© Photo by Ravi Roshan on Unsplash
22. February 2022

When does a corporate purpose pay-off – and when not?

Original Study: Gartenberg, C., Prat, A. and Serafeim, G. (2016): Corporate Purpose and Financial Performance. In: Harvard Business School Working Paper, No. 17-023.

The study in one sentence

This study shows that a company purpose needs to come together with a high clarity on how to act upon this purpose, to positively influence future financial performance.

Interesting for people who…

… want to learn about what is necessary to consider that a corporate purpose drives financial performance.

What to remember

This study is among the first attempts to find out what exactly drives the relationship between purpose and financial performance in publicly-owned firms. Analyzing a massive data set of employee engagement scores across all industries provided by Great-Place-To-Work, the empirical evidence of this study reveals that a formal purpose statement as such does not impact financial performance. Further - and counterintuitively - it’s not high scores in camaraderie or “we are all in this together” that influences this association. It’s the clarity among the management on how to implement the purpose which makes the difference. When a high managerial clarity score goes together with a high purpose score, it means that a company has a strong purpose, and the management has a plan how to implement it. It can be read that employees do not only believe in the purpose but in management’s capacity and commitment to realizing it. Interestingly, the significant group seem to be the middle managers. Only if their scoring is high, a positive impact on future performance could be shown.

The most insightful sentence

«1) The combination of purpose and clarity is associated with performance, rather than purpose alone, and 2) only beliefs within the middle ranks of organizations drive the association.»

The most provocative sentence

«An organization’s purpose is not a formal announcement, but depends on the employees believing in and acting to promote this purpose.»

Consequences for managerial practice

This study reminds us that actions create activation. In other words: top management needs to be clear about how to bring the purpose to life. “Bringing to life” means to create a shared reality, based on a shared understanding and commitment to the purpose among all employees. In best cases, among all stakeholders. It becomes obvious that traditional top-down implementation approaches fall short here. To become a truly purpose-driven organization, top management needs to engage in a co-creative open strategy process, starting out with involving its middle managers to review first existing management practices and aligning them with the purpose. Particularly, goals and performance indicators need to be redesigned in order to empower, allow and reward not only profit-driven but purpose-driven behaviors.

Food for forward thinking…

Most companies today still base their management performance evaluation on indicators (KPIs) that reward profit-driven behaviors. How do management goals and performance indicators need to be redesigned so that they support purpose-driven behaviors? Any experiences and ideas are welcome! Thanks for sharing – either below or with me directly.
 Dr. Eva Bilhuber
Dr. Eva Bilhuber
Human Facts AG
Founder | Managing Partner
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