(When) Should a Company Have Purpose?

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=4rt Congrés d’Economia i Empresa de Catalunya=

Eje: La musculatura del sistema empresarial català

==(When) Should a Company Have Purpose?==

Theodor Vladasel

Universitat Pompeu Fabra

UPF Barcelona School of Management

Barcelona School of Economics

[mailto:theodor.vladasel@upf.edu theodor.vladasel@upf.edu]
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==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==

Baron, D. P. (2007). Corporate social responsibility and social entrepreneurship. ''Journal of Economics & Management Strategy'', 16(3): 683–717.

Besley, T., & Ghatak, M. (2005). Competition and incentives with motivated agents. ''American Economic Review'', 95(3): 616–636.

Besley, T., & Ghatak, M. (2017). Profit with purpose? A theory of social enterprise. ''American Economic Journal: Economic Policy'', 9(3): 19–58.

Burbano, V. C. (2016). Social responsibility messages and worker wage requirements: Field experimental evidence from online labor marketplaces. ''Organization Science'', 27(4): 1010–1028.

Cheng, B., Ioannou, I., and Serafeim, G. (2014). Corporate social responsibility and access to finance. ''Strategic Management Journal'', 35(1): 1–23.

Hawn, O., Chatterji, A. K., and Mitchell, W. (2018). Do investors actually value sustainability? New evidence from investor reactions to the Dow Jones Sustainability Index (DJSI). ''Strategic Management Journal'', 39(4): 949–976.

McMullen, J. S. and Warnick, B. J. (2016). Should we require every new venture to be a hybrid organization? ''Journal of Management Studies'', 53(4): 630–662

Parker, S. C., Gamble, E. N., Moroz, P. W., and Branzei, O. (2019). The impact of B Lab certification on firm growth. ''Academy of Management Discoveries'', 5(1): 57–77.

van Balen, T., & Tarakci, M. (2023). Recruiting talent through entrepreneurs’ social vision communication. ''Organization Science'', forthcoming.

van Balen, T. and Vladasel, T. (2024). B Corp certification and early-stage venture funding, ''Working paper''.

Vladasel, T. (2024). Moral value trade-offs and decision difficulty: An experimental analysis of social enterprises. ''Working paper''.

Vladasel, T., Parker, S. C., Sloof, R., and van Praag, M. (2024). Revenue drift, incentives, and effort allocation in social enterprises. ''Journal of Economics & Management Strategy'', forthcoming.

Wang, T. and Bansal, P. (2012), Social responsibility in new ventures: profiting from a long-term orientation. ''Strategic Management Journal'', 33(1): 1135–1153.