The past few years have been exciting ones for those of us who believe for-profit companies can do much more for the world than simply generate financial returns.
During what has been a highly creative period for both impact investors and mission-driven firms, the emphasis has been on solving the big infrastructural issues that limit the growth of beneficial business. The GIIN and Ronald Cohen with his G7 team of researchers, for example, have done a good job of identifying some of the most significant barriers to sector development, including legal forms, a lack of standardized metrics, and limiting governmental regulation. Efforts to address these obstacles are ongoing.
This work is both timely and necessary. Yet the focus on infrastructural issues may be diverting us from considering other aspects that may be just as important. Potentially, the concentration on the large and the external leaves whole tracts of organizational development unexplored as we pursue the answers to field-level questions. And, worse, the emphasis on infrastructure may be encouraging us to look outside our companies (and ourselves) for answers to questions that we can only find on the inside.
Are we missing a trick?
Despite our successes so far, the sector is still trying to develop better ways to do some very basic things. One of them is to reliably establish for-profit businesses that demonstrate measurable social or environmental benefit as part of an integrated bottom line.
Another is to successfully turn early-stage beneficial business start-ups, which are relatively numerous, into businesses that retain their impact at scale. For complex reasons, businesses that begin life with an extra-financial purpose still often side-line it when they take on investment during the growth stage.
This continues to limit the availability of real opportunities for serious impact investors, even as the impact finance marketplace expands. This fact strengthens the argument for investing in ventures that embed impact within their business models, as opposed to having impact as a secondary consideration.
Recent years have brought us tools to improve our success rate, including specialized legal forms, improvements in regulation, and more effective impact metrics, all of which will help. However, research shows that tools alone don’t deliver double-bottom-line performance or protect mission in the growth stage.
That leaves us with a central question: What more can we do, right now, to encourage beneficial business to flourish? And how can we help businesses embed mission into their DNA to the extent that even the stresses of scaling can’t wipe it out?
Going deep: re-focusing on governance
These were some of the questions we asked ourselves while scoping our new report on managing mission-driven organizations. To find answers, we focused our attention on the internal workings of blended-value companies, exploring the role of governance in creating organizations that can survive the challenges of growth with mission intact. Research on impact funds has identified governance as a one of the keys to success; it made sense that it would prove influential to beneficial businesses too.
Drawing on sector research and interviews with experienced practitioners from the worlds of business, impact finance, and the nonprofit sector, our short study uncovered a number of areas where businesses can use governance systems and processes to build extra-financial purpose into their very bones.
It also revealed a cross-sector trend that sees many different kinds of organizations—including benefit businesses, nonprofit and for-profit tandem structures, classic for-profit corporations, and nonprofits—already using governance as a means to strengthen extra-financial performance and make mission more durable at every stage of development.
Strategic systems and processes
Our study flagged several areas where board-level policymaking, strategic guidance, and leadership can help protect mission and ensure extra-financial performance as the business grows. Some of these include:
Leading through change
Growth typically brings big changes to the governance and leadership of mission-driven businesses. Founders step down, investors assume voting seats, and stakeholders give up board positions—all with potential impact on mission. The governing board can help protect mission at this stage by leading its own change process, recruiting skilled new board members, appointing chairs who know how to support mission, and establishing advisory committees with board-level leadership and reporting.
Recruiting the right investors
With investors now taking voting positions on the boards of beneficial businesses, choosing the right ones emerged in our research as one of the most effective ways to preserve mission through the growth stage. Third Space Learning, for example, sought its growth capital from Clearly Social Angels, and founder Tim Hooper emphasized the importance of working with investors that are “in it for what we’re trying to achieve” and not just for returns.
Governing boards, with senior management teams, can effectively lead the process of identifying mission-aligned investors and writing term sheets that will help the business hold on to its extra-financial impacts as it takes on investment.
Governing boards and senior management teams of mission-driven businesses can help protect mission by developing comprehensive direct engagement strategies for shareholders.
Increasingly important across the world of business, direct engagement involves pro-actively determining the priorities and concerns of investors and addressing them directly. Current best practice, recommended by the Conference Board, sees governing boards creating policies to frame communication and set the stage for cooperative interaction between the company’s leadership and its shareholders. Methods may include disseminating reports, targeted personal communications, and routinely feeding back information about how the board is responding to investor proposals.
Practices such as these help all companies work more productively with shareholders and avoid conflict. For beneficial businesses, they can also be strategic tools for linking mission-related goals to financial performance, and keeping investors and other stakeholders committed to the larger vision.
Our research suggested the need for governing boards to take charge of decisions around reporting on extra-financial performance. In the past, marketing or CSR departments often managed decisions about this kind of reporting without real involvement from the board.
Today, as the practice of integrated reporting continues to gain popularity, research is beginning to reveal a strong connection between reporting practice, overall strategic effectiveness, and extra-financial performance across environmental, social, and governance areas. In two large corporations, National Australia Bank (NAB) and Heineken, for example, there’s recent evidence that adopting integrated reporting has served to deepen and embed sustainability across all company activities, and brought business and extra-financial priorities into closer alignment.
By mandating reporting methods and regimes—like integrated reporting and third-party verification—that foster mission accountability and improve transparency, governing boards can support impact and help embed mission priorities through growth.
Measuring impact is one of the keys to success for mission-driven businesses, but metrics can make a difference only when governing boards and top managers use them to shape strategic decisions. Board-level mission monitoring is a way to achieve this.
Long practiced by nonprofits, it involves establishing a set of organizational systems similar to those used in financial monitoring to gather mission-related information (including metric data) that companies can feed back into board-level strategic decision-making processes and disclose in integrated reporting.
Unilever Indonesia, for example, commissions third-party evaluations of its value chain to provide information for strategic decision-makers. Geneva Global, a philanthropic consultant, evaluates programs across a range of issue areas using quantitative, qualitative, and narrative descriptions. The ratings and analyses that come out of this process help funders and organizations make decisions that will strengthen impact.
Governance in a brave new world
Our high-level study only scratches the surface of a growing trend for using governance to embed mission aims in for-profit business models. This trend crosses sectors and goes beyond the governance arrangements permitted by the use of specialized legal forms, even as it works with them. The impetus for mission-supportive governance practices comes from within the companies that strive to return profits while delivering extra-financial performance. And it comes from investors who are eager to put their capital behind authentic beneficial businesses—and who may well play a direct role in their governance.
The interest in governance innovation we’re seeing makes sense in the current climate. It is yet another sign that social and environmental benefit—factors once marginal to business—are becoming central to it. The systems businesses use to monitor and manage extra-financial performance are moving inward from the fringes to take their place in the boardroom, at the strategic heart of companies.
We need more research—notably in such areas as mission monitoring, direct engagement, and board composition—and more casework to understand exactly how we can deploy governance to embed mission aims in for-profit business models. But one thing is clear: We can expect to see more creative use of governance as the sector innovates new ways to make “profit with purpose” a living reality.