This blog first appeared over at Prolific London.
It compares the contribution that individual British businesses (and sectors) make to our world, based on their simple proposition that “value = profit + purpose”.
The trouble with indices
For an Index to work it has to do a number of things. It needs a robust, clear and repeatable methodology. It needs to measure something which will change over time. The results must remain relevant for long enough to foster debate, scrutiny and greater understanding on the issue it addresses.
Most of all, it has to be interesting. It has to make people want to debate and understand the issue. It has to be built for the audience that will be better informed by it, not for the publisher that craves publicity.
Ideally, people should want to talk about it in the pub.
The indices that endure, such as The Economist’s Big Mac Index and Edelman’s Trust Barometer, do so because they achieve all of these things. The Halifax House Price Index has outlasted the building society that created it.
In other words, creating a good Index is public relations gold. And it is very difficult.
Getting beyond false premises, half-baked ideas and vanity metrics too often proves too much. Too often those trying to do so don’t stop when they should.
Portland’s Total Value Index is different
Portland’s Total Value Index is a breath of fresh air.
The index measured 45 companies, in nine sectors, across 67 different measures, broken down into four pillars which assess each firm by the following criteria:
- producers: R&D spending, capital investment and productivity
- ventures: profits, dividends and share price
- employers: diversity and inclusion, employee satisfaction and parental policies
- citizens: corporate tax, charitable giving and environmental policies
Portland supplemented publicly available data with perception research among what they call “informed and influential audiences”: media, policy makers, business leaders, academics and influential consumers. All in all, the research drew on 1.4 million data points within the black box that ran the analysis.
All this tells us that the sectors which have the most exposure to the public tend to perform better against these criteria than those with less public exposure. By and large, consumer-facing sectors outstrip business-to-business ones.
The discretionary faster-moving (or more frequent) purchases do better than distress, slow or occasional purchases, including utilities.
The best performing sectors are: TMT, food producers, pharma, retail and real estate.
The worst are: oil and gas, water, automotive and banking.
Much of the real interest, though, lies in the gap between the reality of what they do and the wider perceptions of what those informed and influential audiences think they do.
Food producers and retailers are seen as contributing significantly more value than they actually do in practice.
In all other sectors, the perception gap goes the other way: they do not get the reputational credit for for their true performance. They are undervalued and have ground to make up.
It is easy to imagine that this Index will pass the test of time and become a useful framework to understand and explain business performance within the complex web of different audiences with different interests.
The implications for businesses and communications
As importantly as what it tells us, is the debate it informs.
At the launch event, Dame Helena Morrissey, Head of Personal Investing at Legal & General Investment Management, argued that mainstream investment tools are stuck in the past. She said that while the investment community see the gaps in how they value firms (many of which are touched on in this index), they still ask how they can attach value to those gaps.
John O’Brien, author of ‘The Power of Purpose’ and European Managing Partner at One Hundred Agency, spelled out one of the key dangers in the debate. He said there’s been a rush to the “purpose agenda” in recent years. People too often confuse “philanthropy” (such as supporting mental health) with the “purpose” of why a business exists and what it is there to do, which must be more joined up.
Professor David Grayson, Emeritus Professor of Corporate Responsibility at Cranfield School of Management. said “leadership is the art of spotting the weak signals before the rest of us”. He asked whether boards of European companies are really spotting the weak signals and acting on them.
Firms must get more sophisticated in understanding what lots of different stakeholders are thinking and making sense of that, he stressed.
From these early shoots it is easy to see how Portland’s Total Value Index will help inform the discussion on how firms can build the reputations they deserve, and so deserve the reputations that they have.
The need for clarity on “purpose”
This highlights the importance of businesses having a working definition of what purpose means. As I outlined in an earlier blog, “do brands really need a ‘social purpose’ to do good?”, the expression means different things to different people.
For some, purpose is about good governance. For others it is to support the United Nation’s laudable sustainable development goals. Others say purpose should be built around social enterprises which reinvest or donate their profits to create social change. Some call for a combination.
Without clarity on what purpose means, it is risky to ask businesses to bake it into their strategies. It can too easily lead to unexpected consequences, or to ask to be misled. Firms may make bold statements which are not backed up with real action. “Purpose washing” is a real threat.
All this risks undermining the most honourable intents as thinly veiled publicity stunts. And it is fair to say that purpose is a perfectly legitimate marketing strategy. Just as it can be the guiding star that helps inform every decision made in a business.
Firms should be free to use purpose as a strategic tool, along with all the other tools they have available, to shape how they go about their business and deliver to their stakeholders.
Inside the black box
Of course, the difficulty with the Portland index is the question of what happened inside the black box to the 1.4 million data points which produced the analysis.
The results will be based on a relative, but unscientific, weighting between the four ways of measuring performance (as producers, ventures, employers and citizens).
It provides a framework to illuminate the discussion, but it pulls up short of proving its core presumption that “value = profit + performance”.
There may be even more value in publishing the four separate indices, making it possible for everyone to explore the relationships between these pillars.