Inequality is getting in the way of delivering value through corporate purpose statements. It’s an unusual form of inequality – inequality of inspiration, perhaps due to cynicism that arises from unfair treatment of the workforce.
The debate on the value of company purpose statements goes on. Fans of the approach believe it offers companies a route to providing a clear message to their investors and to their workforce about what the company stands for and is seeking to deliver, serving as a rallying point to shape their interactions. For those unpersuaded, corporate purpose looks like more of a fad, a set of at-best fine words that make no difference to how the company has always operated.
Such cynicism is perhaps encouraged by the poor quality of so many corporate purposes. One thing I am repeatedly struck by when reading the shortlisted annual reports of companies considered for the IR Society awards is that even at these companies with apparently exemplary reporting, several have weak or meaningless purposes. Many are so abstract as to be empty fluff while others are strikingly mundane or focus on financials. Few actually strike the right balance of providing a rallying point for shareholders and employees and assisting their decision-making, including notably assisting decisions about what the company, and individual employees, should not do. These are central elements of what an effective purpose should be.
Recent analysis suggests that this failure to inspire employees may mean corporate purpose fails to deliver on its potential.
The debates on purpose were opened up again at a conference late last year entitled Modern Capitalism and Corporate Purpose, hosted by Copenhagen Business School and organised alongside the ever-excellent European Corporate Governance Institute (ECGI). ECGI recently published a user-friendly summary ably written by my friend George Dallas. One of the key speakers at the conference was Claudine Gartenberg, assistant professor of management at the University of Pennsylvania’s much admired Wharton School. Dallas reports her being still more dismissive than I am about many existing corporate purpose statements, calling them both “twaddle” and “word salads of nothing”.
Gartenberg discussed the key results of a recent study into purpose at both public and private companies. This found that employees of public companies have a lower sense of purpose than those of private companies, and the difference is driven by more junior employees (ie middle managers, professional salaried staff and hourly workers rather than those at the executive level). And, as the chart shows, this situation of what she calls ‘purpose inequality’ is reflected in a rapid deterioration in the sense of purpose as you go down the seniority grades in these organisations:
In an earlier paper, Corporate Purpose and Financial Performance, Gartenberg showed that it is clarity of purpose in the middle ranks of an organisation that can lead to company outperformance. That has to make sense: clarity of purpose can assist with board decision-making (perhaps particularly about activities that the company as a whole should not be doing), but really the value of purpose lies in its providing inspirational rallying power for employees, and helping them in their day-to-day decision-making. Where corporate purpose statements fail to inspire employees they will not convince others and will be only so much ‘twaddle’.
The fact that the evidence on purpose inequality indicates that there is not just a step-change in faith in corporate purpose below the executive level, but a steady deterioration as the study considered more junior members of the workforce, is suggestive that in part staff consider their own treatment when thinking about the corporate purpose. A company that isn’t fair to its own workers isn’t likely to inspire them to believe that it is animated in all its actions by a higher purpose – meaning that it is much less likely to achieve its purposeful aims.
A similar finding in a different industry with different ownership structures strongly suggests that this finding of detrimental effects from limited faith among the broader workforce in purported purposes can be seen as potentially broadly generalisable. This evidence is from the legal profession, and comes from work by LexSolutions and the Law Firm Maturity Index. This shows a sharp disconnect between the faith in a law firm’s stated purpose as seen through the eyes of its leadership (partners, directors or board members) and of its broader staff base (professional lawyers below partner level, generally referred to as associates) – and an apparent correlation between this and these individuals’ sense of wellbeing.
As their article on these findings indicates:
“This suggests a causal connection between the reality of a firm’s purpose and the health of its people…Low levels of wellbeing that arise from primarily pursuing a financial purpose may eventually lead to burnout or staff turnover.” [my emphasis]
Gartenberg’s evidence regarding the differences in employee attitudes in private companies in comparison with public ones (and ones with high levels of private equity ownership) is also telling. It suggests that generally employees are less persuaded that purpose is meaningful in the latter organisations, perhaps as they suspect that the profit motive will always be allowed to override all other considerations. Thomas Thune Andersen, chair of Denmark’s energy business Orsted, which has transitioned into renewables, who also spoke at the conference, tended to agree with this. He clearly felt that the support of the government as a majority shareholder had enabled Orsted to deliver on its purpose. Andersen was cynical about the short-termism of mainstream institutional investors.
If owners tend to be driven by things other than corporate purpose, and are not keen to encourage companies to establish purposes and be driven by them, then it is not surprising that the workforce will doubt the sincerity with which the company operates. Of course there are many investors that do have some confidence in the power of purpose and its value for long-term shareholders as well as stakeholders. But it seems that their voices are overwhelmed by a broader market of institutions that are less convinced – at least in the US, where Gartenberg’s work was carried out.
Purpose won’t deliver on its potential positive effects unless it is believed in by those within the company. But purpose inequality won’t be overcome by fiat, but persuasion, and demonstration in practice. In order to deliver, corporate purposes need not only to be better written and more meaningful statements of intent, but that intent needs to be followed through by boards and management in their treatment of staff, and also supported by investors in the business. Failures to deliver on either or both of these elements may serve to explain why there isn’t stronger evidence of the value of corporate purpose.
That redoubles the challenge for boards: live the purpose, demonstrably to your workforce, and reinforce it to your investors too. As I’ve suggested in previous blogs on this topic, there is an opportunity for companies through their actions to influence their shareholder base, discourage those shorter-term voices and encourage the longer-term institutions that will provide more reliable and consistent support. Boards should rise to that challenge, minimise purpose inequality and awaken the opportunities offered by meaningful corporate purposes.
See also: What’s the purpose of purpose?
Summary Report: Modern Capitalism & Corporate Purpose, ECGI, December 2023
Corporate Purpose in Public and Private Firms, Claudine Gartenberg, George Serafeim, Management Science Vol 69 No 9, September 2023
Corporate Purpose and Financial Performance, Claudine Gartenberg, Andrea Prat, George Serafeim, Organization Science Vol 30 No 1, January 2019
Lessons from the Law Firm Maturity Index, Manu Kanwar, Stuart Woollard, Legal Business World, No 1, 2024
The Sense of Fairness blog 