Claudine Gartenberg - The Contingent Relationship Between Purpose and Profits

Hi everybody, my name is Claudine Gartenberg I'm from Wharton, and I am really looking forward to sharing these ideas and getting your thoughts on them today.

00:00:02.000 --> 00:00:13.000

Hi everybody, My name is clouding Gartenberg I am from Wharton, and I'm going to talk in this video about an idea that I've been having for quite a while and I'm grateful for the Illinois conference.

00:00:13.000 --> 00:00:30.000

As a forcing function to putting it down and looking forward to hearing your thoughts on it. So this idea is in the title slide here, which is thinking about the relationship between purpose and profits in more complexity and more depth than that, I think

00:00:30.000 --> 00:00:39.000

it's been doubled from literature. To date, and specifically thinking about what what drives the contingencies between, between how these two ideas relate.

00:00:39.000 --> 00:00:48.000

So, what do I mean by that. So the question again that I've been tossing around is, is how can we, as a field, really get our heads around.

00:00:48.000 --> 00:01:05.000

Understanding the more getting a more developer more nuanced understanding of how purpose and profits relate to each other. And the reason why I think this is a first order question, is because I believe that the answer has profound implications for how

00:01:05.000 --> 00:01:19.000

we think about the role of purpose in the overall debate on from governance and corporations in society. And so the best way of sort of illustrating that is just to think about the two sides of this discussion here.

00:01:19.000 --> 00:01:30.000

And so, there is a side of this discussion where the link between purpose and profits is either implicitly or explicitly positive or complementary to each other.

00:01:30.000 --> 00:01:39.000

And so the idea here is, you know, really arises from the the you know initial.

00:01:39.000 --> 00:01:54.000

You know organizational theorists institutional theorists going back to Barnard cells and even follow it in the teens and 20s of the 20th century, and to these theorists purpose and and there's a paper by Sumatra go show and I can't remember which of

00:01:54.000 --> 00:01:57.000

his co authors that actually states this really beautifully.

00:01:57.000 --> 00:02:07.000

By to these initial organizational theorists purpose was a central to guiding organizations as prices were to markets, it was really axiomatic to organizations.

00:02:07.000 --> 00:02:23.000

When you conceptualize organizations as Bernard did as cooperative systems or cells needed as these enduring institutions of communities of people, or as commonwealth of people.

00:02:23.000 --> 00:02:37.000

Then for them, what guides, these, these systems is adaptive systems, and for them it was purpose, and so there's two quotes here that really sort of encapsulate the two views of Bernard and Selznick for side long purposes high ideals are the basis for

00:02:37.000 --> 00:02:55.000

persistence of cooperation for them, you cannot have a cooperative group of people without purpose to guide that cooperation. And so from this perspective purpose in profits really go together, effective leaders that have a role and their role is to instantiate

00:02:55.000 --> 00:03:08.000

a meaningful and effective purpose inside organizations and when they do that the organizations do better over the long run. And so that's this view of this compliment relationship between purpose and profits, then there's another side that really arises

00:03:08.000 --> 00:03:20.000

arises from a different academic tradition entirely from this sort of organizational theory. It comes more from a law and econ or law and finance view or an incentive view.

00:03:20.000 --> 00:03:33.000

And it takes a more cynical view of human nature and essentially critiques, this idea of purpose is saying, from from various angles, but there's really three main arguments of why purpose and profits are substitutes.

00:03:33.000 --> 00:03:51.000

The first is just pure agency theory. Once you give agents multiple goals, it's an invitation to to basically shirk on you know doing what's best and most valuable for firms they can say that they're following profits but really this is a recipe for not

00:03:51.000 --> 00:04:07.000

just slack but really empire building an agency like behavior inside firm so that's the first argument around substitutes. The second argument around substitutes is really a moral hazard argument that it's almost the inverse of the, of the agency argument,

00:04:07.000 --> 00:04:25.000

which is essentially that you know again once you have these two goals what gets measured gets managed. And so this is almost an argument that you can overweight profits and expensive purpose so this is the type of argument that goes into why jails should

