Article
American Economic Review: Papers and Proceedings

Why Do Firms Have 'Purpose'? The Firm's Role as a Carrier of Identity and Reputation

By: Rebecca Henderson and Eric Van den Steen

Format:Print

Abstract

Why do so many firms publicly espouse a "purpose" beyond simple profit maximization? And why do so many managers and employees appear to care deeply about this purpose and to believe that it is critically important? In this paper we argue that the conventional answers to this question fail to account for the fact that employees usually care whether the pursuit of purpose is authentic and that the embrace of purpose often affects even employees whose own work is remote from the activities that put the purpose into action. In this paper we propose instead that firms may adopt a socially driven purpose because of how it affects—through the visibility of firm membership and through the visibility of the firm's actions—employee identity and reputation, where we define "identity" as our own beliefs about ourselves and "reputation" as others' beliefs about ourselves.