When Purpose Makes Cents

Instilling mid-level employees with a sense of purpose and clear management direction can lead to juicy stock returns
i love my job

The essentials

  • A strong sense of corporate purpose leads to better firm financial performance but only if that sense of purpose is held within the middle ranks and accompanied by clear direction and resources from management.

What is corporate purpose really worth? If you believe some management experts, firms in which employees derive a sense of meaning from their work have an edge over firms that are not similarly blessed. But, in crass terms, does this translate into a better bottom line or is it mere happy talk?

Researchers trying to answer this question have been dogged by one big challenge: how to measure corporate purpose systematically across firms and years.

One research team may have found the answer. They used a proprietary survey of employees that measured their perceptions of their employers, including workplace collegiality and the nature of their jobs. The survey, from the Great Places to Work Institute, involved more than 450,000 employees across various job levels from almost 500 publicly-listed organizations, over a six-year period. “These responses allow us to circumvent corporate cheap talk and measure actual employee beliefs,” says Claudine Gartenberg of The Wharton School.

How is “corporate purpose” defined? According to Gartenberg who reported on her team’s findings at the Organizational Economics Conference at Smith School of Business, “firms with strong purpose are those where employees hold strong beliefs in the meaning and impact of their work.” In other words, their objectives extend beyond maximizing profit.

You won’t necessarily find an organization’s purpose etched on office wall plaques or posted on its website. It is an intangible belief system that is far more intrinsic: employees’ pride in their work and a sense that they’re contributing to their community.

High Purpose-High Clarity

Initially when they analyzed the data in aggregate, Gartenberg and colleagues Andrea Prat (Columbia Business School), and George Serafeim (Harvard Business School), found no relation between the strength of employees’ sense of meaning and firm performance, measured as return on assets and Tobin’s Q (the market value of a company divided by its assets' replacement cost).

Then they looked deeper and identified two types of organizations with a strong sense of purpose. There were organizations that scored high on purpose and workplace camaraderie (“This is a fun place to work”). And there were others that scored high on purpose and management clarity (“Managers have a clear view of where the organization is going and how to get there”).

When they examined the data with these two types of organizations in mind, they hit pay dirt. They found that high purpose–high clarity organizations exhibited superior accounting and stock market performance. Specifically, a portfolio of high purpose–high clarity firms earned significant positive stock returns, up to 7.6 percent annually.

While one might assume that senior executives’ sense of purpose is what drives the connection, the study’s findings report something different. Yes, it is true that the more senior the employee, the stronger is the perceived purpose of the organization.

But in high purpose-high clarity organizations, it is the middle manager and the salaried professional — and the strength of their sense of purpose — that drive financial performance. Whether or not senior executives were really into their work did not make a difference.

“We view this result as especially interesting in the context of frequent arguments about the obsolete nature of middle management as a layer in the organization,” the researchers note in their journal article.

These findings do raise a couple of unanswered questions. What are the determinants of a high purpose–high clarity environment? Do they differ across job levels?

For organizational leaders, what does seem clear is that intangibles such as employees’ sense of purpose in their work and pride in their organization do matter to the bottom line. Purpose, after all, enables a deeper level of commitment and shared meaning. It is up to leaders to communicate a clear vision and pathway to achieve that vision, and to target the middle ranks to instill those values.

As the researchers note, “Our evidence suggests that the middle ranks of an organization are the critical layer through which strong sense of purpose is associated with better performance.”

— Kate Irwin and Alan Morantz

 

Smith School of Business

Goodes Hall, Queen's University
Kingston, Ontario
Canada K7L 3N6

Follow us on:

Queen's logo