Corporate Purpose and Financial Performance

Claudine  Gartenberg; Andrea  Prat; George  Serafeim

Article | Organization Science | January–February 2019

Corporate Purpose and Financial Performance

by Claudine Gartenberg, Andrea Prat and George Serafeim

Abstract

We construct a measure of corporate purpose within a sample of U.S. companies based on approximately 500,000 survey responses of worker perceptions about their employers. We find that this measure of purpose is not related to financial performance. However, high purpose firms come in two forms: firms that are characterized by high camaraderie between workers and firms that are characterized by high clarity from management. We document that firms exhibiting both high purpose and clarity have systematically higher future accounting and stock market performance, even after controlling for current performance, and that this relation is driven by the perceptions of middle management and professional staff rather than senior executives, hourly, or commissioned workers. Taken together, these results suggest that firms with employees that maintain strong beliefs in the meaning of their work experience better performance.

Keywords: corporate purpose; purpose; employee motivation; Belief systems; Corporate performance; human capital; Middle management; culture; corporate culture; Meaning; Mission and Purpose; Organizational Culture; Employees; Perception; Values and Beliefs; Performance Effectiveness;

Format: Print

SSRN Find at Harvard

Citation:

Gartenberg, Claudine, Andrea Prat, and George Serafeim. "Corporate Purpose and Financial Performance." Organization Science 30, no. 1 (January–February 2019): 1–18.

In the face of accelerating climate change, investors are making capital allocations seeking to decarbonize portfolios by reducing the carbon emissions of their holdings. To understand the performance of portfolio decarbonization strategies and investor behavior towards decarbonization we construct decarbonization factors that go long low carbon intensity sectors, industries, or firms and short high carbon intensity. We consider several portfolio formation strategies and find strategies that lowered carbon emissions more aggressively performed better. Decarbonization factor returns are associated with contemporaneous institutional flows into the factors. Buying decarbonization factors when coincident flows are positive while selling when they are negative produces significantly positive alphas. Combining decarbonization factors that have positive contemporaneous flows would provide investors with significantly superior returns and continuous exposure to low carbon portfolios. The results are more pronounced in Europe relative to the U.S. Our results suggest that institutional investor flows contain information about anticipated fundamentals related to climate change developments.

Analyzing data from approximately 1.5 million employees across 1,100 established public and private U.S. companies, we find that the strength of employee beliefs about their firm’s purpose is lower in public companies. This difference is most pronounced within the salaried middle and hourly ranks rather than among senior executives. Among public companies, purpose becomes progressively lower with more concentrated shareholders, especially in firms with high hedge fund ownership. These patterns can be partly explained by differences in CEO backgrounds and compensation: public firms, particularly those with strong shareholders, choose outsider CEOs at higher rates and pay them more relative to their employees. Our analyses suggest that these results are not driven solely by sorting effects but appear attributable in part to the impact that firm owners have on their employees. In summary, shareholders appear to influence the strength of corporate purpose deep within organizations via the leadership and corporate practices they enable at the top.

Aperture Investors is a startup investment firm that seeks to disrupt the asset management industry through competitive differentiation by charging investors primarily when its portfolio managers outperform the marketplace. Headed by Wall Street veteran Peter Kraus and backed with substantial and patient seed capital, Aperture seeks to attract both star portfolio managers and assets from mutual funds and hedge funds. Kraus believes that his innovative business model addresses the current dysfunctional fee and incentive structures in the industry, which have led to long-term market underperformance, and that Aperture will address the reasons that are motivating investors to shift to cheaper, passively-managed index and exchange-traded funds.

Faculty & Research

Corporate Purpose and Financial Performance

Abstract

Citation:

About the Author

More from the Author