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The Economics of Higher Purpose Page 10
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Robert Kaplan, George Serafeim, and Edward Tugendhat surmise that this failure is due to companies undertaking insufficiently ambitious programs. They propose that “instead of trying to fix local problems, corporations and other actors need to reimagine the regional ecosystems in which they participate if they are to bring poor farmers and unemployed urban youths into the mainstream economy.”45
They propose that companies should search for projects that generate economic benefits for the companies themselves while creating socioeconomic gains for others in the “new ecosystem” created by their investments. Such projects require investments from a diversified group of other players and can potentially scale up to other communities and regions.
Kaplan and colleagues provide an example from Uganda, where Carana Corporation, a global economic-development consultancy firm, started a project in 2010 to create a supply chain to bring small and poor Ugandan maize farmers into the mainstream regional economy. The authors describe the project:
This required deep engagement with multiple players, including Nile Breweries, grain traders, and the farmers themselves. It involved multiple investments in new assets and capabilities for the traders and farmers, including the creation of maize demonstration plots to showcase good agricultural practices and proper postharvest handling techniques. An offtake agreement with Nile Breweries facilitated farmers’ access to credit and attracted input suppliers that could help farmers finance the purchase of improved seeds, equipment, and fertilizers along with access to irrigation and pest- and fungus-control solutions.
By 2015 the new supply chain included 27,000 farmers, with more than half of them being female. The farmers’ median crop yields rose by 65 percent, household incomes more than doubled, and participating farmers’ net incomes increased by 50 percent. Farmers’ families experienced a dramatic improvement in their diets, and farmers began to purchase drought-resistant seeds and crop insurance. Numerous other effects rippled through the economy as more and more companies entered the region to create a “sustainable mass for an agribusiness cluster.”
The project also improved the quality of life. One farmer said, “Things are different now. All my children own pairs of shoes. We are a happy family that can afford to eat meat and chicken, which were unheard of in my home before. My children enjoy school because they no longer feel left out.”
The advice that Kaplan and colleagues offer is for companies to aim for higher organizational purpose of this sort. Will companies take it? We hope so. However, in this chapter we explain why many companies may not, despite the enormous potential that they might realize.
The Economics of the Failure to Adopt an Authentic Higher Purpose
We can look to our economic theory of higher purpose that was developed in chapter 5 for an answer. To see the answer, suppose that times are normal and our firm is doing quite well. The employees are being well paid, customers want the firm’s products and services, and investors are earning rates of return that are high enough to compensate them for risk and the time value of money.
We said in chapter 5 that in order to establish authenticity, the leader who is a true believer has to make a commitment to the organization’s higher purpose that is big enough to keep manipulators from mimicking it. The manipulators are deterred because they perceive a smaller marginal benefit from the higher purpose and hence a higher net marginal cost from pursuing it. That is, the manipulators see the personal and organizational cost of pursuing a higher purpose, but they assess that the personal and organizational cost is so small that it does not seem worth pursuing. When times are good, two things happen. First, investing financial and other resources in the pursuit of higher purpose is not particularly costly because the investment is “affordable.” So both the true believer and the manipulator can afford to invest large amounts of resources in it.
Second, the marginal value of the pursuit of higher purpose is also relatively small during the good times. Economists view people as having diminishing marginal utility of consumption. This means that you value an extra unit of wealth or consumption less when you are well off than when you are not doing so well. So whatever the firm does in the pursuit of higher purpose is valued less by those—customers or employees—who benefit from it.
In the Southwest Airlines example we discussed in chapter 5, if Southwest had committed to not laying off any people as an illustration of the practice of its higher purpose during good times, any other airline could have imitated it because no airline wanted to lay people off anyway. An airline would have incurred no economic sacrifice in committing to this course of action. The action also would have been less meaningful to employees since they would have known that the company was not going to lay them off anyway, and even if it did, it is easy to find another job when the economy is doing well.
But the situation changes during a crisis. After 9/11 Southwest was losing $5 million per day, so not laying off any employees meant a major economic sacrifice. Other airlines found mimicking Southwest very costly, making Southwest’s commitment authentic and credible. Moreover, facing an industry downturn in which finding another job would have been difficult for employees, Southwest’s decision not to lay off any employees had especially high value to employees.
Because of these two effects, for any given resource committed to higher purpose, the net perceived cost of pursuing higher purpose is not that much greater for the manipulator than it is for the true believer when times are good. This result makes it more difficult for the true believer to separate from the manipulator by ensuring that the manipulator will not mimic the true believer. Indeed, the resource commitment to the higher purpose may call for such a big financial sacrifice that investors may be unwilling to tolerate it. Even a leader who is a true believer may find that they are boxed in and unable to pursue the higher purpose.
