The Economics of Higher Purpose Read online

  Weave the authentic higher purpose into their execution of the strategy, that is, in their day-to-day decisions

  The second assumption is that there are two kinds of leaders: those who authentically believe in a higher purpose (“true believers”), and those who are interested only in the pursuit of business goals but are willing to masquerade as true believers in order to get their employees to sacrifice for the common good and change their behavior (“manipulators”).

  Only leaders know their own types; to others they all look the same. Moreover, suppose the sacrifices made by employees in the pursuit of higher purpose produce better outcomes regardless of what the leader does, but these gains are small relative to those produced when the leader commits wholeheartedly to an authentic higher purpose and continues to behave over time in a manner consistent with the higher purpose.

  Both types of leaders have an incentive to say that they are true believers. But the employees, even though they may not be able to always tell who is a true believer and who is not, know that the leaders have this incentive to masquerade as true believers. This means that the embrace of higher purpose by the leader of the organization will be viewed with suspicion by the employees, and the leader will have to make a special effort to convince employees of authenticity. This is true even if the manipulator behaves exactly like the true believer and makes (short-term) sacrifices that are costly to them personally and to the organization.

  However, a leader who is a true believer will always derive greater personal satisfaction and utility from pursuing an organizational higher purpose than a leader who is a manipulator. Thus, the net cost to the leader of pursuing an organizational higher purpose is smaller if the leader is a true believer than if the leader is a manipulator. So the true believer may be able to figure out the degree of commitment to purpose that is desirable for the true believer but too high for the manipulator.

  If there is such a commitment to a higher purpose, then the employees will observe it and believe that it is authentic. But in order to do this, the leader has to first discover the higher purpose, one that makes sense for the organization given its business context. There is no formula for what constitutes a great higher purpose.

  The examples we have provided thus far illustrate the great variety of authentic higher purposes. For Starbucks, the higher purpose was to “provide a third place between work and home.” For Eric Greitens of The Mission Continues, it was to reintegrate disabled veterans into society by instilling in them a sense that their service is larger than themselves and that they can pursue their passion while serving society away from the battlefield. For Walt Disney, it was to create “a place where people can find happiness and knowledge.” Organizational higher purpose is as varied as organizations themselves.

  But any leader’s first step is to envision a purpose-driven workforce and discover a higher purpose for the organization, recognizing that this “noble cause”—as defined by Steve Jobs—can be anything prosocial but requires deep contemplation and discovery. This is not always easy. For example, we interviewed Jim Weddle, the CEO of Edward Jones, a large financial services company headquartered in St. Louis. He described to us a process that Peter Drucker took Edward Jones through to discover its higher purpose.

  When they began, they described the purpose of the organization as making a profit. Drucker refused to accept that answer, asserting that profit was an outcome of the pursuit of a higher purpose. The question he asked was “Why does the organization exist?” After a painful discussion that went back and forth, the organization eventually discovered its higher purpose as helping their clients—individuals and families—make financial decisions to achieve their life goals, not just helping them make money but helping them achieve their lifetime financial goals. This is a higher purpose that is not distinct from the business of the company. Rather, it is an integral part of it and influences every aspect of how the company is run.

  Once an organization discovers a higher purpose, the leaders have to understand that it cannot be a covenant unless it is authentic and employees are convinced that it is authentic. In other words, employees must believe that the leader is not a manipulator who is articulating a higher purpose as a public relations ploy.

  Authentic leadership requires not only the appropriate personal and organizational financial sacrifices to signal authenticity but also clear and constant messages. You cannot assume that the employees will hear the leader the first time a higher purpose is communicated. The message has to be repeated over and over again, and its implications for business decisions and tradeoffs have to be continuously explored, debated, and explained.

  Repeating the message will help employees internalize the higher purpose and believe in it, and it will stimulate each of them to learn how they can integrate the organization’s higher purpose into their decisions and actions. In this process, higher purpose becomes an arbiter of all decisions. They find that complexity is reduced, and freedom is increased. They can make the right decisions without asking for direction because they know the highest intention of the organization.

  This learning process can energize employees. As they begin to live in the space at the intersection of organizational higher purpose and business decisions, they begin to make personal sacrifices that help to further the common good, and they become ambassadors for the higher purpose. In this way, midlevel managers are turned into purpose-driven leaders. As a result, intrafirm competition and self-interested behavior decline. Employees perceive less uncertainty about how their fellow employees will behave, reducing what economists refer to as strategic uncertainty. The lower uncertainty and the commitment to purpose permit the organization to change the wage contracts it writes for its employees. The organization does not rely on the expectation that all of the employee’s motivation will come from the explicit wage contracts they are offered. The organization has a higher purpose that substitutes partially for the high-powered incentives of explicit wage contracts that pay bonuses that increase steeply with output. The organization can shield its (risk-averse) employees from some of the risk associated with such contracts without worrying about employees shirking. Employees work harder and smarter not only because they will earn higher bonuses by doing so but because doing so will contribute to a higher purpose they believe in.

