‘Unlocking hidden value’: Why purpose should be more central to business

Description:

Harvard Business School professor and author Ranjay Gulati says that sentiment is growing among business leaders that companies have a larger role to play than simply providing shareholder value.

He joined the FM podcast to discuss that topic and others highlighted in his recent book, Deep Purpose: The Heart and Soul of High-Performance Companies.

Gulati explains about when he realised the expectation "that businesses have to do more" is growing dramatically and what a leader at Lego said about finding purpose.

What you'll learn from this episode:

• Two of Gulati's memories that served as inspiration for writing the book.
• What Microsoft CEO Satya Nadella told Gulati about the company integrating purpose with strategy.
• The story behind Gulati's quest to have a one-word title for his book.
• Why there is cynicism related to company purpose statements.
• Gulati's explanation of the "coin-operated monkey theory of management".

Play the episode below or read the edited transcript:

To comment on this episode or to suggest an idea for another episode, contact Neil Amato at Neil.Amato@aicpa-cima.com.

Transcript:                                                            

Neil Amato: Harvard Business School professor Ranjay Gulati advises corporations around the world. He has recently written the book Deep Purpose: The Heart and Soul of High-Performance Companies. He's our guest on this episode of the FM podcast, where the interview explores what exactly is meant by deep purpose, what he thinks about the inherent tension between purpose and profit, and why for many years purpose has been seen more as a side hobby for organisations than an aspect of their core operations.

Welcome back to the podcast. This is your host, Neil Amato. I'm joined for this segment by a professor at Harvard Business School, a prolific and often-cited author, Ranjay Gulati. Ranjay, thank you for being on the podcast today.

Ranjay Gulati: Thank you, Neil. My pleasure to be here with you today.

Amato: We're talking about your book. The short title of that book is Deep Purpose. We'll get into more of that in just a bit. I read that one piece of inspiration for this book was corporate response after the 2013 Boston Marathon bombing. That sentiment, I guess among your students, was something along the lines of why do companies and leaders only behave benevolently in times of crisis. I was wondering if you could explain a little of the backstory related to that.

Gulati: I think there has been a growing sentiment among business leaders for at least a decade, if not longer, that business has a larger role to play than simply shareholder value. But that story of what that rule is has been unclear. It started off with CSR [corporate social responsibility]. We need to do more on CSR — on the side, charity, outreach work, community service. It evolved into also we need to do something about sustainability. Maybe we need to reduce our own footprint.

There was a sense that business had to do more, but they wouldn't mess with the core for this. Let me run my business as is and how much is a tax I have to pay the society, my licence to operate. We had huge movements around this topic. I think it dawned on me at that time through my students really, that A, the expectation that businesses have to do more is growing exponentially, and B, it's not some side hobby charity project on the side. It has to do with fundamentally transforming ourselves in terms of what are we doing in our core business.

Amato: In the preface to the book, another story of running a business with a purpose is one that, I guess, is quite personal for you. You mentioned the story of your mother's, I guess, start of a clothing business. Why is that something that you hold up as an example of business with purpose?

Gulati: Sometimes we don't know what motivates us to do what we do until somebody asks you. When I was being asked like, what really got you drawn, when was the first time you saw a purpose business? I was thinking back to myself, I said, "Where?" Now, I had been studying startups and entrepreneurial firms for some time. Over there I would show leaders talking about the loss of purpose, when they grew up too big. Too big, too fast, and then somehow the soul, they would talk in soulful terms about losing that entrepreneurial spirit.

When I heard that, it reminded me of a conversation with my mother, when her business, which grew dramatically over a few years, and she also had similar observations that it's not fun anymore. It's not the way it was. We had a clear idea of what we were trying to achieve, and now we're going to run the business and got to achieve business goals. It was my realisation that I had actually first seen a deep purpose business when my mother actually had started her business. I also came to realise that businesses with purpose exist not only to serve society but also to serve shareholders and make money. Businesses have to connect the commercial with their social logic. It's not an either-or — that either we do only commercial or we only do social. You're looking for that intersection between the two.

Amato: Do you want to talk anymore about how you thought your mom's business did intersect those two?

Gulati: Yeah. If you look at my mother's business, so she started a fashion business that was based out of her anthropological training. She had studied Indian tribal women, and she was fascinated by the fact that they lived in these villages that were really poor, but they still valued aesthetics and beauty in their lives. They would use vegetables to create colours and hand-print fabrics to then make for their own clothing. They were wearing Indian traditional clothing like saris. My mother had the idea that she would take this similar fabric and bring it to the Western part in the form of skirts and dresses, and she would also sharpen the colour palette and the designs that were using to make them more appealing.

Now, her instinct had a multiple of motivations to it. One was, you wanted to build a business. She didn't have a job and she was looking to create a livelihood. She needed to do something. But she also had this belief that somehow we have this illusion that people in villages are primitive people. She was very proud of her own ethnic identity, interacting with people from the West, and she also felt that these communities might find a way to create livelihood and work that would uplift them out of really a downward spiral of poverty. It was a combination of things that led her to decide that, OK, if I do this, it's going to be really good for me, for my communities, it brings this idea to the West, and it made me see the successful purpose doing businesses can bring a different set of motivations together in some way.

