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 described 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 generating and adhering to a strong authentic sense of purpose to meet these challenges (if you have not read this groundbreaking study, we encourage you to do so). And when a company operates with purpose at its core, communicates it clearly, and aligns it with their decision-making processes, it tends to deliver revenue growth and drive innovation.
How does it work? Purpose-driven companies can provide employees with an opportunity to contribute to an authentic sense of shared purpose, inviting everyone to jump-in and work together for a unified goal. Or, an organization can have a clear, authentic purpose the attracts the right people. Either way, these 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.
Patagonia, an exceptionally purpose-driven company, has their purpose in their mission statement: “Build the best product, cause no unnecessary harm, use business to inspire and implement solutions to the environmental crisis.” Here at JOOL, our purpose is to help people, teams, and organizations fulfill their own purpose, and achieve shared success.
Purpose Is a Team Sport
There is a very clear distinction between an employee and customer experience that is driven by a didactic mission, and one that is driven by an authentic purpose. 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 provides examples of companies that fell into an aspiration trap (Chipotle’s efforts to rebrand themselves as a farm-to-table fast food company is a shining example) as a warning. A purpose must be believable and actionable. Just because a purpose feels aspirational and/or consciously aware doesn’t mean that it’s authentic. A workforce and customers can see the difference from a mile away, no matter how a purpose is created. And the further away a purpose is from the actual practice of an organization, the more disengaged employees and customers become.
The Balance Sheet Doesn't Lie
Research supports the notion that purpose-driven companies 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 purpose-led 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. Management must have a clear vision and know the steps needed to get there. Additionally, they must communicate this vision to their workforce effectively. This research found that an increase in clarity of organizational purpose can increase ROA by as much as 3.89% per year.
Organizations with a clear sense of 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. They are able to see the connection between their own work and the company’s overall purpose, motivating them to work effectively and enthusiastically. This 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.