The CEO Imperative: Rebound to more sustainable growth

In this environment, understanding your stakeholders’ demands and delivering value for your employees, customers, shareholders, and broader society will ultimately position your company to better adapt to changing market dynamics and drive greater financial value.
 

Reimagine, with purpose

There is a growing body of evidence that becoming a purpose-led organization – one that puts a purpose beyond financial profit and at the center of its decision-making – helps attract and retain customers, and empowers employees to be more engaged and innovative. Furthermore, companies that score highly on ESG metrics can lower their cost of capital, as well as encourage longer-term investment.
 

To seize those competitive advantages, you will need a robust, consistent, and clearly articulated purpose-led strategy for sustainable growth. Laying the right foundations for that strategy to succeed will be crucial.

According to Edelman’s 2020 Trust Barometer, 80% of people expect brands to “solve society’s problems.” Meanwhile, in the United States, JUST Capital found that 89% of Americans agreed that the COVID-19 crisis “is an opportunity for large companies to hit reset and focus on doing right by their workers, customers, communities and the environment.” In response, CEOs have been under increasing pressure to spearhead a re-evaluation of the point and purpose of business.
 

According to research by EY- Parthenon, 66% of European C-suite leaders and board members believe that COVID-19 has increased stakeholders’ expectations that companies will drive societal impact, environmental sustainability, and inclusive growth and the need to measure and report on these issues.
 

The importance of trust highlights the need for CEOs and CFOs to reconsider corporate reporting: greater transparency now goes to the heart of how companies can build and strengthen trust with their stakeholders. While the nature of corporate reporting has not fundamentally changed for decades, the world has changed considerably in that time. Today, businesses are under pressure from their stakeholders to be more transparent about what they do and how they do it. Yet, stakeholders do not necessarily trust that corporate reporting provides them with all the information they require. This is forcing a shift in focus from short-term profit to a positive long-term impact on people, planet, and prosperity – measured by a wider set of standardized non-financial metrics, not just bottom-line figures.

It should be said, an organization's ability to create long-term value cannot be disclosed by its balance sheet alone. Long-term value is also created from its culture, intellectual assets and use of technology - all non-financial assets. Non-financial data that is clearly tied to the organization’s strategic priorities, and communicated cohesively, can help you address the trust gap that exists between current financial reporting and your stakeholders’ expectations.

Companies need to find a more strategic way to measure their performance to meet the changing demands of a broader set of stakeholders. Currently, CEOs are under significant pressure from regulators, investors, and other stakeholders to increase disclosure around stakeholder impact and ESG issues. Yet, you also need to consider how this reporting can be integrated into your strategy, how it affects operations, and what transformation projects might be required to reset the focus on a broad range of measures for success — financial and nonfinancial – while remaining agile and adaptive. It is crucial to be robust about measuring performance against targets that are connected to your strategy, while using a range of metrics that encompass environmental, social, fairness and sustainability targets, as well as peer benchmarking.

By ensuring that those targets are defined with a purpose-led strategy in mind, CEOs can cohesively articulate the value they are creating (or protecting) for stakeholders and elevate the business above mere adherence to minimum regulatory compliance. It also provides the mechanism for scrutinizing internal behaviors and holding yourself and your leadership team to account. This creates an iterative cycle of strategy, transformation, reporting and communication that leads to value creation or protection, while allowing you to be attuned to changing stakeholder behaviors and preferences that serve as inputs for the next round of strategy execution. By using purpose as the lens through which to view all decisions, all assessments of value creation, and all reporting, you will help grow that most fragile and valuable commodity for your organization – trust.  

Geopolitical tensions – and the uncertainty they create – put pressure on CEOs and their leadership teams to constantly re-evaluate supply chains, talent decisions and approaches to building enterprise resilience.
 

Much has been written about the rolling back of globalization. But it is not ending, just changing. New trade flows are developing on a regional basis all the time, and many companies are reconfiguring their supply chains based on their experience of the pandemic.
 

Similarly, countries are encouraging reshoring or investment in certain activities, for example, in semiconductor manufacturing. There is also an emerging desire for self-sufficiency and localized capabilities in other critical industries, such as basic pharmaceuticals, vaccines, steel and industrial materials, and renewables infrastructure manufacturing. Many countries are also adopting more restrictive foreign direct investment (FDI) rules due to national security reasons, with governments imposing tighter review processes for potential foreign investors.
 

You should prioritize the management of supplier risk, both operationally and from an ethical point of view. Many companies are looking to increase near-shoring or on-shoring to reduce the length of their supply chains. 

Barriers around trade and FDI may also encourage the development of fragmented and geographically dispersed supply chains, rather than globally integrated ones. Companies are also looking at the need for smart adaptation of their supply chains to enhance resilience to shocks and changes applying the lessons from the early days of the pandemic.
 