00:04:25.000 --> 00:04:40.000

not be run by for profit institutions by long term health facility should not be run by, by, for profit institutions why there why for profit from or not the right organizational form to enable some types of purposes

00:04:40.000 --> 00:04:56.000

in their within our organization. And then the last the last argument on the substitute side is really, and I apologize because I know some of the authors of this paper, are going to be at this conference I apologize if I miss miss representing this this

00:04:56.000 --> 00:05:12.000

literature in any way, but I found it very impactful, reading, just this idea of multiple goals so once you have hybrid organizations or multiple logic organizations in a for profit corporation so now I'm but we're trying to do X and Y.

00:05:12.000 --> 00:05:28.000

In a for profit corporation, again I sub optimize or sub maximize on both and, you know, you're just fighting over the same pool of resources, right and so it's not that you're engaging in misbehavior in any way it's just literally that you are you know

00:05:28.000 --> 00:05:40.000

you have a fixed set of resources and now the residual claiming of a pool no longer go strictly to the shareholders and now goes to other claims and these competing claims are just definition only substitutes for each other.

00:05:40.000 --> 00:05:54.000

And so as you can see here once we sort of think about purpose in both of these buckets they have very different relationships with firm performance, and where you fall in this debate is very impactful and how you think about our, you know how we think

00:05:54.000 --> 00:06:10.000

about, you know, the emphasis and the role and the mechanisms by which purpose operates inside of companies. And so for that reason both I think we should elevate what assumptions were making around the relationship between these two constructs, but also

00:06:10.000 --> 00:06:23.000

there's an empirical question of how these things go together. And, and can we unpack that empirically to least inform this debate, then so that's that's the law, that's the direction that I've been thinking of here.

00:06:23.000 --> 00:06:40.000

And just I'm going to go very briefly through this slide, this is just a slide to say we have incredibly rich and wonderful empirical research on a series of related topics from ESG and CSR and stakeholder management hybrid organizations multiple organizations

00:06:40.000 --> 00:07:00.000

and then within ob culture trust positive leadership, again, a lot of, a lot of you could be at this conference which is why I'm super excited for this on purpose itself, there's there's there's less empirical facts, to, to, to tune in to enrich the debate.

00:07:00.000 --> 00:07:07.000

And so there's been general calls for more of this and this is sort of where I see

00:07:07.000 --> 00:07:14.000

this, this discussion, really, potentially benefiting from from some of that empirical work.

00:07:14.000 --> 00:07:19.000

Now, The reason why it's hard to do research on purpose is because it's just it's just hard to do.

00:07:19.000 --> 00:07:27.000

It's hard to define, there's another paper this conference that goes through. Wonderful definitions all the different definitions of purpose.

00:07:27.000 --> 00:07:34.000

It's hard to measure an incredible way. There's cheap talk issues with looking at what leaders declares their purpose.

00:07:34.000 --> 00:07:48.000

Looking at public filings public documents which is very hard to get your hands around it. And then there's also just identification issues in this. And so, this is where I've seen my work over the last year, decade fitting in.

00:07:48.000 --> 00:08:04.000

I've had a research program, sort of generally under the umbrella. You know what I call empirical corporate purpose where the tree of empirical studies that tries to at least push the ball a little bit further down the field from an empirical perspective,

00:08:04.000 --> 00:08:21.000

to have some empirical facts on a large sample large and setting on this debate and again this is not the only measurement technique, it's, it has trade offs, it benefits from more qualitative or comparative case analysis studies, but this is sort of

00:08:21.000 --> 00:08:26.000

a large sample empirical project that I've been engaged in.

00:08:26.000 --> 00:08:38.000

There's three papers, so far on this empirical topic, one where we've looked at just the average, you know this real high level relationship between purpose and profits that's an organization science.

00:08:38.000 --> 00:08:52.000

There's a middle paper that is coming forthcoming Management Science which looks at the relationship between who your owners are and and the strength of purpose within organizations that will be that's forthcoming Management Science and then I have another

00:08:52.000 --> 00:08:57.000

paper that looks at purpose in this relationship to the acquisitions that companies engage in.