Amato: That's a good example. I want to ask you also about the foreword to the book. BlackRock CEO Larry Fink is the author of that foreword, and he wrote, "Some people believe there's an inherent tension between purpose and profit." What do you think about that?

Gulati: I think the word purpose has been hijacked, and that's what Larry is speaking to. The idea that people think of purpose and profit being orthogonal or separate from each other. There's a reaction to the one extreme which used to be purpose is shareholder value, and then it became purpose is anything but profit. I think the point we're trying to make is that, look, purpose and profit go together. You can actually have a purpose and be very profitable at the same time — that these are not oppositional forces, but there are additive. I'll tell you the place I heard it in the most extreme form was I interviewed Thomas Thune Andersen, who is the chairman of Ørsted, one of the largest alternative energy companies in the world. Thomas had the following thing to say when I asked him about the same question that you did to me. He said, "I pity those who think of purpose coming at the expense of performance."

Amato: In the sustainability realm there's greenwashing, which is so-called, I'd say sustainability for appearance sake. So what I'd like to know is what are the differences between purpose for the sake of convenience or appearance versus true deep purpose when it comes to organisations?

Gulati: Full confession, I really wanted to have a one-word title for the book. I'd been told by somebody than one-word titles are the way to go, and I was trying to call it Purpose. Unfortunately, I couldn't because I encountered so many instances of what I would call a superficial or shallow purpose and very few instances of what I would ultimately call Deep Purpose, just to distinguish it from that. Just like in greenwashing there's so much purpose washing that goes on. If you see the purpose statement of Theranos, of Purdue pharmaceuticals or even Enron. All these companies, but they had a purpose, and they use it to engage in what is loosely also called virtue cloaking.

I think that's very unfortunate. I myself was a subject of that. That's why I never thought purpose was anything serious. I thought it was a joke. The Financial Times had an article called "The baffling search for purpose in purpose statements." What this has done is bred a lot of cynicism about this topic. That is really irrelevant. That's where I started this research.

Amato: The audience for this podcast is finance professionals, so I'd like to focus a little bit on maybe the ways that you think finance functions can measure value beyond what's on the balance sheet or what goes to shareholders.

Gulati: Let me start first with financial value. The hunt is on to at least correlate purpose measures with performance. Of course, how do you measure purpose? It's very tricky. I'm part of that hunt, so I'll only leave it by saying stay tuned. Just the way people are trying to measure ESG [environmental, social, and governance] in some meaningful way. The effort is on to measure purpose in some meaningful way and see if it correlates.

But until that happens, let me give you a logical way in which purpose actually does make a difference to performance. Because there are suggestive studies by a number of people that are suggesting a correlation between purpose, orientation, and performance. I said correlation because we can't make a causal argument yet.

How can purpose drive financial performance? The first, we know, is directional. Purpose provides an orienting framework, what I call a compass, for the firm to know which direction to go in. That's what Satya Nadella told me about Microsoft. He said, "Look, we really couldn't have built our strategy without a purpose", and it wasn't just building our strategy, but then tweaking our strategy. We needed some constants to refer back to and purpose gave us that constant. Purpose is a compass.

The second plaster of things I would say is purpose is an operating system. Purpose can unlock value in three possible ways as you think about how purpose can do it. The first is purpose is motivational. We know that people who come to deeply connected with a company's purpose and feel it themselves are more inspired at work. When you're more inspired at work, you're more productive at work.

The productivity gains from dissatisfied to inspired can be 3x. Now you've got an unlock in human performance. I saw that in performance athletics also. One of the companies that I looked at was the Seattle Seahawks, and I talked to Pete Carroll. He talked to a high-performance athletic coaches, and they will tell you that when somebody feels connected and inspired by the organisation where they work, they elevate their game, even there. Motivational benefit is the first piece of this new operating system.

The second one is reputational. There's ample data now in marketing showing that customers are more trusting and more loyal of companies that have a purpose. Purpose branding has become this huge industry of lots of marketing and advertising firms trying to present purpose. You got that benefit, too.

There's a third one, which I will call relational. Purpose organisations have an easier time connecting to their communities, to their stakeholders, to their ecosystem of suppliers and other partners. If I say purpose drives performance, I'm telling you the exact pathways by which purpose drives performance.

I don't want to make an assertion. If you come back to me in six months, I'll provide you some data to back it up. I'm convinced that data will show what I'm finding because I have convincing conversations with a large number of companies that actually leverage purpose. Now you ask yourself the question, how many companies fully leverage purpose across all these four pathways? I'll say very few.

That's why purpose is an ideal still. Now if I'm a finance professional, I'd be looking at these companies because I believe that they are unlocking value. They're unlocking hidden value.

Amato: There's a career and talent aspect to this that maybe is important for people to think about, just that you are a much better candidate for all those employees out there if you have a true purpose.

