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Questioning The Enterprise Case For Objective

Question the business case for the purpose

The company's purpose is the buzzword of the day. In August last year, the US Business Roundtable radically redefined its “purpose of a company” statement to include not only shareholders but also stakeholders. Larry Fink, who heads the world's largest wealth management company BlackRock, wrote in a letter to the company's CEOs in 2018: "Without a purpose, no public or private company can develop its full potential."

But is there really evidence to support this claim? It has been quoted frequently to emphasize the urgency of accepting a purpose – but the statement itself never cited evidence, but was accepted uncritically. This is an example of an affirmation bias – the temptation to accept evidence that it confirms what we want to be true, what I examined in a TED talk. What to trust in a world based on truth. We would love to see targeted companies succeed for at least two reasons. First, we want to live in a world where companies that do good also do good and selfish companies get their comeuppance. Second, the idea that purpose drives success is a strengthening, since any company can develop a purpose. So it means that a manager only has to follow a three-point plan and then be on the way to wealth. In fact, I have just deliberately written a book called Grow the Pie: How great companies deliver both purpose and profitabout the importance of the purpose and could therefore have a vested interest in arguing that the business model is clear for the purpose.

But it is not. Let's intentionally take one of the most influential books, "Start With Why" by Simon Sinek. (I really like Sinek's TED talks and agree with the meaning of the purpose; these comments are just an assessment of the scientific evidence). He claims that this purpose has driven Apple's success since Apple was founded on the "why" statement "Everything we do we believe in questioning the status quo". Apple has been extremely successful indeed. But there could be a lot of reasons for his success – maybe Steve Jobs & # 39; novel ideas or his network of relationships. However, the narrative that success is due to Apple's "why" is particularly appealing because everyone can accept a "why" – while not everyone can suddenly think of a new idea or have a network of relationships. In addition, Apple has never said "everything we do, we believe in questioning the status quo" or the like, but people have taken this for granted, and Google actually does find 23,000 articles that include this Sentence is quoted because they accepted it uncritically.

In addition, Apple is a single handpicked example. You will almost always find an anecdote that supports everything you want to support. To show that this purpose promotes success, we need to look at hundreds of "targeted" companies and see if they outperform targeted companies. This is the case in a recent book, but as highlighted in an excellent insider article on branding strategy by Richard Shotton, the evidence is extremely weak. It shows that targeted brands performed better, but the "targeted brands" were chosen as those that ended up being successful, so the argument is circular. Furthermore, interpreting "successful companies have a purpose" as "targeted companies are successful" is a serious logical mistake – just like "all successful CEOs have two legs" does not mean that "all CEOs are two-legged". To make the claim that "targeted companies are successful", you have to look at that all targeted companies, not just those that have been successful, and compare them to non-targeted ones.

The evidence behind the concept of purpose

How strong is the evidence for the purpose really? That is what my book should collect. Instead of starting with a preconceived notion that the purpose must matter and then choosing studies to support it, I want to let the data speak and critically question the evidence. In this way, all evidence that survives the test should appeal not only to the converts – people who already believe in the purpose – but also stubborn business leaders who previously thought that purpose to be a luxury or an optional extra.

The first thing to realize is that it is almost impossible to measure the "purpose". We could look at explanations of purpose, but companies can always make statements, even if they don't actually put them into practice. In addition, the impossibility of the measurement purpose gives the researchers considerable freedom to cook the data. You can find companies that ended up being successful, and then classify all of these companies as “targeted”. Since the purpose can only be assessed subjectively, nobody can objectively falsify its definition. In fact, luxury brands such as Moët & Chandon and Mercedes-Benz have been classified as “functional”. However, the purpose is to serve society and not just 1%. Therefore, these classifications are questionable.