00:08:57.000 --> 00:09:02.000

And what unifies these three papers, is a common measurement approach.

00:09:02.000 --> 00:09:18.000

And what we do here, is there's a little bit of jujitsu level spanning work that we do here that again, has its benefits has its trade offs. But we have a common measurement approach, where we circumvent the chief talk issue of measuring purposes, a CEOs

00:09:18.000 --> 00:09:33.000

declarations of by actually aggregating up employees beliefs in the meaning and impact of their work. And so we say firms are companies where employees on aggregate have a strong sense of meaning and impact of their work, our companies that have been

00:09:33.000 --> 00:09:46.000

able to implement a strong purpose. We can't measure that purpose directly but we can measure the impact on the employees on aggregate. And so note all of these papers we measure the strength so we measure purposefulness we don't measure the content of

00:09:46.000 --> 00:09:52.000

purpose for itself.

00:09:52.000 --> 00:10:05.000

And so from a definitional perspective. When we think of corporate purpose, we think of it as the meaning of a firm's work beyond quantitative measures of financial performance so this is really a within sort of bottom up idea of purpose, as opposed to

00:10:05.000 --> 00:10:15.000

sort of the objective of the corporate form or what I call the purpose of Corporation, you know what, who is it serve What does it do. This is really for given company what's.

00:10:15.000 --> 00:10:29.000

Why is this company exists. What's the meaning of the work why does it matter. And so it's not a goal or an objective it's really the sense of meaning within firms, and our measurement approaches is exemplified by this slide here.

00:10:29.000 --> 00:10:35.000

So you can see it's a level spanning construct where we're interested in an organizational construct called purpose.

00:10:35.000 --> 00:10:51.000

But what we do is we measure variation of the individual level in the sense of meaningfulness shared vision and identification that people feel in order to infer variation at the organizational level which we can't observe.

00:10:51.000 --> 00:10:55.000

And so that's what that's what's common across these studies. And what I'll show to you today.

00:10:55.000 --> 00:11:12.000

And so let me just show some empirical facts that then in will inform what I what I want to talk about it, Illinois. So in our first paper a corporate purpose of financial performance which is most closely related with what I want to talk about this weekend,

00:11:12.000 --> 00:11:26.000

what we, what we find is we establish this measure and then we relate it to downstream financial performance. So, you know, down the road financial performance, and we find to empirical facts that have stuck with us.

00:11:26.000 --> 00:11:43.000

So the first is with our measure of purpose. One. One. Empirical pattern that is throughout our studies is that purpose falls down the organization. So, executives and senior managers, feel the strongest sense of this aggregate meaning and then all the

00:11:43.000 --> 00:11:50.000

way down to low hourly workers feel the lowest a sense of aggregated meeting, and as you go down the hierarchy that sense of purpose dropped.

00:11:50.000 --> 00:12:07.000

That's, that's empirical fact one empirical fact two is our measure of purpose actually comes in two flavors when we do a factor analysis on this survey instrument that measures employed believes it comes in a in a in a in a flavor and factor where our

00:12:07.000 --> 00:12:21.000

questions on meaning are also joined with questions of community and family will be called purpose camaraderie of a family feeling among that factor is not at all related to firm performance.

00:12:21.000 --> 00:12:36.000

But there's another flavor of purpose that we find in organizations, which is these purpose beliefs are linked to a sense of clarity, I have a clear view of where we're going as a firm I have the resources I need to do to do my job so it'll be the sort

00:12:36.000 --> 00:12:49.000

of sense of path called leadership where I know the purpose and as I didn't know that I have an impact I can make an impact with my job. And what we find is that firms with high sense of purpose clarity, actually perform better.

00:12:49.000 --> 00:13:03.000

And this is not related to the engagement of a company of the people their satisfaction, trust and management, all of that is stripped down, it is those sets of beliefs orthogonal from the rest of the beliefs that employees have, and those beliefs strongly

00:13:03.000 --> 00:13:10.000

predict downstream performance return on assets enterprise growth so Tobin's Q, as well as stock returns.

