PNR Paper

Corporate Purpose and Financial Performance

Gartenberg, Claudine, Andrea Prat, and George Serafeim. “Corporate Purpose and Financial Performance.” Harvard Business School Working Paper, №17–023, September 2016

Executive Summary

In this paper, the authors want to determine whether employee beliefs in a corporate purpose are associated with superior financial performance or not. They found that, at an aggregate level, purpose is not related to financial performance. However, a subset of firms from the dataset (high purpose/high management clarity firms) have systematically higher accounting and stock market performance. This relation is driven by middle managers and professional staff rather than by senior executives or hourly workers.

Profit Maximization or Purpose Maximization ?

A long-standing argument from the business world is that a corporation’s role is to maximize profits and shareholder value and that any deviation from this role is evidence of agency problems. On the other hand, some business leaders argue that a strong purpose, defined as “a concrete goal or objective for the firm that reaches beyond profit maximization,” is necessary to generate financial success. For example, Virgin’s purpose is “changing business for good”. Given that these firms might make non-profit maximizing decisions, having a strong purpose can be seen as a distraction. However, purpose could be related to financial performance because it might increase employee effort or customer loyalty and satisfaction.

High Purpose Firms and Financial Performance

For this paper, the authors focused on public companies in the US across a broad range of industries. They calculated measures of purpose for 456,666 employees within 429 firms on a six-year period. At an aggregate level, they found that purpose is not related to financial performance.

From this analysis, they identified two groups of organizations with high purpose. The first group is Purpose-Camaraderie (e.g. “This is a fun place to work”; “We are all in this together”; “There is a family or team feeling here”) and the second group is Purpose-Clarity (e.g. “Management makes its expectations clear”; “Management has a clear view of where the organization is going and how to get there”). The authors found that Purpose-Clarity firms generated significant abnormal stock returns, which are estimated between 5.9% and 7.6%.

Furthermore, the authors found that the more senior the employee, the stronger is the perceived purpose of the organization. In the case of Purpose-Clarity firms, it is solely the middle managers and professionals that drive the relation with financial performance.

Discussion of Mechanisms Influencing Financial Performance

Relational Contracts and Trust
It is the presence of clarity that makes possible for purpose to develop into a relational contract between all levels of employees. Indeed, an inability to clearly communicate expectations and roles in a workplace makes it less likely for different parties to cooperate.

Decentralization
In a decentralized environment, employees have more autonomy and feel more empowered, thus leading to higher levels of perceived purpose. Coupled with high clarity, it results in better and more efficient decision-making.

Customer Loyalty and Satisfaction
Other papers have suggested that purpose leads to higher customer satisfaction and loyalty when customers care about the firm’s purpose.

Conclusion

In this paper, the authors found that an overall measure of purpose is not related to financial performance. However, high purpose firms come in different types: high camaraderie and high clarity workplaces. High clarity firms superior financial performance is driven by the middle ranks of the organization.

Given these findings, senior executives should make sure their expectations are clear and that they communicate their view of where the organization is going and how to get there. In addition, they should make sure that employees feel empowered and that they communicate their purpose to the external world as well.