A Conversation with Gregory Milano, CEO of Fortuna Advisors
There’s a significant body of research validating that companies with a clear purpose outperform their peers. To help us better understand the link between purpose and performance, I spoke with Gregory Milano, founder and chief executive officer at Fortuna Advisors, and author of the book, Curing Corporate Short-termism. Greg is also the co-author of The Return on Purpose: Before and During a Crisis, a new study on the relationship between purpose and performance in public companies.
In the first part of a two-part series, Greg explains the research and how corporate purpose impacts financial performance, market valuation and shareholder value creation. In part two of our conversation, Greg will take a look at how public companies are navigating the shift from shareholder primacy to a stakeholder view and offers key recommendations for those making the shift.
By the Numbers: High Purpose, High Performance
“Data shows companies with high purpose perform better,” explained Greg. “I started Fortuna to help public companies unlock value and increase performance. So, it’s our job to understand the internal and external factors that impact value creation. After the Business Roundtable gave their proclamation on corporate purpose, I started doing some research.”
“I initially decided to compare the share prices of companies on the list of Fortune’s Most Admired Companies and the Forbes Just 100 to average market performance,” said Greg. His research showed 70% of the companies on the list beat the market. Further, these companies delivered a cumulative total shareholder return that was 41.5% higher than the S&P 500. “This piqued my interest. I knew there was a cost to building an admired brand. The data showed there’s also a benefit.”
Greg was right. In 2020, Fortuna partnered with Chief Executives for Corporate Purpose (CECP) to explore the financial impact of corporate purpose. They published a joint report, The Return on Purpose: Before and During a Crisis, to share the results of their findings.
At its core, the report showed profitable growth in competitive environments is enhanced by purpose. Here are some of the notable proof points for the return on purpose. High purpose companies average a 13.2% return on capital compared to a 7.3% return in low purpose companies. High purpose companies reported a 17.3x multiple of EBITDA, or earnings before interest, taxes, depreciation and amortization, on their valuation compared to 13.1x in low purpose organizations, and a nearly a 25% total shareholder return, compared to 5.1%, respectively.
Embracing New Market Trends
Greg went on to explain the findings. “First, it’s difficult to perform well when you’re treating one of your key stakeholder groups poorly. Take employees, for example, it’s not possible for you to deliver continued profit without taking care of your people. Sure, you can make money and treat your employees poorly in the short run, but eventually it will catch up to you.”
“It’s going to be harder to compete for top talent and more difficult to keep your best employees. Not to mention your productivity, and eventually your production quality, will likely suffer,” said Greg. “Producing long-term results means taking their wishes into consideration.”
The second notable trend is that there’s a growing segment of people who identify with brands that stand for something. They’re also willing to pay a premium if they support the same cause or hold the same beliefs. The report noted that 50% of CPG growth from 2013 to 2018 came from sustainably marketed products.
“Purpose drives how consumers think about a brand. A strong connection to the brand drives sales, often at a premium price, which creates shareholder value. Not to mention a company more closely aligned to its consumer’s preferences will spend less per dollar of revenue to acquire and serve that consumer.”
Greg also noted a third trend which was discussed in a recent webinar about the paper. “We’re reaching a place where purpose is no longer a choice or a nice to have. It’s not just about doing good. It’s also about having a voice. Consumers and employees expect businesses to have a defined set of beliefs and to be clear about what they will and will not support.”
“In other words, we’re now seeing that those with a clear purpose will win through delivering superior financial performance and better share price,” added Greg.
Thank you to Greg Milano for graciously sharing his research and knowledge with us. Subscribe to our newsletter or stay tuned for part two of our discussion. Greg and I discuss making the shift from shareholder primacy to stakeholder value.