Instead of measuring "purpose", a stricter approach is to measure the results – whether a company actually delivers value to society. One of my own studies looked at the list of “100 Best Companies to Work For in America”, which is a measure of employee wellbeing. It was compiled independently of the Great Place to Work Institute, so I didn't have the freedom to choose which companies I considered "employee-friendly". This list is particularly thorough: it randomly selects 250 employees and interviews them about 57 employee wellbeing issues that include credibility, respect, fairness, pride, and camaraderie. As a result, it is widely recognized and has existed since 1984 and has since expanded to 45 countries.

However, it is not enough to just show that the best companies outperform their competitors. For example, Google is constantly on the list and has performed well. This has nothing to do with employee satisfaction. Maybe it's because Google is in the technology industry and the technology industry happened to be doing well. To isolate the impact of employee satisfaction, I excluded the impact of a corporate industry and many other factors that could have affected returns, such as size and recent performance. And I went into the problem that it could be a fixed performance that causes employee satisfaction, not the other way around. After all the blood, sweat, and tears, I found that the best companies outperformed their peers by 2.3-3.8% per year over a 28-year period, an increase of 89-184%.

These study ended in a peer-reviewed journal, the Financial Economics Journal. To achieve this, it must be scrutinized by leading scientists worldwide who have tried to take my arguments apart. Does being on the list of the best companies cause socially responsible funds to buy these companies, and does that drive up the share price? Are companies that treat their employees well are well governed, and is it good governance rather than employee well-being that causes the outperformance? Did the market think that employee-friendly companies were “tree-rich” and therefore valued them too cheaply, and that made them make good progress? I had to answer all of these questions to keep the peer reviewers happy and to publish the paper. However, many studies that claim that “purpose pays off” are published without the need for such testing.

What about other dimensions of stakeholder value that go beyond employees? A study Published in The balance sheet check, a top accounting journal, uses MSCI (Environmental, Social and Governance) ESG scores, which are in turn produced by a third party (MSCI) and are not at the discretion of researchers. These ratings cover the performance of a company in various social dimensions, e.g. B. with employees, customers, the environment and the communities. In contrast to the usual folklore companies with high scores across the board Don't hit the market. Instead, only companies beat the market that do well in terms of the key stakeholder dimensions for their industry and actually do poorly in intangible dimensions. For a bank, this could mean focusing on fair marketing and data security rather than climate change, even if the latter could be the order of the day.

All of this means that there is no evidence that a “purpose” that tries to be everything for everyone outperforms. A goal that aims to "serve customers, colleagues, suppliers, the environment and the communities while at the same time generating returns for investors" sounds inspiring. But it ignores the reality of compromise – for example, shutting down a coal-fired power plant helps the environment, but hurts workers. The intended purpose sounds good, but it cannot be put into practice and does not provide guidance on how to navigate compromises.

Purpose defined

Indeed, the word "purpose" is often misunderstood. "Appropriately" is often viewed as a synonym for "altruistic", e.g. A "targeted company" is an altruistic one. Semantically, however, this does not mean "targeted" – it means targeted and targeted. A targeted meeting has a clear agenda. When I do something "on purpose", I do it on purpose. A targeted company recognizes that it must serve a broader society – but also recognizes that it has to make difficult decisions when compromises are made. The goal is to understand who are the "first of equals" who make such compromises – it's about knowing what not to do and what to do. Purpose is the answer to the question: "How is the world a better place when your company is here?" The response must be focused, just as the purpose of a citizen would never be to be a doctor, teacher, lawyer, and entrepreneur.

And this more nuanced view of purpose actually liberates rather than limits it. Some companies may find it daunting to be targeted because they “need to serve customers, colleagues, suppliers, the environment, and communities while generating returns for investors”. So they may not even try and instead maximize short-term profit by default. As a result, broad claims about the criticality of the purpose can hinder rather than support the move towards a more enlightened view of capitalism. Instead, evidence of the importance of materiality gives managers the certainty that they don't have to be targeted. By relying on evidence rather than wishful thinking, executives can better put what purpose means into practice – and serve both shareholders and society as a whole.

Contribution to Branding Strategy Insider by: Alex Edmans, Professor of Finance at London Business School and author of Grow the Pie, How great companies deliver both purpose and profit.

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