A Deeper Look at the Return on Purpose: Before and During a Crisis

Greg Milano, Riley Whately, Brian Tomlinson and Alexa Yiğit

Journal of Applied Corporate Finance, 2021, vol. 33, issue 2, 95-111

Abstract: The authors summarize findings from their research on how purpose relates to the profitability, growth, and value of public companies. Using a unique dataset that measures consumer perceptions of purpose at the brand level, the authors construct high‐ and low‐purpose cohorts for a population of public companies where a single brand accounts for a substantial majority of company revenues and value. In analyzing median performance of the high‐ and low‐purpose cohorts, the authors provide striking evidence of the relationship of purpose to improved financial performance, market valuation and shareholder value creation. In addition, by measuring cohort performance over the three years ending 2019 and on a quarterly basis during 2020, the authors create a picture of how high‐purpose companies materially increased their performance, valuation, and value creation advantage over low‐purpose companies in response to the market disruption and recovery caused by COVID. Among the most notable findings, the high‐purpose cohort's revenue growth advantage increased from 2.5% pre‐COVID to 14.1%; operating margin advantage increased from 5.2% pre‐COVID to 7.7%; return on capital advantage increased from 3.0% pre‐COVID to 5.8%; EV/EBITDA premium increased from 3.2x to 6.2x; and annualized TSR advantage increased from 13.3% to 34.7%. The authors complement these findings with a regression analysis that evaluates the explanatory power of purpose on market valuations for the study population while controlling for a range of financial performance variables and select sector designations. They find that a 1‐unit increase in purpose (on a scale of 0 to 100), is associated with a 1.2% increase in valuation. For the median S&P 500 company by revenue and valuation, this suggests that improving from a median score on purpose to a top‐quartile score could be worth an incremental $9.2 billion in shareholder value. The authors conclude by placing these findings in context of the current debate on the role of purpose in public corporations and provide guidance on how they can be applied in practice to improve both stakeholder value and shareholder value.

Date: 2021
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