The Type of Purpose That Makes Companies More Profitable
We hear more and more that organizations must have a “purpose.” Purpose is on the agenda of the World Economic Forum in Davos, and discussed by celebrity CEOs like Richard Branson of Virgin Group, who has said, “It’s always been my objective to create businesses with a defined Purpose beyond just making money.” Oxford University and Ernst and Young found that public dialog on purpose has increased five-fold between 1995 and 2016.
But is all this talk about purpose actually delivering business results? Most companies have mission and vision statements, but those tend to communicate very little about a company’s purpose. They all use the same words, such as “respect,” “teamwork,” and “innovation.” But many, perhaps most, of the same organizations lack those characteristics. A recent study found that corporate jargon about values has absolutely no relationship with firm performance.
In a new research paper we tried to determine if all the resources companies are putting toward at least the appearance of purpose are working. We constructed a measure of corporate purpose within a sample of 429 U.S. companies, based on more than 450,000 survey responses of worker perceptions about their employers. Our evidence comes from a proprietary survey from the Great Place To Work (GPTW) Institute that covers employees across all hierarchical levels within hundreds of organizations that rate their employers in terms of a wide variety of organizational workplace variables.
The primary benefit of this dataset is that it allows us to construct measures across a diverse set of companies based on actual employee beliefs about their employer. A subset of the survey asks employees to agree or disagree with statements like: “My work has special meaning: this is not just a job”; “I feel good about the ways we contribute to the community”; “When I look at what we accomplish, I feel a sense of pride”; and “I’m proud to tell others I work here.”
Notice that these questions do not ask exactly what that purpose is, whether it is to save the environment, advance human health, push the technological frontier, or provide cheap and efficient energy for all. The actual purpose of the company can differ wildly across companies. All that matters for our purposes is that it focuses employees on a goal beyond profit-maximization and resonates in a meaningful and personal way within the company.
The Great Places to Work survey also gives us the opportunity to measure other employee beliefs about their employer (e.g. fairness, management quality) and connect them both to purpose and financial performance. Even more interestingly, the survey allows us to measure these beliefs at various job levels, from executives down to hourly workers, and report how beliefs differ by job levels and how those differences relate to performance.
So what did we find?
Interestingly, in our initial analysis, we found that our measures of purpose weren’t correlated with firm financial performance in either direction.
We then performed what is called a “factor analysis” on the survey responses. This analysis lets us see how purpose interacts with other attributes in the data. From this analysis, we identify two types of companies with purpose. The first type, high purpose-camaraderie organizations, includes companies that score high on purpose and also on dimensions of workplace camaraderie (e.g. “This is a fun place to work”; “We are all in this together”; “There is a family or team feeling here”). The second type includes high Purpose-Clarity organizations that score high on purpose but also on dimensions of management clarity (e.g. “Management makes its expectations clear”; “Management has a clear view of where the organization is going and how to get there”).
When we replaced our initial measure of purpose with these measures capturing the two types of purpose organizations, we found that only the high Purpose-Clarity organizations exhibit superior accounting and stock market performance.
We also found that middle managers and professional workers seem to be the key players in driving this relationship, not hourly workers and not top executives. This last finding underscores the absolute importance of fostering an effective middle manager layer within firms: managers who buy into the vision of the company and can make daily decisions that guide the firm in the right direction.
Ultimately, our study suggests that purpose does, in fact, matter. But it only matters if it is implemented in conjunction with clear, concise direction from top management and in such a way that the middle layer within the firm is fully bought in.
George Serafeim is a professor of business administration at Harvard Business School, a cofounder of KKS Advisors, and the
chairman of Greece’s National Corporate Governance Council. Follow him on Twitter @georgeserafeim.
Claudine Gartenberg is an Assistant Professor of Management at Wharton School of Business at University of Pennsylvania. She has consulted to Fortune 500 companies in energy, retail and banking on change management and technology. Follow her on twitter @cmgartenberg.
The Type of Purpose That Makes Companies More Profitable
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