The Financial Benefits of Purpose-Driven Companies
Purpose-driven companies have one thing in common, according to organizational consultant and thought leader Simon Sinek. “If you go to work in a purpose-driven organization, you are a happier person … and you will go home happier.”
What Are Purpose-driven Companies?
The Harvard Business Review Analytic Services Report on The Business Case for Purpose describes the landscape modern businesses face today succinctly: “Businesses face an accelerated pace of change as digitalization, disruptive business, and rapidly changing consumer expectations reshape their world.” The study recognizes that a growing number of leaders are recognizing the importance of developing a strong authentic sense of purpose to meet these challenges (if you have not read this groundbreaking study, we encourage you to do so). The results? When an organization prioritizes purpose, they grow and transform more vigorously than their peers, customers are more loyal, and employees are more engaged.
How does it work? Purpose-driven companies recognize the importance of employees bringing their best selves to work every day, and helps them develop meaning and purpose both at work and at home. And while this approach ultimately drives financial growth by creating a highly engaged and high-performing workforce, it’s also a powerful talent recruitment and retention tool. Another path an organization can go down is to have a clear, shared purpose that attracts likeminded people, like Patagonia or Zingerman’s here in Ann Arbor.
Either way, purpose-driven organizations do a better job of seeing the big picture, and they typically prioritize long-term improvements over short-term gains. Another convenient side-effect of either of these practices is contributors feel more energized at work, more resilient to change, and are happier at home.
And not surprisingly, it turns out that purpose-driven companies tend to have purpose-driven leaders. Research in the Journal of Applied Psychology found that when leaders connect to an authentic purpose that is personally meaningful to them, their team is also more likely to connect to a higher purpose as well.
Authenticity is Paramount
Organizations can’t simply say one day “we are now a purpose-driven team.” It doesn’t work that way. And the pivotal feature of a truly purpose-driven organization is one that so many fail to nurture. Michael Chavez wrote in an article posted at Forbes.com titled Crafting Your Business Purpose: Beware of the Authenticity Trap: “the last thing business needs is for purpose to become another fad or entry into the dictionary of meaningless business jargon.” Mr. Chavez stresses the importance of getting purpose right, and points out that efforts to promote purpose in a workforce must be authentic and actionable. Otherwise, efforts to develop a culture that values purpose will fall flat. This is because too often, organizations attempt to create a purpose drafted by committee in pursuit of an objective and urge their workforces to adopt and align to it. Mr. Chavez warns that this approach will not work. At Kumanu, we believe organizations interested in developing a purpose-driven workforce must create employee experiences that begin with the employee, not their mission statement.
The Balance Sheet Doesn't Lie
If an organization is able to foster a culture that values purpose, research shows they will experience better financial performance—better stock performance, ROA, and more. The acclaimed book Firms of Endearment tracked the financial performance of 18 purpose-driven companies over the course of 10 years. These 18 companies had an average annual return on equity of 13.1%–9%—higher than the average company in the S&P 500. The book also found that purposeful companies outperformed the S&P 500 by an impressive 10 times.
Another study on this topic from the Harvard Business School noted the importance of clarity regarding purpose. A clear sense of purpose is imperative to inspire a team to work together and achieve success. This research found that an increase in clarity of purpose can increase ROA by as much as 3.89% per year.
Organizations that value purpose also perform better in the stock market: the Harvard study above found they consistently outperform the Fortune 100. The book Built to Last: Successful Habits of Visionary Companies did further analysis on this topic. The research discovered that value and purpose driven organizations outperformed the market 15:1.
Why Does Purpose Improve Financial Performance?
It’s hard to pin down one concrete reason that explains purpose’s impact on financial performance. There are so many ways that purpose impacts business outcomes—both directly and indirectly—that can explain the positive relationship between financial performance and being purpose-driven as a company. The three main contributors to financial performance that are driven by purpose are:
The innovations created by purpose-driven businesses contribute to better financial performance. A powerful purpose like Patagonia’s helps inspire employees to work more creatively, leading to further innovation. According to Deloitte, companies driven by purpose have 30% higher levels of innovation, and studies show that more innovative companies exhibit superior financial performance.
Purpose-driven organizations give employees a north star to follow. Because of this, employees are often more personally committed to their organizations and bring their best selves to work every day. They are able to see the connection between their own work and the company’s overall goals, motivating them to work effectively and enthusiastically. This intrinsic motivation has real impacts on productivity. In fact, one study discovered that when employees have a sense of meaning behind the work they do, their performance increases. This improved productivity is one factor that contributes to purpose-driven companies being more financially successful.
Of course, there’s also the mountain of evidence surrounding the health benefits of purpose. Some major benefits include healthier aging, better sleep, more energy and willpower, repairing and protecting DNA, decreasing risk of heart attack and stroke, and a better immune system. Healthier workers are more productive and have lower healthcare costs, both contributing to superior financial performance.