(When) Should a Company Have Purpose?

Abstract

Organizations in Catalonia and elsewhere are facing mounting pressures to embrace social, environmental, and governance (ESG) goals beyond profit maximization. Yet, these objectives are rarely aligned in ways that create value for shareholders and society. I use an organizational economics lens and survey recent evidence to answer the question: when should a company have purpose? I focus firms’ ability to attract talent and finance via social activities, contrasting the experiences of smaller, younger organizations and those of larger, established ones. This review does not aim to be comprehensive, but simply to interpret poignant recent evidence.

Beyond superior ESG performance’s inherent value, observers often claim purpose enhances productivity by motivating employees. Besley and Ghatak (2005) paved the way for this logic by theoretically showing how workers enjoy working for a firm whose mission matches their social preferences, exerting higher effort and allowing firms to save on monetary rewards. In Burbano’s (2016) field experiment, this is indeed the case: by highlighting corporate social responsibility (CSR), large firms attract additional workers at lower pay. So long as CSR activities are not too costly, motivated employees can improve organizational performance. Yet, start-up job postings data and experimental data on start-up recruiting reveal this insight does not apply to young firms: espousing a social vision leads job candidates to perceive lower career advancement prospects and rewards (Tarakci and van Balen, 2023). Unless economic performance is strong, purpose is unlikely to attract talent.

Even when purpose – pursued alongside profits, as in social enterprises (Baron, 2007; Besley and Ghatak, 2017) – does attract workers, it may induce an undesirable effort allocation. In a multitasking model with motivated workers, the absence of incentives renders mission the only motivation tool and leads social enterprise employees to exert effort on social, rather than commercial tasks (Vladasel et al., 2024). Since this threatens organizational performance, they show that low-powered incentives can redirect employee attention towards commercial tasks and attract additional workers. Yet, this solution is imperfect: prosocial workers experience cognitive dissonance when bonuses encroach upon their moral values, slowing down response times (Vladasel, 2024). If firms value agility, pursuing profits and purpose jointly can prove counterproductive.

Finally, while CSR can improve public firms’ ability to raise external finance (Cheng et al., 2014; Hawn et al., 2018) things are different for start-ups that desire to signal their engagement with ESG practices. Popular third-party ESG certification – e.g., ‘B Corp’ – may hinder young firms’ ability to sustain economic performance (Wang and Bansal, 2012; Parker et al., 2019). ESG certification may thus lower their success in raising finance from traditional and impact investors (van Balen and Vladasel, 2024). Both investor types view certification as beneficial if a start-up has already proven its business model: only then can consumer appeal begin to create economic value.

Altogether, young firms should be reluctant to embrace purpose, as reflected in the difficulties associated with attracting talent and funding: not all firms need to be hybrids that maximize shareholder profits while addressing grand societal challenges (McMullen and Warnick, 2016).

(498 words)

References

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