  Over time, these purpose-driven leaders begin to connect others in the organization to the higher purpose. Employees begin to see their work as not only helping the organization achieve its business goals but as something larger than themselves. The covenant begins to take hold. Like the war veterans in The Mission Continues, employees see themselves as making large contributions to society. Leading this charge of connecting people to purpose will be the positive energizers—those whose boundless enthusiasm for the higher purpose radiates brightly and converts others. Leaders must make sure these positive energizers are unleashed.

  Thus, our theory of higher purpose does not seek to negate the principal–agent model but to augment it. We recognize the power of incentives in overcoming effort aversion and the extent to which employee risk aversion impedes contractual resolutions. An authentic organizational higher purpose reduces the risk employees perceive, and it also helps overcome employee aversion to working hard.

  Economics of Higher Purpose at Work in Practice: A Case Study

  We can see how organizations that do what we described above behave, especially during times of stress. One of these organizations is Southwest Airlines.

  Southwest Airlines has long been known as a purpose-driven, values-based organization.35 Pursuing the purpose and living the values often leads to unconventional decisions and positive outcomes. The 2001 attack on the World Trade Center had a devastating effect on air travel. As passengers turned away, airlines were forced to downsize, and many did so with a purely economic mind-set. US Airways, for example, declared financial exigency. This allowed it to lay off more employees than any other airline, with no benefits and no severance for
the laid-off employees, as union contracts became null and void.

  Like US Airways, Southwest was also a short-haul airline, and such airlines were the most adversely affected. However, Southwest acted on the assumption that the trust and loyalty of employees was more important than responding to short-term financial pressures. Southwest risked being severely punished by investors for not making the right economic decision. Yet over the next 12 months, while all airlines, including Southwest, had negative stock returns, Southwest’s shareholders suffered the least among all major airlines. Southwest recovered more quickly that most of the other airlines.36

  Southwest retains its ability to perform under pressure. In April 2018 Southwest experienced a different kind of crisis: a passenger was killed when pieces of a failed engine damaged the wing and the fuselage of a plane.37 The airline faced many technical, legal, and financial issues, as well as issues of dealing with the grieving family and the 148 others who were on the plane.

  Employees across the country rushed to respond, but in a crisis a workforce cannot be managed centrally. While a few basic directives can be sent out, hundreds of decisions have to be made in each location, without direction from above. At such times the culture reigns, and, as we know, some companies have failed miserably.

  Southwest had two chief concerns: ensuring the safety of the rest of the fleet and caring for the affected customers. The company arranged a special flight, staffed by experienced crew, for the 148 passengers. The passengers later described the company as “friendly, understanding, concerned.” Afterward, employees stayed in contact with the passengers. The company sent $5,000 to each passenger for immediate expenses. It sent the money in a letter from the CEO offering “our sincerest apologies.”

  The Southwest community felt sadness over the loss. Employees sent messages of compassion and support to one another and regularly checked on and cared for one another. As a former HR employee stated, “It’s a different culture. When there’s an issue, everybody feels it.”

  Empirical Evidence on the Economics of Higher Purpose

  Recent research provides evidence to support the observation that pursuit of an authentic higher purpose improves economic performance. Two Swedish economists studied the effect of higher purpose pursuit in a laboratory study of principals and agents. They hypothesized that the pursuit of an authentic higher purpose creates in employees a “warm glow” about the firm, thereby positively influencing employee behavior. In a laboratory setting in which some participants in the experiment acted as principals and others as agents, they asked the principals in the treatment group to donate their earnings to the Swedish Red Cross in the various treatments designed in the experiment. They found that agents work the hardest and economic efficiency is the highest in the treatment in which a portion of the principal’s earnings goes to charity. They concluded that the pursuit of higher purpose improves the efficacy of the contracts that principals and agents negotiate, and that this plays an important role in the higher effort agents provide.38

  As we indicated in our economic theory of higher purpose in chapter 4, behavior can be significantly influenced by the pursuit of higher purpose in part because even the explicit contracts that are negotiated may be affected by this pursuit. In other words, it is the entire ecosystem of contracts, effort, and output that is fundamentally altered.

  A large-sample study by researchers at Harvard Business School, Columbia University, and the Wharton School surveyed nearly 500,000 people across 429 firms involving 917 firm-year observations from 2006 to 2011. The study found that an authentic higher purpose that is communicated with clarity has a positive impact on both operating financial performance and forward-looking measures of performance like stock price.39

  The authors found that high-purpose organizations come in two forms: firms characterized by high camaraderie between workers, and those characterized by high clarity from management. They document that firms exhibiting both higher purpose and clarity have systematically higher future earnings and stock market performance, even after controlling for current performance. They concluded that this relationship is driven by the perceptions of middle management and professional staff, rather than senior executives. Their findings are consistent with our economic theory of higher purpose: when midlevel employees believe that the organizational higher purpose is authentic and is communicated with clarity by top management, better economic performance results.

