The Management Case for Inclusionary Corporate Purpose

The most vital and deeply practical argument for more broadly understanding corporate purpose comes from the management literature and the data on how to motivate people in organizations. Put simply, people in organizations do not work as hard or come up with as many innovations for companies unless they see themselves as part of a broader purpose beyond wealth maximization for shareholders. Employee engagement, first described in management literature, and now addressed even in mainstream business publications such as Forbes, is “the emotional commitment [an] employee has to the organization and its goals. When employees care – when they are engaged – they use discretionary effort.” Management research shows that engagement comes from binding people together for a common purpose.

A recent article in the Harvard Business Review, “Financial Targets Don’t Motivate Employees,” lays out the basic facts upon which I elaborate, as supported by a diverse series of findings:

  • financial results may be the outcome that management seeks, but they are not a root driver for employee performance;
  • by contrast, employee engagement is the lifeblood of successful organizations; and
  • there is no path to “spreadsheet your way to passion.” Organizations will either genuinely harness the full potential of their employees because they give those employees purpose to be “excited and care about their work,” or they will not.

First, few people work extra hours, voluntarily spend sleepless nights, or dream up inventions for a company when told that they are “a cog in a machine whose primary purpose is to hit… financial targets” for shareholders they do not know. The data illuminate this intuitive understanding: Driven to financial goals by maximizing shareholder primacy, merely two in ten (21 percent) U.S. employees strongly agree that their performance is managed in a way that motivates them to do outstanding work.

Second, empirical findings, such as those from the Gallup organization, confirm that “[e]mployee engagement is a consistent predictor of many organizational outcomes—including customer loyalty, profitability and sales.” Data collected over the last year of pandemic and economic dislocation reveal that employee engagement is, in fact, “an even stronger predictor of organizational performance during recessions than in non-recession times.” Employee engagement is further related to organizational resilience and endurance. These are qualities that every business has needed over the last year and that we will continue to need to recover from the pandemic.

Third, when inspired and harnessed through common purpose, employee engagement leads to breakthroughs that keep organizations innovative and make larger profits. The data also illustrate this point dramatically: Among engaged employees, polling finds that 71 percent strongly agree that they could “take risks at work that could lead to important new products, services or solutions.” By contrast, only 2 percent of actively disengaged employees strongly agree that they could do so. As even Gallup concludes, because “engaged employees are 36 times more likely to take the kind of risks that can lead to breakthroughs,” companies need to engage them with compelling and unifying purpose.

Lessons for businesses coming out of the coronavirus and resulting recession

What do these findings mean for businesses, especially businesses trying to recover and reinvent themselves after the damage caused by the coronavirus and resulting recession? It’s time to rethink corporate purpose and move beyond shareholder primacy to engage employees in unifying visions.

  1. Think beyond shareholder primacy

Fifty years ago, Milton Friedman presented a then-compelling argument for shareholder primacy. Friedman’s essay provided, as Professors Oliver Hart and Luigi Zingales have written, “the intellectual foundation for the ‘shareholder value’ revolution,” which emphasized profits for shareholders above the interests of other contributors to the corporation. An argument for shareholder primacy over the corporation’s other stakeholders was that shareholders were uniquely situated to represent other stakeholders’ interests and maximize them as well.

If shareholders are rational actors, however, under shareholder primacy, they are going to maximize their own utility, not that of other stakeholders. Perhaps shareholders should understand their own utility in terms of enabling the rest of the corporation – and its other investors/stakeholders – to do well. The data show, however, that they do not.

For example, evidence from a Harvard study demonstrates that, since the rise of shareholder primacy, shareholders have received corporate profits at the expense of workers. In fact, since the rise of shareholder primacy, the “decline in worker power is big enough to explain the entire decline in the labor share of income in the United States over the past four decades.”

