Witold Henisz - The Value of Organizational Purpose (and Its Measurement)

16:39:17 Well, thank you, Willie Matt Dave for organizing the conference, and and for the thoughtful design that's hopefully gonna allow us a lot of time to deeply interact with each other as opposed to just observe these presentations and the time we have together, in 16:39:29 Chicago next week the paper i'm gonna present about the value of corporate purpose and its measurement and in it I i'm gonna try to situate the ongoing and exciting discussions around corporate 16:39:42 purpose in a range of different literatures. what I observe. 16:39:47 Either. when I look at the August group of people that are coming together in Chicago next week, or or on Google scholar in the word cloud here on the left is that the conversation on corporate per really has many different themes many different 16:40:02 elements it's bringing together work on stakeholder theory, corporate governance, relational contracting, sustainability, impression, management, and so on. 16:40:12 Most of that literature, though, seems to be focused on defining the concept of purpose and justifying why a purpose beyond shareholder value, Maximization might be allowed, or consistent with a company's judiciary 16:40:26 duty to its shareholders. I wanna take a different tack, because I think as management scholars, while those are really important conversations, and I commend those of you that are engaged in them. 16:40:37 I think our comparative advantage by somewhere else. and it lies in situating the discussion on corporate purpose and a theory of the firm and highlighting. 16:40:46 Why and how and when, an organizational purpose might be consistent with long term, shareholder value, maximization. 16:40:54 Really drawing the link to performance. and strategy and thinking how, when, where, organizational purpose can support sustain competitive advantage of firms. 16:41:04 So that's the tack i'm gonna take in this paper, and in the presentation, if we think about the evolution of the theory of the firm we've had a a steady enriching of the scale and 16:41:15 scope of that theory It started out very narrowly, focused on the firm as a bundle of contracts with buyers and suppliers. 16:41:23 With the key strategic choices being the allocation of rights and the terms of those contracts. 16:41:29 The buyers inspires were providing what was specified in the contract. 16:41:35 And the mechanisms were really the the legal support institutional environment that supported those. 16:41:40 The terms of those agreed contracts. over time we started broadening, and recognizing that there was something distinct to fundamental transformation that occurred when we moved inside the boundaries of the firm that led it to be more than just as 16:41:51 bundle of contracts. There was a zone of discretion that managers had over their employees that could allow them to respond to uncertainty, respond to change and direct employees to behave differently inside the 16:42:04 firm than they could through contract in in the case of a need for renegotiation. 16:42:10 We've continued to broaden that going beyond just that zone of discretion to thinking about the coordinating value of relational contracts, both with our employees and with our external stakeholders thinking about the 16:42:23 psychological and behavioral supports for relational contracts. 16:42:27 They can lead employees and stakeholders to exhibit more effort, or to contribute more to the value creation process that might be specified in the contract. 16:42:38 Because of the perception of aligned incentives, were aligned interests. 16:42:42 And aligned identity that might occur through a strong relational contracting system. 16:42:47 But those contracts are still Dianic, individual relational contracts between the firm and its stakeholders. 16:42:54 Both individual sorry, internal to the firm and external. 16:42:59 The stakeholder. perception of the firm is much broader. 16:43:02 It incorporates not just primary stakeholders, but also secondary. 16:43:05 Those outside the value chain, like government officials, regulatory actors. 16:43:10 Ngos and it treats them as a interconnected system. 16:43:14 Not just a series of datic contracts and that's where organizational or corporate purpose comes in I think, corporate purposes of mechanism to make relation contracting easier to enter into and more sustainable or 16:43:31 more reinforced, because not only do new stakeholders understand that the firm stands for more than short-term value. 16:43:40 Maximization, but also we can hardest the power of peer sanctioning. 16:43:45 Just punish those who defect from the system or the harmony in that system, whether the individual stakeholders or the firm itself. 16:43:55 And so we talk about the firm as a next system stakehold relationships. That's more than just a bundle of relationships. 16:44:00 There's something about that interconnected system that gives it more power, and I think, apps in a discussion of organizational purpose. 16:44:07 It's not exactly clear what that nexus brings us So what is the value of corporate purpose? 16:44:13 I think it's that stakeholders who perceive a company to have the purpose of achieving harmony in the stakeholder system as opposed to the narrow, short-term shareholder value maximization 16:44:23 purpose have a greater confidence that the future distribution of value created within that system will be distributed in matter that's perceived as fair, just, and legitimate, by all the stakeholders in that system as a result they 16:44:37 cooperate more readily and value creation that means they contribute more and more value is created. but also, when it comes to the value distribution process, there's less conflict, less contention. 