitment to purpose can drive business results. And Danone’s Faber said the change is coming whether business wants it or not. Society is demanding more from business, he said. “It is there, and it is there to stay. Either we are working with the movement, or we choose to resist it. It is a clear moment of choice.”

Alan Murray is CEO of Fortune Media. Bruce Simpson is senior partner at McKinsey & Co. and leader of its ESG/Purpose Practice.