Clicky

How to Turn Purpose Into Profits - Ideas for Leaders
Idea #760

How to Turn Purpose Into Profits

This is one of our free-to-access content pieces. To gain access to all Ideas for Leaders content please Log In Here or if you are not already a Subscriber then Subscribe Here.

KEY CONCEPT

Corporate purpose can give employees a sense that their work is meaningful. Whether such meaningfulness translates into better corporate performance is dependent on a number of factors. These factors include the clarity with which top management communicates the purpose, and whether middle managers and the company’s professionals feel this sense of purpose and meaning.


IDEA SUMMARY

Milton Friedman notwithstanding, maximizing profit (and thus shareholder value) is no longer considered the one and only purpose of a corporation or business. The truly successful business is driven by a greater purpose that benefits society and our world and inspires a firm’s leaders and employees by giving their work meaning. The inspiration and commitment at the heart of a purpose-driven company leads to greater profits: one does well by doing good.

So says the common wisdom.

As often happens, what intuitively seems correct and logical is not always borne out in the real world. In short: do purpose-driven companies truly perform better financially than companies focused only on financial gain?

The challenge in answering this question is how to measure corporate purpose. Companies can have a wide variety of purposes — from saving the environment, to enriching the daily lives of the less affluent through less expensive, quality products and services, to providing innovative and affordable health care choices — to cite just a tiny sample. In addition, true purpose is much more than the pithy, easy-to-say words of mission and value statements. A slogan on a website and on marketing materials — our products make your lives better — is hardly proof of corporate purpose. As indicated by the definition above, true purpose is intangible — it is found in the hearts of leaders, employees and even customers. To measure purpose, you must look inside people, not read the marketing collateral.

A team of researchers from Wharton, Columbia and Harvard accepted the challenge of measuring purpose across a wide variety and significant number of companies and through a number of In conjunction with the Great Place to Work Institute, the researchers designed a comprehensive survey designed to reveal whether employees (not executives or marketers) had, as a group, a strong of the meaningfulness and impact of their work. Companies in which employees felt the meaningfulness and impact of their work were considered strong in purpose.

More than 450,000 employees across 429 firms participated in the survey over a period of six years.

The survey questions came in the form of statements to which participants indicated — on a scale of 1 (almost always untrue) to 5 (almost always true) — whether the statement was accurate. Examples of statements on the survey included: 

  • “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.”
  • “I'm proud to tell others I work here.”

The researchers then compared the level of purpose in companies to their financial results as measured by accounting (e.g. Return on Assets and Tobin’s Q) and stock market performance. The results will disappoint some: the study showed no direct connection between corporate purpose and corporate performance.

However, a ‘factor analysis’, which is the effort to uncover relationships between purpose and other factors — revealed two categories of companies with purpose: the purpose-camaraderie company, which is the company that scores high on both purpose and workplace camaraderie; and the purpose-clarity company that scores high on both purpose and management clarity — that is, the clarity with which management expresses its expectations, and communicates where the company is going. 

Workplace camaraderie was measured through survey questions that explored employee perceptions on whether they considered their workplace a fun place to work, and whether there was a familial atmosphere among the employees. Clarity was measured through such survey questions as “Management has a clear view of where the organization is going and how to get there; “Management makes its expectations clear”; and “I am given the resources and equipment to do my job.”

Comparing these two refined measures of purpose — purpose-camaraderie and purpose-clarity — to corporate results showed no correlation between purpose-camaraderie and superior financial performance. However, the factor analysis did uncover a correlation between purpose-clarity and financial performance, notably in terms of future stock marketing performance. 

The researchers further parsed the data from the data by dividing the results based on level in the organization, specifically: executives and senior managers, sales force, middle managers, salaried professionals, and hourly workers. In general, the researchers found that the higher the level in the organization, the more likely the individual would believe that the company had a purpose.

In terms of relating purpose-clarity to financial results, the data showed that the perception of middle managers and professionals are what counted the most — that is, when middle managers and professionals believed in the purpose of the company, that company would show higher results.


BUSINESS APPLICATION

This study adds nuance to the pat phrase that a company “does well by doing good.” Corporate purpose can drive higher firm performance, but the effect is far from automatic. Among the practical applications of this study are the following:

  • Executives tend to believe that the company has a purpose, but they should not assume that other levels of the organization share this belief. The company will want to make a targeted communication effort about the company’s purposes aimed at the other levels of the organization.
  • Clarity is the required differentiator if the company wants to see its purpose reflected in the company’s financial performance. Simply having a sense of purpose is not enough if the management has not clearly communicated its expectations and the direction and ambitions of the company. 
  • Achieving buy-in into the company’s purpose from middle managers and professionals is essential, for they are the employees who can translate purpose into performance.

  • SHARE


FURTHER READING

  Claudine Gartenberg profile at The Wharton School
  Andrea Prat’s profile at Columbia Business School
  George Serafeim’s profile at Harvard Business School
  The Wharton School Executive Education profile at IEDP
  Columbia Business School Executive Education profile at IEDP

Ideas for Leaders is a free-to-access site. If you enjoy our content and find it valuable, please consider subscribing to our Developing Leaders Quarterly publication, this presents academic, business and consultant perspectives on leadership issues in a beautifully produced, small volume delivered to your desk four times a year.

FIND OUT MORE HERE

Idea conceived

January 7, 2019

Idea posted

Jan 2020
Can't find the Idea you are after?
Then 'Challenge Us' to source it.

SUBSCRIBE TO IDEAS FOR LEADERS AND ACCESS ALL OUR IDEAS, PODCASTS, WEBINARS AND RECEIVE EXCLUSIVE EVENT INVITATIONS.

For the less than the price of a coffee a week you can read over 650 summaries of research that cost universities over $1 billion to produce.

Use our Ideas to:

  • Catalyse conversations with mentors, mentees, peers and colleagues.
  • Keep program participants engaged with leadership thinking when they return to their workplace.
  • Create a common language amongst your colleagues on leadership and management practice
  • Keep up-to-date with the latest thought-leadership from the world’s leading business schools.
  • Drill-down on the original research or even contact the researchers directly

Speak to us on how else you can leverage this content to benefit your organization. info@ideasforleaders.com