There are 2 types of purpose, according to a Harvard professor - but only one of them boosts company productivity. Here's the question every manager should be asking to focus on the right kind of purpose.
- Harvard professor Rebecca Henderson said years of research found why the top 10% of most productive corporations are so much more productive than the rest: they are driven by purpose.
- There are two types of purpose, she clarified: the one that is used to boost camaraderie and the one that is used for mission-alignment. The latter leads to high performance.
- The Better Capitalism series tracks the ways companies and individuals are rethinking the economy and role of business in society.
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Rebecca Henderson has been a business school professor for 20 years, first at MIT and then Harvard.
For much of those two decades, a persistent finding puzzled her and her colleagues: The productivity of the top 10% of most productive firms was growing significantly faster than that of every other firm. Economics textbooks define "productivity" as output per unit of input, or how much revenue each worker at a company contributes to its bottom line. And Henderson's findings on productivity across nearly 20 years were consistent across all industries and across all OECD countries.
Before the financial crisis, the top 10% simply led the pack in productivity rate. After the crisis, the productivity of the top 10% kept sharply rising, and started to drop for the others. Today, the productivity of the top 10% of most productive firms is about twice as large as the bottom 10%.
Ultimately, Henderson came to a surprisingly simple explanation: The most productive companies recognized that companies driven by purpose invested the most in long-term value, and in turn created the most value overall, therefore becoming more productive.
But there are two kinds of purpose, Henderson added, and you don't want to choose the wrong one.
Purpose-driven productivity is not a measurement error, and not all purpose is equal
"I spent 20 years in windowless conference room trying to make this finding go away," Henderson told an audience of CEOs and investors gathered for the CECP's annual Strategic Investor Initiative. "Nobody believed it. It must be a measurement error."
But the studies kept consistently coming to the same conclusion. And now, ahead of the release of her book, "Reimagining Capitalism in a World on Fire," she has found that companies driven by a certain kind of purpose are more productive, regardless of industry or country.
"What's going on is that there are some firms that are able to run genuine continuous improvement, that genuinely treat their employees with dignity and respect, that can run teams that work together well, that promote on the basis of performance - not just on the basis of quantitative metrics, but genuinely on the basis of performance."
Henderson noted an important distinction between two primary types of purpose. Organizations that used their purpose primarily to build camaraderie, creating a familial atmosphere, saw no positive or negative impact on their bottom line; those that used their purpose primarily for mission alignment, answering the "why" of everyone's work, outperformed their peers. Henderson cited research on corporate purpose by Claudine Gartenberg, Andrea Prat, and George Serafeim.
While Henderson said she would not disparage purpose's effect on camaraderie, she added, "if you really want outperformance, the data strongly suggests you need it linked to the strategy."
Natural and social capital are not "free"
Henderson told the audience that she believes capitalism is at a turning point, where a mentality of profits above all else for more than four decades has been proven to be unsustainable. Corporations previously assumed that natural and social capital, like the environment and workers' livelihoods, were "free," and could largely be ignored. But in the past several years, even the most jaded executives have realized that their actions impact a climate crisis and a wave of inequality-fueled populism. They are realizing that natural and social capital is now "expensive."
Henderson is part of the increasingly loud group that says if corporations do not abandon profits at all costs and recognize this transition from free to expensive, countries will experience significant economic and social destabilization.
"Really transforming organizations is really, really hard. We have to do it at scale in the next 20 years and really transform the society," she said. "A purpose," as long as it's implemented correctly, "can help."
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