Intangible assets—patents, brands, client relationships, skilled workers, and organizational processes—generate most corporate growth and represent 90% of the market value of the S&P500. Despite their dominance, intangible assets are commonly mispriced. Accurately valuing them can bolster risk-adjusted returns and avoid costly investment mistakes in scenarios like the dot-com and cleantech booms and busts.
The importance of corporate purpose, a set of beliefs about the meaning of a firm’s work beyond quantitative measures of financial performance is well established. Corporate purpose has been around since at least 1947, when Forrest E. Mars, Sr. described the objective of the Mars candy company as “the manufacture and distribution of food products in such manner as to promote a mutuality of services and benefits among consumers, distributors, competitors, suppliers, governmental bodies, employees and shareholders.” Then in 1994, leading strategy professors Bartlett and Ghosal’s suggested that in a dynamic environment where front line workers are more likely to have the knowledge and expertise to set strategy, top management should instead focus on building employee commitment to and pride in the organization. Said differently, the primary role of executives is to instill corporate purpose, rather than to determine strategy. Oxford and EY research also shows that public conversations about corporate purpose have increased more than five-fold since then. Nevertheless, measuring the inherently intangible corporate purpose remains elusive for most investors.
As regulators and standard setters develop sustainability disclosure requirements and consider how to modernize traditional accounting by better incorporating intangibles, investors can benefit from this inefficiency and enhance risk-adjusted returns by accurately valuing intangible assets. This article, the second in a series on pricing sustainability-related intangibles, focuses on harnessing how employees feel about their work to drive risk-adjusted returns.
Finally A Way To Measure Corporate Purpose!
New research from Wharton professor Claudine Gartenberg, Columbia professor Andrea Prat, and sustainable investing trailblazer and Harvard professor George Serafeim represents a great leap forward: the trio breaks new ground by systematically measuring corporate purpose and linking it to stronger financial and market performance.
Specifically, the trio identifies multiple forms of high purpose firms. Of those forms, firms with both high clarity and high camaraderie have stronger future accounting and stock price performance, even after controlling for current performance. The results make intuitive sense, and research on motivation shows that employees who view their work as meaningful demonstrate greater organizational commitment, stronger job performance, and organizational citizenship behavior. As a case in point, a value-weighted portfolio of the ‘‘100 Best Companies to Work For in America’’ consistently outperformed benchmarks over 25 years.
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The Lynchpin Of Corporate Purpose And Performance: Middle Managers
Further, the trio finds that perceptions of middle management and professional staff, rather than those of senior executives or junior hourly workers, drive the association between high clarity and high camaraderie and strong accounting and stock price performance.
Not surprisingly, Gartenberg, Prat, and Serafeim find systematic differences across levels of employees in the degree of purpose: the more senior the employee, the stronger their sense of organizational purpose. Indeed, numerous firms have struggled to imbue a sense of purpose at junior levels.
The result that only middle managers and salaried professionals that drive the association between high purpose and high clarity firms and financial performance may be due the most valuable responsibilities of mid-level employees being hard to quantify and incorporate into formal legal contracts. Specifically, implementing strategy, influencing junior employees, and communicating information and insights from junior employees upward to shape strategy are challenging to observe and quantify. Firms must therefore rely on informal agreements based on trust and the shadow of the future with middle management rather than on formal legally enforceable contracts. By contrast, executive compensation is often explicitly tied to firm performance, and for entry level employees, the simpler nature of their repetitive tasks are more easily measured.
Corporate Ownership Matters To Corporate Purpose And Performance
In a separate study, Gartenberg and Serafeim find that corporate purpose is stronger in private companies and weaker in public ones. This difference in employee beliefs between private and public companies is starkest among salaried mid-level and hourly employees, rather than senior executives. Among private companies, private equity ownership is linked to a weaker sense of purpose. Among public companies, purpose is stronger for companies with long-term investors and weaker for companies with high hedge fund ownership. FCLTGlobal research also finds that long-term risk-adjusted returns are higher when a higher percentage of a company’s shares are held by long-term investors, measured as the portfolio-wide holding period of the investor base. Collectively, these finding indicate that higher owner commitment is predictive of a stronger sense of purpose among employees.
Want To Try This At Home?
For investors and corporate executives seeking to apply these insights within their portfolios or firms, the research is based on surveys that measure the overall strength of employee responses to questions about how meaningful their work is, on dimensions of workplace camaraderie, and on strategic clarity.
The corporate purpose questions determine the strength of employee belief about four statements: my work has special meaning and if not just a job; I feel good about the ways we contribute to the community, I feel pride in what we accomplish, and I’m proud to tell others that I work here.
The camaraderie questions assess employee agreement with three assertions: this is a fun place to work; we are all in this together; and there is a family or team feeling here.
The clarity questions gauge employee agreement with management has a clear view of where the organization is going and how to get there, management makes its expectations clear, and I am given the resources and equipment to do my job.
Measuring corporate purpose and culture and having the information to recalibrate those intangibles and drive corporate purpose remains difficult. At the same time, thanks to Gartenberg, Prat, and Serafeim, it just got a whole lot easier.
Note: As a grateful Harvard Business School alumna, I in no way suggest that it is impossible to study the relationship between corporate purpose and corporate performance at Harvard Business School today. Sustainable investing is a new and dynamic field, and the school has done considerable groundbreaking research since my matriculation over fifteen years ago.