‘The social benefit of better pay and conditions can produce competitive advantage’

The concept of profit with purpose is well understood, but purpose with profit is not as widely known. This will be among the topics for discussion at Ibec’s inaugural S in ESG Summit which takes place at the Intercontinental Hotel Dublin on November 30th.

The half-day event will bring together some of Ireland’s leading chief executives and business voices along with international experts to discuss the important social issues of our time and economic challenges impacting business growth in Ireland. The aim is to provide space for discussions on rethinking future business and economic models and the leadership role business can take in creating sustainable, inclusive economic growth.

Keynote speaker Mark Kramer is a recognised global authority on strategies that drive competitive advantage by leveraging business opportunities with social impact. A former Harvard Business School lecturer, Kramer is a founder of social impact consultancy FSG and a partner in Congruence Capital, a newly launched impact investing hedge fund.

“The social element of ESG is fundamentally important,” he says. “The environment element is quite clear. It lends itself to metrics around emissions reductions and comparisons with other companies. But social offers a whole range of opportunities for organisations to differentiate themselves in terms of the social benefits their products or services might bring as well as the company’s practices in areas like health benefits and employment and so on.”

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While there are no common standards to measure these things, there are numerous examples of direct linkages between the delivery of social benefits and the achievement of competitive advantage.

One of those is South African health and life assurance company Discovery which offered incentives to customers to lead healthier lifestyles. “They gave them a free Apple smartwatch and set weekly exercise goals for them,” Kramer explains. “Meeting the goal earned the customer a reward like a free coffee, if they don’t keep up, they’ve got to give the watch back. Behavioural economists will tell you that people value what they have more than what they never had and might get. They don’t want to lose the watch and will tend to do what it takes to keep it.”

The result was a classic win-win. “It increased the profitability of the company and the health of its customers at the same time,” says Kramer. “Life expectancy of its customers increased by 10 years, their healthcare costs went down by 15 per cent, and hospital stay lengths were reduced by an average of between one and two days. The company has licensed the Vitality programme to other companies around the world. It has shifted the understanding of insurance from one of spreading risk to reducing risk. The company gained competitive advantage by making its customers healthier.”

Another example he points to is Nestle’s nutraceuticals business. “Of course, they sell candy, but they also take the link between nutrition and health very seriously. They started developing nutritional products with medical benefits including significant reductions in post-operative infection rates and support for people suffering from drug resistant depression. The nutraceutical business is now the fastest growing part of Nestle.”

PayPal got involved in social programmes to provide greater access to financial services for lower income populations. “They give small businesses access to working capital loans,” says Kramer. “In the US, small businesses are disproportionately owned by minorities and women. PayPal can see the businesses’ revenue streams. The businesses can apply online and be granted a loan in minutes and repayments are based on a percentage of revenue. The nice thing is that when a recession comes and revenue declines, the debt service payments also decline.”

This has been extremely successful for PayPal, he adds. “Small businesses participating in the scheme grow by 20 per cent year on year as opposed to the 2 per cent achieved by a control group of comparable businesses. These are examples of how companies can develop new lines of profitable business by delivering social benefits. That’s what creating shared value means; creating value in a way that contributes to making people’s lives better.”

The results can be surprising depending on your perspective. Kramer points to the work of Zeynep Ton of MIT Sloan School of Management, author of The Good Jobs Strategy: How the Smartest Companies Invest in Employees to Lower Costs and Boost Profits.

“She showed that by paying people a living wage with additional benefits, autonomy in work, predictable shift patterns to give them more control over their lives, productivity increases, and employee retention improves,” he says. “It’s more profitable to pay people more than the minimum wage and not have a workforce stressed by financial pressures. The social benefit of better pay and conditions can produce competitive advantage. Companies can’t replace governments in creating a just and fair society, but they can do quite a lot in the regions where they operate.”