Another factor that may discourage the adoption of higher purpose during good times is that a manipulator may have pet projects that generate personal utility but have few prosocial benefits. These pet projects may destroy significant shareholder value.46 For example, a CEO who has political ambitions decides to give away products or services to certain constituent groups—in the name of the pursuit of higher purpose—in order to curry political goodwill for a future run for office. Or a CEO may undertake activities that help them develop a reputation for generosity in order to get more seats on corporate boards of directors. In such cases, the manipulator may perceive a high personal benefit from allocating substantial organizational resources to the pursuit of the activity that requires financial sacrifices by the company. The activity would be dressed up to look like a higher purpose, and a sufficiently large commitment of organizational resources may even make it appear authentic to employees. The manipulator would be willing to make the large commitment because they would perceive a relatively low net marginal cost of doing so due to the high personal benefit.
Just like employees, investors may be unable to distinguish between a manipulator and a true believer. But they would rationally recognize the possibility. This recognition may lead them to be suspicious of all pursuits of higher purpose. So investor activism may obstruct the pursuit of higher purpose.
Indeed, this suspicion is an important reason why economists like Milton Friedman and many others so strongly advocate shareholder value maximization as the main goal that companies should pursue. The goal is for the wealth of the firm’s owners to be maximized after the claims of all others have been satisfied. It leaves no room for the pursuit of pet projects. No one has to figure out whether the CEO is pursuing a pet project to the detriment of the firm or a prosocial goal to benefit society. It has clarity. It means that you maximize the value of the residual claims of the firm’s owners. This clarity provides the discipline needed to ensure that resources are not mismanaged.
The introduction of higher purpose complicates the picture. Leaders look not only for opportunities that maximize shareholder value (in the long run), but also those t
hat serve an authentic higher purpose: the intersection of higher purpose and business purpose. But the bigger the distance between the company’s operations and the higher purpose it articulates, the more daunting is the task of convincing investors and employees that the higher purpose is authentic. Thus, the higher purpose of developing ambitious programs like regional ecosystems may prove quite formidable for many companies to adopt.
The Effect of a Crisis
When there is a crisis, things change. Any financial sacrifice made by the firm or personal sacrifice made by the leader becomes significantly more costly to both the true believer and the manipulator. But the manipulator has a smaller perceived benefit than the true believer. More importantly, the difference between the true believer and the manipulator in terms of their calculations of the perceived marginal benefit of pursuing the higher purpose may be much bigger during a crisis than during normal times. The easiest way to see this is to make the extreme assumption that the manipulator attaches no value to the pursuit of higher purpose. In that case, the marginal value of the higher purpose pursuit is greater for the true believer during a crisis than during normal times, so the difference between the manipulator and the true believer in terms of their net costs of pursuing the higher purpose is also greater during a crisis. This difference enables the true believer to adopt a higher purpose in a way that deters mimicry by the manipulator.
What about a manipulator pursuing a pet project masquerading as a pursuit of higher purpose? Two considerations make this very difficult during a crisis. First, the commitment of resources to the pet project can put the survival of the organization at risk. Imagine Ricardo and the pain caused by the downsizing that was essential for survival. This may be a cost that a leader who is not a true believer may be unwilling to bear. Second, financiers are likely to be more inquisitive and willing to invest more resources into investigating the leader’s pursuit of the so-called higher purpose during a period of crisis. There is simply more at stake. This scrutiny may increase the likelihood of the pet project being exposed for what it truly is during a crisis to such an extent that the manipulator is simply unwilling to risk it.
The anticipated behavior of the manipulator also affects the true believer. A leader who is a true believer can adopt a higher purpose without worrying so much about mimicry by a manipulator. They can pursue that higher purpose without risking everything, although in many instances in which a higher purpose emerges from a crisis, the commitment of resources to the higher purpose is substantial.
Thus, the pursuit of higher purpose often arises during crises because it is, perhaps surprisingly, easier for the leader to convey authenticity and convince employees that they will continue to pursue the higher purpose. A covenant, like the one described by Ricardo and Rabbi Sacks, often emerges during a crisis because it unites people more readily to a common purpose they must sacrifice for. Moreover, the recipients of the benefits of the pursuit of higher purpose value the benefits very highly. Consequently, the beliefs of employees about the future change, and a profound change in behavior emerges.
More on Higher Purpose and Crisis
When people experience a life trauma, the conventional response is to become stressed and depressed. The way out is to clarify and articulate one’s highest purpose. Purpose shifts the focus from a sense of loss to the value of loss in teaching us how to move forward. Purpose gives rise to learning, renewal, and regeneration.
