In praise of the purposeless company

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No purpose? No problem. Create customers, care for employees, be a good citizen, and make money instead.

These days, my vote for the most misunderstood and misused management concept goes to “corporate purpose.” Back in 1973, the concept was crystal clear to Peter Drucker, who declared with admirable concision in Management: Tasks, Responsibilities, Practices: “There is only one valid definition of business purpose: to create a customer.” Since then, however, the definition of corporate purpose has mutated into pretty much any reason for being in business that isn’t explicitly connected to making money.

Business professors Sumantra Ghoshal and Christopher A. Bartlett unbottled this genie in a 1994 article in Harvard Business Review, in which they argued that strategy (“an amoral plan for exploiting commercial opportunity”) wasn’t enough: “A company today is more than just a business. As important repositories of resources and knowledge, companies shoulder a huge responsibility for generating wealth by continuously improving their productivity and competitiveness. Furthermore, their responsibility for defining, creating, and distributing value makes corporations one of society’s principal agents of social change. At the micro level, companies are important forums for social interaction and personal fulfillment.”

Ghoshal, who passed away in 2004, and Bartlett, who is now professor emeritus of business administration at Harvard Business School, concluded that companies had to transform themselves from economic entities to social institutions. They added that the “definition and articulation [of purpose] must be top management’s first responsibility.”

Why was a highfalutin corporate purpose seen as such a big deal? It had a lot to do with mobilizing human resources in the modern economy. Ghoshal and Bartlett said that purpose was needed to tap the “scarcest corporate resource,” which was “the knowledge and expertise of the people on the front lines” of increasingly large and diverse companies. In a time when most employees “no longer know — or even care — what or why their companies are,” wrote the duo, purpose was a way to create “strong, enduring emotional attachments.”

How were leaders supposed to go about getting some purpose for their companies? Rather than boring employees with financial goals, they were to energize them by describing work in “human” terms. Ghoshal and Bartlett pointed to Robert Allen, who was CEO of AT&T from 1988 to 1997, as an exemplar. As deregulation and disruption hammered the telecom industry, AT&T needed to transform itself. But Allen didn’t talk about the company’s objectives in rational and analytic terms. Instead, he told employees that AT&T was “dedicated to becoming the world’s best at bringing people together — giving them easy access to each other and to the information and services they want and need — anytime, anywhere.”

Of course, this purpose didn’t cause 50,000 AT&T employees to lose their jobs during Allen’s tenure. On the other hand, this purpose didn’t save them or the reputations of AT&T or Allen — he ranked number 12 on the now-defunct Portfolio magazine’s list of the “Worst American CEOs of All Time.”

 
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Fast-forward 20 years, and the concept of purpose is well ensconced in the corporate vocabulary. But its salutary effects are still unproven in empirical terms. In fact, a recent study covering more than 450,000 employees in 429 firms across industries, conducted by business professors Claudine Gartenberg, Andrea Prat, and George Serafeim, found no correlation between the level of employee purposefulness within a company and either return on assets or Tobin’s Q ratio (the market value of a company divided by the replacement value of its assets).

The professors did uncover one correlation between purpose and financial metrics. “Our evidence suggests that a strong sense of corporate purpose is indeed associated with better firm performance,” they write in their working paper, “but only if that sense is held within the middle ranks of an organization, and only if accompanied with clear direction and resources from management.” Which I think is another way of saying that purpose is only effective to the extent that it is organic and pervasive.

There certainly seems to be a strong, authentic sense of purpose at a company like Patagonia. In his new book, The Enlightened Capitalists: Cautionary Tales of Business Pioneers Who Tried to Do Well by Doing Good, James O’Toole, professor emeritus at the University of Southern California Marshall School of Business, highlights the company, which operates as a benefit corporation (a legal structure that allows its leaders to prioritize decisions benefiting society over shareholder interests), and its founder, Yvon Chouinard, as positive examples. (O’Toole is a frequent strategy+business contributor, and an article adapted from his book can be read here.) “Before we are entitled to encourage other companies to act responsibly we have to do so ourselves,” Chouinard declared in his book, Let My People Go Surfing: The Education of a Reluctant Businessman. So, in November 2018, when CEO Rose Marcario announced that Patagonia was donating the US$10 million it saved because of the Tax Cuts and Jobs Act of 2017 to “groups committed to protecting air, land and water and finding solutions to the climate crisis,” the act was widely lauded. And it seemed entirely in keeping with the company’s image and self-perception.

If a company doesn’t have an authentic and organic purpose, should a leader bother spending a lot of mental and financial energy trying to establish one?

A similar level of purpose doesn’t seem to be associated with Gillette. Is Gillette’s self-proclaimed role “as a company that encourages men to be their best” grounded in the way it operates? Given the derision with which its “The Best Men Can Be” campaign, launched in January of this year, was met, it appears that many of us don’t believe so. Much of the criticism was colored by political views, but there is a scolding sort of tone-deafness to Gillette’s first salvo — a nearly two-minute ad. And a few observers pointed out the incongruities of the campaign alongside a brand that has embraced and promoted macho male and hairless female stereotypes for 30 years under the tagline, “the best a man can get.”

Ghoshal and Bartlett warned that the leaders of companies “that have been less clear and consistent about what they stand for” would find creating a purpose a “difficult but still achievable” task. But if a company doesn’t have an authentic and organic purpose, should a leader bother spending a lot of mental and financial energy trying to establish one?

Amazon, which is one of the most valuable public companies in the U.S., appears to be doing just fine with a seemingly primitive purpose that harkens back to Peter Drucker: “to be Earth’s most customer-centric company.” The company is in fact changing the world. But Jeff Bezos, who recently pledged $2 billion of his own money to helping homeless families and starting preschools in low-income communities, doesn’t seem to be driven to proclaim a higher corporate purpose for the company he runs.

A company needs customers, which it can get by delivering value-laden products and services. A company needs employees, which it can get by treating people with respect, paying them fairly, and offering them opportunities for advancement. A company needs to act as a responsible citizen, which it can do by operating in a legal and ethical manner. An expressed purpose may provide some companies with an edge in carrying out each of these essential functions. But data and observed experience suggest that it is not a prerequisite.

Ted Kinni

Theodore Kinni is a contributing editor at strategy+business. He also blogs at Reading, Writing re: Management

 

 

 
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