While sector impact varies, from our conversations with many decision-makers, five industry-wide themes emerge as critical constituents of a purpose-led growth strategy. Focusing on these five themes will help leaders overcome the current challenges they face and propel their companies to the forefront of the economic rebound and onwards to long-term, sustained value creation. These themes are trust, trade, technology, and sustainability – with people firmly at the center of every aspect of the business and your decision making.
Trust – the fundamental currency of business
Trust has long been a key asset for any transaction or relationship. In a hyper-connected, increasingly virtual environment, trust matters more than ever. People want to have trust in the organizations they buy from, work for, and invest in. Trust is also an important currency in a world where value is increasingly intangible – where brand equity, innovation and employee engagement are, in many cases, more valuable than physical assets. A recent study highlighted that intangible assets now make up over 90% of the market capitalization of the S&P 500, a five-fold increase from 17% in 1975.
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, 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.
CEO imperatives to foster greater trust in your business:
- Be ambitious – integrate reporting on a wider range of non-financial metrics into your strategy. Reporting that merely meets standards of compliance will not be enough.
- Listen – understanding the changing needs and expectations of stakeholders is critical to the reset of your strategic foundations.
- Be transparent – articulate purpose-led near- and longer-term targets to stakeholders, linking them to strategy and performance, assigning clear lines of responsibility and accountability.
Trade – flows and patterns are changing
While turbulent geopolitics are creating an imperative to develop ever more strategic approaches to managing risk, CEOs still have an inescapable need to operate globally. The challenge is to navigate complexities that are not in your immediate control.
Current geopolitical tensions
Some notable examples of current geopolitical tensions include the relationship between the US and China and the post-Brexit disagreements between the UK and the EU. The tension between the US and China is manifesting itself in an acrimonious trade relationship, technological competition, and rival industrial policies. Meanwhile, the UK and the EU have clashed over Northern Ireland, the implementation of new trading arrangements and the distribution of vaccines. The EU is also asserting its position as a global regulatory leader through its ambition to shape global norms and standards while moving toward strategic autonomy.
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.
CEO imperatives to help navigate today’s trade issues:
- Understand the trends — globalization, technology, demographics, and environment, and monitor how these forces will impact across the organization.
- Define risk more holistically – understand the impact on different areas of the organization (finance, operations, strategy, reputational, etc.).
- Test the geostrategy — develop a strategy to mitigate risks – and revisit it dynamically, the days of yearly updates are over.