It’s almost an article of faith today that the purpose of a business is more than just profit maximisation – and further that having greater purpose will lead to better financial performance.
But is that actually true?
Before we review the evidence, let’s be clear what we mean by purpose, which is sadly all too often confused with woolly or grandiose mission statements.
Your purpose is the reason your business exists beyond financial results. It’s what gives the work of the business meaning to employees, customers, investors and leaders.
This is sometimes but not always rooted in a pro-social position (e.g. ‘our purpose is to make sustainable fashion affordable’), or correlated with one via ESG initiatives (e.g. when your chocolate company invests in schools in its cocoa-growing regions).
It’s also inherently subjective – you may truly believe your tablecloth firm exists to make the world a better place for everyone – which has made it difficult for academics to say definitively that purposeful businesses do or do not outperform their more mercenary competitors.
Nonetheless, two key patterns do emerge from the research.
1. Purpose improves employee engagement
There’s a substantial body of evidence that firms with engaged employees outperform those with unengaged or actively disengaged employees, for obvious reasons – people who are motivated will give more of their energy and talents, on which success or failure ultimately depend.
Numerous surveys reveal the connection between purpose and engagement. The EY Beacon Institute for example surveyed 474 senior executives, 89% of whom believed that having a strong sense of purpose increased employee satisfaction. McKinsey found that 72% of employees hoped their organisation would put purpose ahead of profit, while 70% of Americans expressed an interest in working for companies with a purpose that aligned with their values, according to Cone and Porter Novelli.
Purpose also appears to have a strong link to employees sticking around, with Deloitte finding employees at ‘mission-driven’ organisations had 40% higher retention levels.
2. Purpose increases customer loyalty
Consumers too have repeatedly expressed a preference for companies with a pro-social, values-led purpose. The Porter Novelli study found that 79% of consumers felt a deeper connection to purposeful companies, while 88% would be more likely to buy products or services from them.
Accenture meanwhile found that 42% of customers who were disappointed with a company’s behaviour on a social or ethical issue would walk away, half of those never coming back.
But what about hard results?
The effects of purpose on customer loyalty and employee engagement – combined with ideas around purposeful companies having more patient investors, and some evidence that mission-driven companies are more innovative – mean that leaders believe you get better results if you have a deeper purpose.
But surveys only take you so far. The evidence of whether purposeful companies actually perform better has been mixed, no doubt in part because of the difficulties in deciding whether a company is purposeful or not.
The most extensive study to look into this was published a couple of years ago by Columbia Business School. The authors – Professors Claudine Gartenberg, George Serafeim and Andrea Prat – compared the beliefs of nearly 500,000 employees at more than 500 leading companies with financial performance over a six-year period.
They found that purpose (expressed as agreement with the following statements: ‘my work has special meaning: this is not just a job’; ‘When I look at what we accomplish, I feel a sense of pride’; ‘I’m proud to tell others I work here’; and ‘I feel good about the ways we contribute to the community’) was not associated per se with improved returns.
However, the authors found that high levels of purpose combined with high levels of clarity (‘management has a clear view of where the organisation is going and how to get there’ and ‘management makes its expectations clear’) were “highly predictive of financial performance” corresponding to increases of approximately 0.7% in annual return on enterprise value, 4% in return on assets and 7% in annual stock returns.
They also found, interestingly, that the improved results could be traced back almost entirely to better performance among middle management, who lacked the financial incentives of senior leaders or the simpler, contracted tasks of front-line employees: “they work for meaning”.
What this means
A guiding purpose is no mere leadership accessory: it can be a powerful tool for motivating employees and connecting with customers. But at the same time, it’s not a solve-all. No amount of navel-gazing about why you’re here will compensate for a lack of good leadership, as exemplified by the role of clarity in the Columbia study.
The real value of corporate purpose – at least as far as financial results are concerned – is really as part of that good leadership. Simply put, if you as the leader don’t know why you’re there, how can you expect anyone else to?
A strong purpose, clearly understood and commercially viable, is therefore not a distraction from growth or profit, as Friedman had it, but a foundation upon which they are built.