Driving home one day I was struck by a U.S. Army billboard advertisement with the words “Nothing More Powerful than Purpose.” The message was directed at individuals but can be extended to business because businesses don’t exist without people – employees, customers, and investors.
Private equity backed companies are being held to increasingly higher standards by all three of these stakeholder groups. For example:
- Employees: Two-thirds of millennials say they won’t work for a company that does not have strong corporate responsibility commitments; and once hired, they are more likely to be loyal when they feel they can make a positive impact on issues at work1
- Customers: Large companies are increasingly setting more immediate net zero and carbon neutral targets. As a result, middle market players upstream and downstream will be held to increasingly higher environmental standards to maintain their position2
- Investors: 68% of private equity LPs surveyed last year expect to increase their ESG3 investment allocation and in-house ESG-related capabilities over the next three years4. Another survey found that found that 90% of LPs factor ESG into their investment decisions and 77% use it as a criterion in selecting general partners5
There are examples of thriving, purpose-driven companies across a wide array of sectors. Take the example of Schneider Electric. Schneider’s purpose is to “empower all to make the most of our energy and resources, bridging progress and sustainability for all.” In 2019, the company announced it was drastically stepping up its commitment to carbon neutrality with three new actions: (1) accelerating its 2030 goal of carbon neutrality by demonstrating carbon neutrality in its extended ecosystem by 2025 (2) achieving net-zero operational emissions by 2030 and (3) engaging with suppliers towards a net-zero supply chain by 2050. During the four years since that announcement, Schneider’s stock price has risen 95% – twice as fast as the S&P 500 during the same period.
Take the additional example of Dave’s Killer Bread, a baker of organic, whole grain breads. Grown from his family’s business starting in 2005, founder Dave Dahl turned his life around after serving a 15-year prison sentence and made the company a proud Second Chance Employer – hiring the best person for the job, regardless of criminal history. In 2011, the company was recognized by Inc. Magazine as one of the fastest growing 5000 companies. In 2015, the company was sold to Flower Foods for $275M. Under Flower Foods the brand has become the largest organic bread company in North America.
Why Middle Market and Lower Middle Market Private Equity Investors Should Care
Beyond the moral imperative, middle market and lower middle market PE firms should be invested in creating purpose-driven businesses for two very practical reasons.
First, there are real economic benefits to be had. Companies that embed strong, multi-stakeholder purpose as core to the business outperform their peers on multiple dimensions. Gallup’s workplace studies show that engaged organizations realize 17% more productivity, 20% increase in sales and 21% higher profitability6. A recent survey of corporate directors showed that organizations are realizing benefits from their ESG efforts including enhanced brand and reputation (57%), enhanced risk management and resilience (54%), improved talent attraction (44%) and retention (40%), and greater innovation and competitiveness (29%). The survey also found that while about half of large, public companies have ESG targets, smaller, private companies lag behind7.
Improved talent attraction and retention is an especially salient benefit considering the “silver tsunami” – the mass exodus of baby boomers from the workforce. The combination of baby boomer retirements, low birthrates, shifting immigration policies and changing worker preferences mean that businesses will increasingly have compete to attract and retain talent from younger Millennial and Gen Z generations. When deciding where to work, 79% of Millennials consider a company’s environmental and social commitments. Further, 76% of Millennials would choose to work for a socially responsible company even if the salary was less than at other companies8.
Second, deserved or not, private equity’s reputation as corporate raider persists in the minds of many business owners. Showing a demonstrated commitment to building purpose-driven businesses that, by nature, benefit multiple stakeholders – employees, customers, broader society and shareholders – goes a long way to establishing trust and goodwill.
What Private Equity Investors Can Do
Private equity’s model, whereby investors are often in control ownership positions with multi-year investment horizons, places PE investors in a uniquely qualified position to support portfolio companies in their journey to create purpose-driven organizations that outperform. Private equity investors can guide and support portfolio companies in their journey to articulate a compelling purpose (beyond just turning a profit), embed that purpose in the growth strategy and execute the strategy. Best practice sharing across the portfolio, internal expertise, an advisor network and access to capital give portfolio companies an advantage. Of course, companies that write a mission statement without doing the hard work around how it translates to strategy and how to execute the strategy will struggle to realize both the vision and the benefits. Investors that actively engage to ensure the mission is cascaded down through strategy and execution will see the greatest benefits.
Middle market and lower middle market private equity investors should be invested in creating purpose-driven businesses to realize real economic benefits and to help establish trust and goodwill with business founders. PE firms and their portfolio companies are well positioned to create purpose- driven businesses that outperform their peers. Those that don’t rise with the sea change underfoot risk being left behind.
Jennifer Kozak is a Managing Director with Groove Strategy Group LLC. She has over 15 years of ex- perience helping B2B companies accelerate profitable growth via strategic growth planning, commer- cial excellence, go-to-market transformation, market / opportunity assessment and entry planning. She can be reached at email@example.com.
Michael Connerty is the Founder and Managing Partner of Groove Strategy Group LLC, a strategy consulting firm focused on helping B2B companies grow their business profitably. He can be reached at firstname.lastname@example.org.
1: 2016 Cone Communications Employee Engagement Survey
2: “Many Boards are Playing Catch-up on ESG and Green Issues”, WSJ, September 14, 2023
3: ESG stands for Environmental, Social and Governance
4: ILPA-Bain ESG Survey, February 17, 2022
5: “Green Shoots: Can Private Equity Firms meet the Responsible Investing expectations of their investors?”, INSEAD, Oct. 2020 6: The Right Culture, Not Just about Employee Satisfaction, Gallup Workplace Study, Jim Harter and AnnaMarie Mann
7: WSJ Pro/National Association of Corporate Directors survey
8: 2016 Cone Communications Employee Engagement Survey