An interesting interaction takes place between a crisis (which is an exogenous shock), higher purpose, and the behavior people exhibit during the crisis. We have discovered that this interaction is a recurring theme. In our workshops we often give participants the opportunity to reexamine their lives by telling their most important stories. When we do this, one theme overshadows all the others. The participants speak of a crisis, how it tested them, how they got through it, and the positive benefits they now see. So while we have discussed how a higher purpose emerges from a crisis, we then turn to how having a higher purpose helps you cope with a crisis.
Our colleague Vic Strecher has a chapter in his book on purpose, challenge, and learning.47 He suggests that having a life purpose greatly influences how you respond in times of difficulty. If you have a purpose, you think differently than you would otherwise. You have greater consciousness, and you exercise more control on how you construct meaning from your experience. Over time, you learn to think about how you think, and you learn to control how you think. You learn to invest your energy in your desired future.
Strecher reviews studies of responses to devastating earthquakes. After an earthquake, many people suffer for long periods. However, people with a life purpose are less likely to suffer from stress, depression, and lower quality of life. They are more likely to learn and grow from their traumatic experience and live a higher-quality life. They experience more growth, are less likely to suffer from traumatic stress, and have more energy and will power. In fact, the more extensive the crisis, the greater the post-traumatic growth.
These findings suggest that when you have a purpose and experience great challenges, you put less focus on what is lost and more focus on your purpose. Pursuing the purpose keeps you moving forward. Moving forward reduces your sense of fear. It promotes confidence and learning. The learning is not conventional but deep, transformative learning. You come to a new view of who you are and how you can act upon the world.
Challenge opens you up. In times of challenge, you have to reexamine your values, assumptions and perceptions. You have to take a fresh view, one centered in the present reality not in past experiences. As you go through this process, if you did not previously have a purpose, you gain one. If you did have a purpose, you test and clarify it. You thus “repurpose” your life.
As you experience stressors in life, you tend to respond with bitterness (fight) or denial (flight). But a healthier response is to accept reality and adapt. You are able to engage in this kind of learning more easily when you have a life purpose and you live in hope of a better future. Our economic theory of authentic higher purpose suggests that people can become leaders who create high-performance organizations. While this often happens through crisis, that is not always the case; each person can take charge of their own leadership development.
The Personal Challenge in Adopting Higher Purpose
Our work has revealed numerous reasons why executives fail to adopt a higher purpose for their organizations. The following lists are the six central challenges they face. The bullet points reflect some of the responses of 44 executives from a Fortune 500 company when we asked them to share their most authentic personal question regarding leading change.
Personal Doubt
What if I am not sure I am the right person to lead the change?
How do I lead strategic change when my orientation and my role are anchored in control?
How do I help my team believe that the impossible is possible?
How do I get people with no sense of ownership to believe they can create change?
How do I motivate my team to provide innovative services when morale is low, bonus payouts are declining, and attrition is increasing?
How do I inspire folks to enter troubled waters where they need to move back and forth between collaboration and competition?
How can I become someone who, like a monk, unselfishly helps others?
Dealing with personal doubt. If you have doubts about whether you are the right person to lead, much of it can be dissipated by joining others in the organization to discover the purpose. We explain how to do this in chapters 7 and 8.
Ethical Conflict
What if I am not sure I want to invest in the change? What if I genuinely think the change is not good for the team?
How do I inspire others to make a change when I am not authentically committed?
How do I realign my team’s goals and execution when my team’s original charter may get shot down during reorganization?
How do I live every
day—and make decisions based on—what I truly believe instead of what I think I am supposed to believe and do?
Dealing with personal doubt and ethical conflict. If you are personally unsure of your own authentic commitment to the higher purpose, don’t do it. Either you need to do more contemplation to determine if the purpose is right for you, or you need to move on to discovering a purpose that you can believe in. Just remember that if you are looking for reassurance or proof that the chosen higher purpose will “work,” you are not going to find it. You will see the power of the purpose only if you believe in it. In other words, you will have to believe in it first before you will see its power.
Time Stress
How do I create change when I have only enough time for the next customer crisis?
How can I maintain work-life balance?
How do I balance being a senior leader and with having time for my family?
Dealing with time stress. Time stress is a big issue for many, but it is not something that is going to go away. However, if you feel passionate about the higher purpose, creativity will follow, and you will come up with a creative solution to the problem of not having enough time. Indeed, clarifying your highest purpose is transformational because it becomes the arbiter of all decisions. When you know your highest purpose, many things that otherwise keep you busy begin to drop off your to-do list. Things you thought you had to do are no longer the right things to do.
Horizontal Distrust
How do I get peers who want to dominate and defeat others to want to collaborate and cooperate with others?
How do I inspire my team and peers to collaborate without being blocked by the question “What is in it for me?”