How PayPal has made societal impact and purpose the guiding lights of its strategy.
In the latest episode of the Inside the Strategy Room podcast, environmental, social, and governance (ESG) topics take center stage. While ESG discussions are widespread among executives, the social component often receives less attention compared to environmental and governance aspects. This podcast episode explores the significance of the social element, particularly highlighted by the pandemic. Vivian Hunt, a senior partner, and Bruce Simpson, CEO of the Stephen A. Schwarzman Foundation and a senior advisor to McKinsey on ESG and purpose, engage in a discussion with Franz Paasche, who oversees corporate affairs globally for PayPal, including stakeholder management. The conversation, edited for clarity, sheds light on the importance of addressing social issues in corporate strategies. For more insightful discussions on critical strategy issues, tune in to the series on your preferred podcast platform.
Sean Brown: Vivian and Bruce, you coauthored an article on stakeholder capitalism that talks about the growing importance of companies focusing on their societal impact. Why is that attention so vital today?
Vivian Hunt: We have done a lot of work on the impact of multiple performance variables and found that corporate outperformers look at a broader range of issues for their employees, investors, and other stakeholders over longer periods of time. If 2020–21 is teaching us anything, it is that the intersections of health, economy, technology, social factors, and, of course, geopolitics are more profound than ever. In the 1950s, a CEO might have said, “I spend a lot of time on regulatory or external relations.” Now, it is a much more complicated landscape. How do you get real insight into stakeholders’ needs and then link that to your strategy? Because we know that stakeholder relationships do link to value, and not only economic value. How do you define that value more broadly and bring it to bear in ways your stakeholders recognize?
“How do you get real insight into stakeholders’ needs and then link that to your strategy? Because we know that stakeholder relationships do link to value, and not only economic value.” -Vivian Hunt
The broader focus on purpose and ESG also enhances resilience, a critical quality highlighted by recent events. The economic crisis has underscored the asymmetrical impacts, with significant job losses disproportionately affecting women and lower-paying jobs. Technology advancements offer benefits like accessibility and efficiency but can also lead to job displacement for those lacking necessary skills. Questions arise about what constitutes a sustainable income and how to account for additional household pressures such as eldercare. Failing to address these issues incurs tangible costs, whereas companies that prioritize them tend to perform better.
Sean Brown: Bruce, what does the S, or social, part of ESG cover in relation to corporations?
Bruce Simpson: We see a few factors, starting with treating workers fairly and paying them wages that give them disposable income beyond just paying for food and rent. In the US, frontline workers’ wages have not risen in real terms in 40 years. Second is investing in employee skills, training, and development, so people can move up to higher echelons on the economic ladder. Truly living diversity, equity, and inclusion and creating products that contribute positively to society are other aspects, as is improving communities where you operate.
Finally, there is moving from brands to stands. This last one is controversial because CEOs are “damned if you do, damned if you don’t.” Employees expect them to take stands on social topics that go well beyond the products and services their companies provide. In fact, 38 percent of consumers today are boycotting products or services due to a mismatch in values. On the other hand, of course, you can be criticized for such stands, particularly if people see your stand on a topic as inconsistent with other things the company is doing.
Sean Brown: How would you advise corporate leaders to determine which aspects of their companies’ social impact to prioritize?
Bruce Simpson: Companies need to know their vulnerabilities and strengths in the ESG space. They can look at themselves from the outside and calibrate: What is my environmental footprint? What is my social footprint? What is my governance footprint? Then consider what your vulnerabilities are within those brackets, as well as your strengths. Where can you step up and really make a difference? If you don’t know your vulnerability, the critics will point it out as soon as you start speaking about ESG or purpose externally and criticize you for it, so you had better get there first.
Now, 85 percent of companies have a purpose statement that does not mean anything to anybody. It’s a fluffy statement, often created by an ad agency, that does not anchor any specific business initiatives. Developing a purpose and an ESG focus is a business exercise requiring specificity. PayPal has a clear purpose statement, which cascades down into an understanding of the company’s vulnerabilities—cybersecurity, for example, and protecting users’ financial data—and its strengths: they have good data, for example, on working-capital challenges in their communities, and that is a strength they can develop. They also have clear platforms: employees, social innovation, environmental sustainability, and responsible business practices, with clear commitments that are measurable and for which people are accountable.
“Most companies have a purpose statement that does not mean anything. It’s a fluffy statement, often created by an ad agency, that does not anchor any specific business initiatives.”-Bruce Simpson
Sean Brown: Franz, can you take us through the process of how PayPal engaged the organization in developing its corporate purpose and identifying the strengths and vulnerabilities?
Franz Paasche: This was a five-year journey for us. We had the opportunity to essentially re-found PayPal after eBay spun it out in 2015. The first task we took on was to articulate a new mission with a strong central purpose and values that would reinforce that mission. We also defined a strategy that was built in combination with and would reinforce the mission and values, and our employees have become a huge force for the mission and hold us accountable to live our values.
We articulate our central purpose as democratizing financial services and e-commerce. We help underserved communities connect to the financial system and have the benefits of the global economy, and we strive to improve the financial health of customers and communities who needed affordable, easy, safe ways to connect to the global economy. We had some difficult moments of learning what it means to live your values both internally and externally.
Sean Brown: One of those moments was probably seeing the results of the financial-security audit you did of your workers to understand whether they have enough income to live on. Can you tell us about that?
Franz Paasche: This goes back to 2018 but it prepared us for how our employees would experience the pandemic period. At the time, we were building products such as PayPal Working Capital, which enables small businesses that don’t have access to banking services or can’t afford the fees to get capital online, and as we studied the data, we started to think about our own employees. We have a broad range: some employees work in call and operation centers; others are lawyers, PhDs, and engineers. We also have an employee emergency fund to help employees during personal crises, and we started to see some requests for seemingly small crises that one would not think would derail a person’s finances. So we did a survey and found that about a third of our employees were struggling paycheck to paycheck. That was a surprise to us because we pay at market or well above market rates. Clearly, capitalism wasn’t working for this portion of the economy.
We worked with nonprofits and academic experts and developed a concept we call “net disposable income.” We asked, “What do our employees have after they have paid their essential living expenses and taxes?” What we found was that many of the employees in that third of the company that were struggling financially had 4 to 6 percent net disposable income. We set 20 percent as our goal and took immediate action. We looked at this from a stakeholder perspective—our employees are our most important constituency and it was unacceptable, given who we were and what we stood for, that we would have employees who were concerned about making ends meet.
Tran Dung/ATES GLOBAL
Source: Mckinsey