16:44:48 About what is fair, what is legitimate in terms of who gets what? 16:44:52 Because of that the firm is able to generate more revenue growth. 16:44:58 Lower margins, sorry, higher margins and more efficiency in the production process and obtain higher value. 16:45:06 One of the things that helps as I mentioned previously, is that when a stakeholder defects from the system, behaving opportunistically, behaving in their narrow self-interest, or if the firm were to do 16:45:18 so there would be a collective section by the system of stakeholders that would punish that defection that allows more confidence, more credibility, and more clarity in terms of the system or relational contracts that has been built 16:45:31 up through the invitation. a broader, corporate person. 16:45:36 No, it's possible for this system. this nexus of relational contracts to deliver more long term value that a system focused on short-term valuement maximization under a number of conditions the first condition is where the 16:45:50 corporation imposes certain externalities on its stakeholders that can't work. 16:45:56 All immediately priced in the market the second is where it's difficult for stakeholders to up contract on the optimal contributions that they should make in the future, under all contingencies and the optimal form distribution across the 16:46:10 entire system stakeholders for any value created but that's difficult to do. 16:46:15 Upfront may be better to work through this through a system of relational contracts. 16:46:19 Also we're stakeholder knowledge of the total value creation and distribution is imperfect and potentially open to manipulation by the firm. 16:46:28 There's additional reason to rely on relational contracts as opposed to more explicit formal contracting that so, under those 3 mechanisms possible within the system for an organization that's focused on a broader corporate 16:46:41 person. the narrow shirt share shareholder value maximization to actually deliver long-term sustainable value for shareholders, and then stakeholders alike. 16:46:53 I'm an empiricist though and I think it while it's critical that we have the the rhetoric the logic, the anecdotes to support. 16:47:01 Oh, shifting away from a narrow shareholder value maximization to a broader, corporate purpose. 16:47:06 I think that the social movement that many of us are engaged in in trying to effect that shift is gonna require rigorous empirical analysis, demonstrating the long-term sustainable value of that shift 16:47:21 absent that I don't think We'll succeed I think 3, 5, maybe 10 years from now. 16:47:27 We'll look back on this period and say it was a lost opportunity. 16:47:30 Others will say it was a fad. I think we have a narrow window now, and all the attention is focused on purpose, on Esg. 16:47:36 On stakeholder theories management to to deliver rigorous proof of the value proposition of broader corporate purpose. 16:47:45 In order to do that, I think we need more empirical work on 3 distinct constructs. 16:47:50 The first is, what is the dollarized value of the externalities that firms impose on their stakeholders, both positive and negative, and under what conditions? 16:48:00 And over. What time frames are those externalities priced in the market for ownership in the share market? 16:48:10 Does that occur immediately? Why, when, how, fact? what does it depend? 16:48:16 What role does regulation play, stakeholder, mobilization, play? 16:48:20 What role does market competition play? under? what contingency are those externalities priced? and over what time? 16:48:28 For second empirical question is, how to stick hold a relational capital factor. In how does the opinion of State holders towards the firm and the way that was opinions diffuse across the system of stakeholders affects the impact of 16:48:43 externalities on shareholder value essentially what all the stakeholder mobilization play is, what enhances or moderates its power. 16:48:53 Finally, what limits the ability of firms to deflect or obfuscate the name? 16:49:00 You have externalities? they're creating to overclaim their stakeholder orientation of their organizational purpose. 16:49:07 How does that affect the internalization of the externalities? 16:49:12 How does that affect the evolving system of stakeholder opinions and sentiment? 16:49:17 We have to understand when and how far misrepresentation of their organizational purpose can alter the patterns of internalization. 16:49:28 And if we believe it's important to align short-term to align long term values share shareholder value of expectation and corporate purpose, we need to undertake efforts to punish greenwash and 16:49:40 enhance transparency and ease with which stakeholders can punish defection both by firms and by pure stakeholders. 16:49:48 That empirical agenda I think is critical to realize the the benefits of a broader corporate purpose again absent that I think the social movement that's had some exciting momentum. 16:50:00 It's an exciting progress in recent years stands a risk of falling short of its potential look forward to the conversation and the reactions next week, and hopefully the research to come, both on the value of corporate purpose but also the