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Questioning The Business Case For Purpose

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Questioning The Business Case For Purpose

Corporate purpose is the buzzword of the day. Last August, the US Business Roundtable radically redefined its statement of the “purpose of a corporation” to include stakeholders, rather than just shareholders. Larry Fink, who leads the world’s largest asset management firm BlackRock, wrote in a 2018 letter to corporate CEOs: “Without a sense of purpose, no company, either public or private, can achieve its full potential.

But is there actually evidence to back up this claim? It’s been widely quoted to highlight the urgency of adopting a purpose – but the statement itself never cited any evidence, yet has been accepted uncritically. This is an example of confirmation bias – the temptation to accept evidence that it confirms what we want to be true, which I explored in a TED talk, What to Trust in a Post-Truth World. We’d love it to be the case that purposeful companies succeed, for at least two reasons. First, we’d like to live in a world in which companies that do good also do well, and selfish companies get their comeuppance. Second, the idea that purpose drives success is empowering, because any company can come up with a purpose. So it suggests that a leader merely needs to follow a three-point purpose plan and then she’s on the road to riches. Indeed, I’ve just written a book on purpose, entitled Grow the Pie: How Great Companies Deliver Both Purpose and Profit, on the importance of purpose, and so might have a vested interest in arguing that the business case for purpose is unambiguous.

But it’s not. Let’s take one of the most influential books on purpose, “Start With Why” by Simon Sinek. (I very much like Sinek’s TED talks and agree with the importance of purpose; these remarks are merely an assessment of the scientific evidence).  He claims that purpose has driven Apple’s success, since Apple was founded on the “why” statement “Everything we do, we believe in challenging the status quo.” Apple has indeed been extremely successful.  But there could be a ton of reasons behind its success – perhaps Steve Jobs’ novel ideas or his network of relationships. However, the narrative that success was due to Apple’s “why” is particularly appealing as anyone can adopt a “why” – whereas not everyone can suddenly think of a novel idea or has a network of relationships. Moreover, Apple never actually said “everything we do, we believe in challenging the status quo”, nor anything similar, but people took this for granted and indeed you can find 23,000 articles on Google quoting this phrase because they accepted it uncritically.

In addition, Apple is a single hand-picked example. You can almost always find an anecdote to support anything you’d like to support. To show that purpose drives success, we’d need to look at hundreds of “purposeful” companies and see whether they outperformed non-purposeful ones.  Indeed a recent book does so, but as highlighted in an excellent Branding Strategy Insider article by Richard Shotton, the evidence is extremely weak. It shows that purposeful brands performed better, but the “purposeful brands” were selected as those that ended up being successful, so the argument is circular. Moreover, interpreting “successful companies have a purpose” as “purposeful companies are successful” is a major logical error – just as “all successful CEOs have two legs” doesn’t imply that “all CEOs with two legs are successful.” To make the claim that “purposeful companies are successful”, you’d have to look at all purposeful companies, not just those that ended up being successful, and compare them to non-purposeful ones.

The Evidence Behind The Concept Of Purpose

So how strong is the evidence for purpose, really?  That’s what my book aims to gather.  Rather than starting from a pre-conceived notion that purpose must matter and then hand-picking studies that support it, I aim to let the data speak and scrutinize the evidence critically. By doing so, any evidence that survives the scrutiny should speak not only to the converted – people who already believe in purpose – but also to hard-headed business leaders who previously thought that purpose is a luxury or an optional extra.

The first thing to acknowledge is that it’s almost impossible to measure “purpose”. We could indeed look at purpose statements, but companies can always come up with statements even if they don’t actually put them into practice. Moreover, the impossibility of measuring purpose gives researchers substantial freedom to cook the data. They can find companies that ended up being successful, and then categorize all these companies as “purposeful”.  Since purpose can only be assessed subjectively, no-one can objectively falsify their definition. Indeed, luxury brands such as Moët & Chandon and Mercedes-Benz were classified as “purposeful” – but purpose involves serving wider society rather than just the 1%, so these classifications are dubious.

Rather than aiming to measure “purpose”, a more rigorous approach is to measure outcomes – whether a company actually delivers value to society. One of my own studies looks at the list of the “100 Best Companies to Work For in America”, which is a measure of employee well-being.  It’s compiled independently by the Great Place to Work Institute, so I didn’t have the freedom to pick and choose which companies I counted as “employee-friendly.”  This list is particularly thorough – it randomly selects 250 employees and surveys them on 57 questions of employee well-being spanning credibility, respect, fairness, pride, and camaraderie. As a result, it’s widely respected and thus has been around since 1984 and since expanded to 45 countries.