As economies reopen, and take off at different rates, companies focused on their purpose-led growth strategies will adapt both their organic and inorganic strategies to capture emerging opportunities. At the same time, many sectors are undergoing a major transformation. Asset bases have to become lighter, which may lead to consolidation opportunities for others. There are sectors which are thriving in the crisis and present investment opportunities. Changing consumer expectations also lead to interesting new potential avenues to growth. But you still need to make a fine judgement call on whether it’s better to invest in existing operations with a view to moving into new markets or to acquire assets to achieve fast-track market entry.

The pandemic catapulted us into the ‘digital first’ era overnight. Many studies show that the desire for technological acceleration is one of the most significant drivers of transformation. A majority of CEOs (68%) surveyed for the global EY- Parthenon CEO Imperative survey are planning a major investment in data and technology over the next year. Furthermore, 63% revealed that accelerating technology and digital innovation is having the greatest impact on their company.
 

Another result of the pandemic is that traditional B2B businesses are looking at B2C models – often with a focus on customization and personalization. The number one issue for many B2B companies is creating better customer experiences. But significant investment is required to build the technology infrastructure that supports this level of digitalization.
 

Whatever the motivation for technology investment, you should carefully consider one issue above all others before widescale implementation: The pandemic catapulted the human impact of every technology you deploy. The human-technology interface will be decisive for future success in light of growing public awareness around the ethical, privacy and security risks of technology. Only 34% of CEOs say customers trust them with their data. This lack of trust stands in the way of many priorities, from business model reimagination to supply chain visibility and new customer propositions. In particular, you should focus on building trust with stakeholders to enable your businesses to reap the full benefits of deploying AI and data science.
 

If you are to successfully harness technology at speed, you need to upskill and reskill your people. You must also embed a transformative mindset across the entire organization – at all levels. To fully realize the value of technology and improve human experiences in an increasingly virtual world, you will also need your risk management practices to be more forward-looking and strengthened cybersecurity capabilities.

Sustainability is one of the defining challenges of our lifetime. It is also the innovation opportunity of a generation – a chance to create long-term financial, consumer, human and societal value for all stakeholders. CEOs are increasingly embracing the business case for sustainability, where they protect and create value by accelerating their business toward a more sustainable future. The initiatives you choose to prioritize must closely align with the purpose of your business, the context in which it operates and your ambition for competitive advantage for the long-term.
 

Becoming a purpose-driven business can require you to make difficult trade-offs. These can be around prioritizing long-term investments over short-term returns or moving from a focus on the bottom line to creating long-term value measured by other means. Yet purpose also brings some important payoffs:
 

• Engagement – purpose-driven companies have employees who are more engaged, committed and intrinsically motivated.
• Lower risk – by purposefully working with partners and suppliers that have similar values, businesses are less exposed to reputational risk that can destroy company value.
• Better performance – companies that both define and act with a sense of purpose outperform the market by 5% – 7% per year.
• Market differentiation – consumers are four times more likely to buy from companies with a strong purpose.

But what does long-term, sustainable value really mean? As a term, sustainability is often used in the context of a company’s compliance with environmental regulations and its policies on decarbonization; but companies need to think about sustainability more broadly.

A sustainable business embraces long-term value and growth in the widest sense. To do this, it usually has a long-term strategy with a broad range of objectives, including both financial and non-financial goals. It also measures its progress against those goals.

Looking at value creation beyond the financial aspect is difficult, but necessary if you are serious about achieving sustainable, long-term value creation for all your stakeholders. Critically, you must be willing to transform aspects of your business and potentially take bold action in areas of your operations that are not currently aligned with your purpose-led strategy – before you get pushed to do so by investors. To instill change, you need to ensure that all stakeholder groups – including customers, employees, investors, partners, and suppliers – understand the reasons why change is necessary, the benefits of doing so and how their actions are aligned to the purpose of the business.
 

The buy-in of employees is particularly important since, without their commitment, the organization’s purpose risks remaining in the realms of rhetoric, rather than reality. Unfortunately, employees can quickly become disengaged if they do not genuinely experience their organization’s purpose. Research by EY-Parthenon found that more than a third of employees (35%) observed a “say/do” disconnect between their organization’s stated purpose and its day-to-day actions.
 

There are many ways to embed sustainability within your operations. You can actively seek out partners and suppliers that share your organization’s purpose and values around sustainability. You can also implement responsive supply chain risk management procedures based on your business purpose. Once the immediate audit has been completed, you can review ongoing third-party risk through monitoring and testing, and adapt your business integrity controls to ensure compliance.
 

Leading purpose-driven companies communicate their purpose and its connection to their sustainability strategies clearly, candidly, and consistently to their customers and make it a central part of the overall customer experience. As a result, they are able to attract and retain customers – and not only customers who prioritize sustainability.