Other descriptions map additional paths of transferring power to shareholders at the expense of fellow stakeholders. An increase in monopolistic, or similar monopsonistic, concentration of firms over the same time period has increased both shareholders’ profits and corporate control over workers. The U.S. Supreme Court’s Citizens United decision increased corporations’, and their shareholders’, political power over government policy through lifting certain limits on political contributions. Growing wealth inequality across society primarily benefits the top 1 percent of households that own more than half of U.S. stocks, magnifying their power to extract profits from corporations, as well as their gains from tax policies that better insulate the transfer of that wealth.

2. Corporate purpose must be inclusionary, or it can be harmful

As currently implemented, shareholder primacy threatens the unifying vision that creates employee engagement within organizations and therefore endangers both resilience and long-term profits. We are diminishing our workers’ engagement and replacing it with an economy driven by fear. Tying healthcare coverage to employment during a pandemic further disadvantages businesses that do try to help employees, and it reveals the starkness of accumulated power differentials harming our workers. As an economic paper even before the pandemic described, our low level of employee engagement was already “one of the most alarming global economic problems.”

In theory, the 2019 Business Roundtable Statement demoting shareholder primacy, and describing corporate purpose as “a fundamental commitment to all of our stakeholders,” was a good start to rethink our direction. Recent work asks why, however, if corporations were serious about these changes, they did not bring them more often to their governing boards. The coronavirus has also tested the resolve of the companies that signed the statement. Since the economic impacts of Covid-19 began, the statement’s signatories have paid out 20 percent more capital to shareholders than similar companies, and signatory companies have been almost 20 percent more likely to announce layoffs or worker furloughs. Given management incentive systems in place, the statement’s aspirations do not seem to be penetrating the behavior of signatory corporations.

3. Businesses need both an inclusionary purpose AND reassessment of management incentives 

It is in moments of crisis that employees and other stakeholders most remember what corporations do. These are moments in which having a higher, unifying purpose, and ensuring that incentives throughout the corporation are in line with that purpose, are most important. Such moments are when we decide who we want to be – all of us, including the employees upon whom we have leaned for so long. As we build back after the coronavirus, we must return to corporate purpose that inspires continued investment from all stakeholders, and that does not elevate shareholders solely above others. Balancing tradeoffs amongst stakeholders is hard, but that is part of why we have corporate boards. And perhaps those boards, as Professor John Coffee, Jr. has argued, should be diversified to attain these goals.

I leave aside whether corporate purpose should be legally mandated (see Professors Jill Fisch and Steven Solomon’s excellent forthcoming article in the Texas Law Review). But I agree with their basic argument that corporate purpose may be instead the instrumental means to bind diverse constituencies and increase investment in the enterprise from stakeholders of all types. Professor Edward Rock’s call to separate business purpose (how things are done) from corporate purpose (why things are done) has a related effect. Professors Hillary Sale and George Moscary independently reached similar conclusions about corporate purpose here and here. Insofar as our corporations have a purpose – and the very definition of management is to control people and resources toward a common goal – then that purpose should unify us to support the corporation. As another recent paper explains, corporate purpose can be our “raison d’être for [the] enterprise that goes beyond mere profit making and… anchor it in the entire value chain.”

Conclusion

We can change our ways, and we can choose ethically, strategically, and economically better than we have over the last 50 years, during which Milton Friedman’s narrower idea of shareholder primacy has held sway. Recovering from the coronavirus is our chance. It is now vital that we re-expand corporate purpose and use its power to spur employee and other stakeholder engagement. Through broadening corporate purpose and sparking employee engagement to buttress our resilience and fuel innovation, we can rise to this challenge too.

This post comes to us from J.S. Nelson, a professor at Villanova Law School who holds an appointment (by courtesy) in Villanovas Business School and serves as a senior fellow with the Zicklin Center for Business Ethics Research at Univ. of Pennsylvania’s Wharton School. It is based on her recent book chapter for the University of Chicago’s Stigler Center, “Bringing Ethics Back to Friedman’s Call to Purpose for the Next 50 Years,” available here. Her book with the late Professor Lynn Stout and the Oxford University Press, Business Ethics: What Everyone Needs to Know, will be published this fall.

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