  A study looked at the issue in the context of reward-based crowdfunding, in which creators of entrepreneurial projects solicit capital from potential consumers to reach a funding goal and offer them future products or services in return. The study examined consumers’ contribution patterns using a novel dataset of 28,591 projects collected at 30-minute resolution from Kickstarter.com.40 It showed that consumers also have prosocial motives to help creators reach their funding goals. Projects were funded faster right before they met their funding goals than right after, presumably because consumers wanted to direct more funds to projects that needed to successfully finish their funding campaigns so they could commence pursuit of their prosocial goals. These findings suggest that consumers’ prosocial motives play a role in rewards-based crowdfunding.

  Another study looked at an economic model of an industry equilibrium in which firms have a choice to engage in corporate social responsibility (CSR) activities.41 The CSR is modeled as an investment to increase product differentiation that allows firms to benefit from higher profit margins, so there is an integration of higher purpose with the business goals of the company. The model predicts that CSR decreases systematic risk and increases firm value, and that these effects are stronger for firms with high product differentiation. The authors found supporting empirical evidence for these predictions.

  Conclusion

  In a nutshell, our economic theory of higher purpose is as follows: By adopting an authentic higher purpose that intersects the organization’s business goals, employees are persuaded that their personally-costly effort has two effects—it contributes to their own economic well-being (through higher compensation, promotions, and other extrinsic rewards), and it contributes to a greater social good that they care about. This increases the value they perceive in their own hard work, making them willing to work harder, take more risks, and be more entrepreneurial than they would be otherwise. Thus, the power of extrinsic reward and punishment mechanisms in aligning the self-interest of employees with the larger good of the organization is enhanced. The key is that the economic sacrifice made by the authentic leader to pursue higher purpose must be great enough to convince employees that the purpose is authentic and not simply another tool to control and manipulate employees.

  If higher purpose is so compelling, why is everybody not embracing it? We turn to this question in the next chapter.

  CHAPTER SIX

  Why Isn’t Everyone Doing It?

  We are not the first to elucidate the meaning of higher purpose. Indeed, a large number of books have been written on the subject, some on the role of higher purpose in the lives of individuals and others on the role of higher purpose in organizations. Authors talk about “leading with the soul,” “managing from the outside in,” “focusing first on the ‘why’ instead of the ‘how.’” Yet few organizations have adopted an authentic higher purpose that influences their daily business decisions. Why? Why have the books had so little influence on actual business practice?

  The Economic Case for Higher Purpose: The Threat to Free-Market Capitalism

  This question is important because of the enormous potential that higher purpose has to change the world. Global corporations and market-driven capitalism have contributed handsomely to economic growth since World War II. This growth has significantly reduced poverty around the world. However, not everyone has benefited equally. Economic inequality has actually increased as a small fraction of the population has benefited more than the rest. The situation is worse in developing countries.42

  This failur
e to spread the wealth equally has led to a disillusionment with capitalism in many quarters. A recent Gallup survey of Americans found that, for the first time, the percentage of Democrats favoring socialism was higher than that favoring capitalism. While a much lower percentage of Republicans like socialism (16 percent), in 2018 a majority of Americans ages 18 to 29 had a more favorable view of socialism (51 percent) than of capitalism (45 percent).43

  For those who believe in free markets and are aware of all the evidence of failed experiments in socialism, this result is shocking. It is an existential threat to the very economic system that underlies much of the prosperity enjoyed by the West in the decades since World War II and the rapidly growing prosperity in emerging market countries. Rather than dismissing these attitudes favoring socialism as stemming from a lack of information, a misunderstanding of what socialism really is, or political ideology, we can ponder how capitalism can deal with this challenge in a way that restores faith in the capitalist economic system. We believe that one way to restore faith in the system is for corporations to adopt authentic prosocial higher purposes, without government coaxing or societal pressure.44 If firms fail to do so, the consequences will be dire. We are all acutely aware of instances in which voters get so dissatisfied with the status quo that they vote in favor of something even worse.

  This disillusionment has happened despite an increasing focus on corporate programs that are often linked to corporate higher purpose. Indeed, corporate social responsibility (CSR) programs can often provide valuable ideas for corporations to discover their higher purpose. An example of such a CSR program is Syngenta’s Good Growth Plan, which aims to increase the productivity of small farmers in Indonesia and Nicaragua. Yet many of these programs have failed to deliver the promised results.