00:13:10.000 --> 00:13:25.000

And then what we find is Fact number three is that the stronger purpose is enabled by more committed owners so this is our Management Science paper. And what we find here is that purpose is stronger in private firms, relative to public firms.

00:13:25.000 --> 00:13:40.000

And then within public firms. It's stronger, the more dedicated shareholders you have so on as x axis here we have the degree of what we call overcommitment, so the degree of a month or institutional shareholders.

00:13:40.000 --> 00:13:53.000

Your dedicated minus your transit investors so on the on the on the right side of this access as you have more dedicated investors. And what we find is the more dedicated your investors are the higher sense of purpose clarity that you have and so that's

00:13:53.000 --> 00:13:56.000

the punch line of that Management Science paper.

00:13:56.000 --> 00:14:09.000

And then we also find in the third paper that purposes weekend after companies engaged in some kinds of acquisitions. Not all, but some, on average, yes, and then some types of acquisitions.

00:14:09.000 --> 00:14:15.000

So the idea here, I'm just going to skip over time over this graph, but you can you can look at it as.

00:14:15.000 --> 00:14:31.000

The idea here is that these facts together support the idea that purpose has a first order relationship with corporate governance strategy and from performance and the implications go far beyond the studies alone, and they're worth understanding.

00:14:31.000 --> 00:14:45.000

And as I said here these implications really depend on what assumptions were making about her purpose and profits relate. So, so this goes, these two graphs show sort of the two assumptions and I call them.

00:14:45.000 --> 00:14:55.000

Lucky companies and unlucky companies depending on which side you're on. So, the lucky company's purpose and profits are our compliments to each other.

00:14:55.000 --> 00:15:01.000

So, the higher purpose that you're able to instill the better you perform, and that's a nice compliment relationship.

00:15:01.000 --> 00:15:13.000

And that goes to the bartered Selznick view of the world. And then on the left side of the graph is what I call unlucky companies where you're in a world where you actually are trading these off the higher purpose you have the worst year economic performance

00:15:13.000 --> 00:15:21.000

so you have to choose and make a choice and allocate between the two of them. And so as I said before here.

00:15:21.000 --> 00:15:33.000

You know if we're if we're in a world that's a burden Selznick world, then the questions that we engage with are different. Right. The questions are really structural challenges Why doesn't every company have purpose, what's the barriers for instilling

00:15:33.000 --> 00:15:47.000

it. What are the you know either market failures contractual failures leadership failures. You know what's preventing us from all being sort of on the side of the curve as opposed to you know on the side of the curve sort of interior to both.

00:15:47.000 --> 00:16:00.000

If we're in the unlucky world and the substitute growth and the questions are really different. The questions are all around organizational form is a for profit from the right company, the right form to do these things, what's the right governance structure,

00:16:00.000 --> 00:16:04.000

what's the right legal structure, what's the true objective of a corporation.

00:16:04.000 --> 00:16:12.000

You know all this sort of stakeholder type of debate. So, which world we're in really is going to drive the first order of questions of this, of this field.

00:16:12.000 --> 00:16:28.000

Now, with with with our with our work science paper we show the average relationship and we show that on average, let me go back a slide on average looks like the average, and on average we're sort of in this Bernard cells mid worlds right on average,

00:16:28.000 --> 00:16:31.000

we see a positive relationship if you believe our measure of purpose.

00:16:31.000 --> 00:16:46.000

between the sort of aggregate, you know, sort of corporate purpose and financial performance. So on average companies are able to instill this high collective meaning this pro sociality among their employees.

00:16:46.000 --> 00:16:53.000

Those are also companies that tend to do better. So that's great but that's just an average effect and in masks a ton of heterogeneity.

00:16:53.000 --> 00:16:58.000

So here's some of the contingencies that I think are worth exploring.

00:16:58.000 --> 00:17:13.000

So one contingency is what setting Are you in. And there may be something deeper than just what industry you're in, but industry conditions do appear to drive, whether you're in Barnet Selznick world or in a substitution of world.