Gulati: The balance story is very compelling. The motivational benefit, as I called it earlier. Now that we're facing a Great Resignation or great reshuffle or whatever you want to call it, you can see how people are processing this. Many of them are saying people want to get paid more. Pay more. I'm not disagreeing with that. All of us want a living wage, and if you're not getting paid a living wage, I think you should. Whether we are healthcare workers on the front line or we have front-line workers in the food and beverage business, we should get paid more, and I think that's happening. The recalibration of the wage structure is happening.

But I think there's something else also going on, which is people are questioning. Why do I do what I do? Do I really want to keep doing this job? How much meaning does it give? I think what has happened during COVID is, it's created a meaning crisis. We are looking for meaning, and if we don't find it, we're going to leave.

It's interesting. KPMG had every partner write on an index card, "Why do I come to work?" The act of getting everyone to write it is so empowering because most of us don't even think about, why do I come to work? Putting us in this contemplative place and reflecting back from it is actually dangerous business because what if they would leave?

Everybody wrote I need to make money. No one is disagreeing with that. People want to get paid. They're going to support their families, they're going to support themselves. There's another whole layer to this. I think my frustration in this whole debate is, we have, I think, regressed over several decades into what I would call loosely the coin-operated monkey theory of management. A belief that human beings are monkeys with a coin machine attached to them. You drop a coin, they'll dance for you. You drop two coins, and they'll do two dances for you. It's a pay-for-performance model. I am not disagreeing. People want to get paid for performance and people work incredibly hard for pay, which is tied to performance, it's the wonderful thing.

But we also know from 50 years of research, people want more than just pay. We want pay plus we want meaning, we want to have an impact, we want to feel like we're making a difference, we are contributing to something bigger than ourselves. When we do feel that, we elevate our game.

Amato: I actually wrote an article recently about a survey that showed that more and more companies say they're going to pay their employees more in an effort to keep them. It was posted on social media, and the first response was, "Well, sure they can pay them, but how are they really going to value them?" That's the point. There's so many other aspects to it than just, sure I'm going to bump up your pay, therefore, keep doing work.

Gulati: I was just with a group of doctors. I just this morning gave a lecture to a group of physicians. We were talking about nurses shortages. We have a major crisis in the United States, but also in other parts of the world. Severe shortage of nurses. By some accounts, travelling nurses who are willing to travel across state boundaries are getting paid triple wages, and they still can't find enough nurses because a record number of nurses have quit, left the professional completely. The question is why? Now you might say I didn't get paid enough, but they were not getting paid enough before also. Or is it simply that I don't feel valued at work? I don't feel inspired at work. I used to love what I do but I don't anymore. It's a drag now. I'm constantly being pressured to deliver throughput only, and patient satisfaction doesn't really matter. By th way, I'm not getting pay that much either. I go and don't get respected, and I don't feel I'm significant. I know people don't appreciate the contribution I make.

Amato: Yeah, it's hard to know. It's really. That's a very important profession for sure. Tell me this, if an organisation has been behind in being about a purpose, how can it get started on such a thing?

Gulati: I would like to say this, it's never too early and never too late to think about your purpose, both as human beings and as organisations. Let me start with the organisational context and talk about a company that didn't have one and then thought they should have one. I looked for instance, Lego was an example. I think it was Lego was fascinating to me because Lego to discover, if you will. The CEO at the time Jorgen Vig Knudstorp said to me, "You don't discover a purpose, you detect the purpose."

The purpose is already there. Your job is to look inside the organisation to say what exactly is it? You're basically putting into words and articulating the collective aspirations of the people who work there. You're also looking back into the past to say when the founders created this organisation, what was their purpose? You're using that to build a vision for the future. You're not just revelling in the past. This is not an exercise in nostalgia as I call it in the book. It'' a postalgia exercise also. It's looking at the past while looking forward. Having that purpose is ground floor. Then what do you do with it? As Satya Nadella told me, "Writing a purpose statement is easy; what comes next is much harder." That's where the bulk of my research and book is all about.

Amato: There's obviously plenty more we could discuss, but I think that's a great spot to end on. Anything else you'd like to say in closing?

Gulati: I want to end by pointing out that, we spend so much time at work. That it's our job to help people find their purpose through the work they do as well. Human beings, we have a life purpose. I think if you look at what has happened is we had this compartmentalisation of our life, work/life balance. That's a very pernicious phrase.

I think people want to live more coherent lives where what I do at work gives me as much meaning as what I do outside of work. I feel I'm making a difference. I'm making a contribution. That's the people who are going to win the talent war, and I can tell you purpose would be a source of competitive advantage.

Amato: Ranjay. Thank you very much.

Gulati: Thank you, Neil. Pleasure to be here with you today.

Amato: Again, that was Ranjay Gulati of Harvard Business School. We appreciate his time on the podcast. If you like what you're hearing, we invite you to subscribe, share, rate, and review the FM podcast. Thank you for listening.