But simply showing that the Best Companies outperform their peers isn’t enough. For example, Google is perennially on the list, and has performed well. That could be nothing to do with employee satisfaction. Perhaps it’s because Google is in the tech industry, and the tech industry happens to have performed well. So, to isolate the effect of employee satisfaction, I stripped out the impact of a company industry, and many other factors that could have driven returns such as its size and recent performance. And I addressed the problem that it could be firm performance that causes employee satisfaction, rather than the other way round.  After all that blood, sweat, and tears, I found that the Best Companies outperformed their peers by 2.3-3.8% per year over a 28-year period, which is 89-184% compounded.

This study ended up being published in a top peer-reviewed academic journal, the Journal of Financial Economics. To do so, it has to be rigorously scrutinized by world-leading scholars, who tried to take apart my arguments. Does being on the Best Companies list causes socially responsible funds to buy these companies, and that’s what drives up the stock price? Are companies that treat their employees well also well-governed, and it’s good governance, rather than employee well-being, that cause the outperformance? Did the market think that employee-friendly companies were “tree-huggy” and thus priced them too cheaply, and that’s what caused them to do well going forwards? I needed to answer all of these questions to satisfy the peer reviewers and get the paper published. But many studies claiming that “purpose pays” are released without having to undergo such scrutiny.

What about other dimensions of stakeholder value beyond employees?  A study published in The Accounting Review, a top accounting journal, uses MSCI ESG (Environmental, Social, and Governance) scores, which are again produced by a third-party (MSCI) rather than being subject to the researchers’ discretion. These scores cover a company’s performance on multiple societal dimensions, such as employees, customers, the environment, and communities. Contrary to common folklore, companies with high scores across the board do not beat the market. Instead, only companies that do well on the stakeholder dimensions material to their industry, and actually do badly on immaterial dimensions, beat the market.  For a bank, this might mean focusing on fair marketing and data security rather than climate change, even though the latter might be the order of the day.

What this all means is that there is no evidence that a “purpose” that tries to be all things to all people will outperform. A purpose that aims “to serve customers, colleagues, suppliers, the environment, and communities while generating returns to investors” sounds inspiring. But it ignores the reality of trade-offs – for example, shutting down a coal-fired power station helps the environment but hurts workers.  So while the above purpose statement sounds great, it can’t be put into practice, and offers no guidance on how to navigate trade-offs.

Purpose Defined

Indeed, the word “purpose” is often misunderstood.  “Purposeful” is often seen as a synonym for “altruistic”, e.g. a “purposeful company” is an altruistic one. But, semantically, this isn’t what “purposeful” means – it means targeted and focused. A purposeful meeting is one that has a clear agenda; if I do something “on purpose”, I do it deliberately. A purposeful company recognizes that it needs to serve wider society – but also recognizes that it will need to take tough decisions when trade-offs arise. Purpose involves understanding who are the “first among equals” to guide such trade-offs – it’s about knowing what not to do as well as what to do.  Purpose is the answer to the question “How is the world a better place by your company being here?”  The response has to be focused, just as a citizen’s purpose would never to be a doctor, teacher, lawyer, and entrepreneur.

And this more nuanced view of purpose is actually freeing, rather than constraining.  Some companies may think that being purposeful is a daunting task, since they need to “serve customers, colleagues, suppliers, the environment, and communities while generating returns to investors”.  They may thus not even try, and instead default to maximizing short-term profit.  As a result, sweeping claims on the criticality of purpose may hinder, rather than help, the move towards a more enlightened view of capitalism.  Instead, the evidence on the importance of materiality gives leaders reassurance that they don’t need to be purposeful.  By being grounded on evidence rather than wishful thinking, leaders can better put into practice what purpose actually means – and by doing so serve both shareholders and wider society.

Contributed to Branding Strategy Insider by: Alex Edmans, Professor of Finance at London Business School and author of Grow the Pie, How Great Companies Deliver Both Purpose and Profit.

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1 Comment

John Rosling
Twitter: jrosling
on June 02nd, 2020 said

As always, a great piece by Alex Edmans.

“Indeed, the word “purpose” is often misunderstood. “Purposeful” is often seen as a synonym for “altruistic” .. but this isn’t what “purposeful” means – it means targeted and focused.”

Spot on. The bit that often seems to be missed is that ‘purpose’ clarifies and accelerates decision-making AS WELL AS engaging humanity.

Can its benefits be measured? Alex says ‘rather than aiming to measure “purpose”, a more rigorous approach is to measure outcomes’. To which I can only agree. Our approach for last few years has been to measure a wide palette of employee belief and behaviours known to be factors in human and organisational success and establish how and why these are being influenced by purpose.

What we can show is that purpose significantly shifts the dial on organisational performance. But that ‘having a purpose’ (in the sense of people being aware of the words) has very little impact. Purpose must be activated in the culture of the organisation for it have a material impact on performance. And what the numbers show is what activates purpose in organisations in cultures across the world is both remarkably consistent and somewhat surprising.

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