00:17:13.000 --> 00:17:17.000

And so here, all I did in this is I've looked at.

00:17:17.000 --> 00:17:21.000

And this is the stuff that that is new for this conference.

00:17:21.000 --> 00:17:30.000

Looking at this relationship between purpose and performance that relationship that we wouldn't get an org science paper but by industry.

00:17:30.000 --> 00:17:33.000

And so here within healthcare.

00:17:33.000 --> 00:17:48.000

It looks like it's. We're in the compliments world, right, the higher the sense of purpose clarity in healthcare, the better your performances. So this is sort of a Bernard Selznick type of context, then you flip over to financial services, and suddenly

00:17:48.000 --> 00:18:00.000

we're in this substitution world, where the higher purpose clarity is the lower your performances so there's something going on in industries that say you can manage for purpose and profits and health care, this is not surprising.

00:18:00.000 --> 00:18:11.000

Right. But in financial services, the higher sense of purpose the worst those companies perform the best performing companies and financial services are also the ones where the employees feel the least meaning in their work.

00:18:11.000 --> 00:18:22.000

And that's just the way these different industries operate. And so there's something interesting about these competitive context that drives whether you're in a complimentary substitution world.

00:18:22.000 --> 00:18:33.000

The other contingencies that's interesting is, who your owners are for firms. So on the left side is companies with the most committed owners so the most dedicated owners.

00:18:33.000 --> 00:18:49.000

So back to our Management Science separation of dedicated versus transient owners. So companies whose owners are in for the long haul tend to have this complimentary relationship between purpose and profits, so you can manage for purpose and for profits,

00:18:49.000 --> 00:18:53.000

when your owners are long term oriented.

00:18:53.000 --> 00:18:58.000

Notice I'm using correlation language here, I'm very careful. these are all conditional relations.

00:18:58.000 --> 00:19:11.000

When you go and flip over to firms that are managed by the most transient owners the owners they go in and go out and don't hold companies very often, then you're in a substitution a world where the companies that perform best also have the employees

00:19:11.000 --> 00:19:20.000

with a low sense of purpose. So, ownership, really drives with a purpose in profits work together or working opposition from each other.

00:19:20.000 --> 00:19:33.000

So, this is the type of thing I want to explore purpose in profits, on average, if you believe our work science paper appear to be compliments, but that masks huge heterogeneity across settings and firms within some context they work together within other

00:19:33.000 --> 00:19:36.000

context of their post.

00:19:36.000 --> 00:19:53.000

And that should drive how we discuss the role of purpose in society and governance and and and organizations, it appears related, at least conditionally with these Exploratory Studies on industry context on our commitment, and probably lots of other things

00:19:53.000 --> 00:20:03.000

things managerial taste there was just a paper that came out that probably many of you have seen that talk about MBAs and manage for cost versus other CEOs that managed for growth or other types of things.

00:20:03.000 --> 00:20:08.000

So could be managerial taste it could be

00:20:08.000 --> 00:20:17.000

incentive structures that are put into place that incentivize for different types of things that that then create a substitution or complimentary type of setting for firms.

00:20:17.000 --> 00:20:27.000

So, the point of this is that I think this is a really this contingencies between this relationship with somebody who it's very important to unpack and something that we should take more seriously.

00:20:27.000 --> 00:20:30.000

Just one last thing I'll show you.

00:20:30.000 --> 00:20:37.000

Because I'm sure I've gone over time is just the stacking of companies in our data set.

00:20:37.000 --> 00:20:56.000

By, you can see here. What this is is the y axis here is essentially this complimentary versus substitution or relationship within firms, so. So within the firm's on the left, the semi elasticity of profits relative to purpose is positive, you bump up

00:20:56.000 --> 00:21:03.000

purpose you bump up profits within these companies, so everything where it's above zero has a complimentary relationship.

00:21:03.000 --> 00:21:33.000

On this side of the graph, the semi elasticity of purpose relative to promise is negative you bump up purpose, you see a drop in profits. And so what you can see us for about 55% of the companies in our sample, we're going to Barnard Selznick world.