Organisational purpose

Author: Niklas Hetmank, October 10, 2024

1. The Importance of Purpose

Spence and Rushing state that “the secret ingredient of exceptional companies is purpose.”³ Recent industry evidence shows that 89% of US consumers think positively, 86% trust and 83% remain loyal to companies that prioritize purpose.⁴ Purpose-driven companies also generally higher performers on measures such as faster growth, outperformance relative to the market, and share price growth.⁵ Younger generations are also increasingly choosing to work for a company based on its purpose,⁴ and more employees will sacrifice a portion of their lifetime earnings in favor of more meaning in the workplace. Purpose has also been linked to higher employee productivity.⁶ The focus on purpose has reached the highest levels of business leadership. Both, the United States Business Roundtable and the World Economic Forum, have advocated a fundamental reassessment of corporate purpose to include broader societal and environmental goals and responsibilities.^{7, 8} Although some promising and forward-looking research is available a number of questions remain unanswered.^{1, 9, 10}

The challenge for management is greater today because many companies have suffered intense criticism over their environmental and social performance, both from external stakeholders and within their own organizations. Social and environmental activists continue accusing companies of failing to keep their promises, while shareholders are increasingly asking companies to be more transparent over these issues. Employees, disappointed by perceived inaction or hypocrisy, may become disengaged or even leave, as seen in the resignation of Facebook engineers over management decisions. Only 55% of the public trust companies to behave ethically, with trust even lower in developed countries.¹¹ Greenwashing by large companies has further eroded employee trust. In response, the concept of purpose has gained traction as a way for leaders to align profit goals with social and environmental responsibility.¹² Purpose helps companies integrate external pressures and internal expectations, reflecting a broader impact on society and nature. However, purpose is not just another business goal, it has a moral meaning rooted in deeper values and commitments.^{13, 14} What employees perceive as a legitimate and authentic purpose affects both financial and non-financial performance. Moreover, individual responses to purpose vary and are influenced by different levels of prosocial orientation.¹⁵

2. Drivers of Purpose

Having defined purpose, now some key questions will be addressed: Where does purpose come from? How is purpose internalized within a for-profit organization, and how does the organization translate purpose into reality? And what external factors influence these organizational processes? To explore these questions, literature proposes a framework of corporate purpose consisting of six components.¹⁶

In the beginning the antecedents of purpose will be discussed, highlighting both internal and external drivers. Then three processes through which firms implement a purposeful organization will be examined. First, the framing of purpose, which involves defining the firm’s mission and vision, articulating a clear set of values, and creating a corporate narrative that links values, mission, and vision will be considered. Then the formalization of purpose will be analyzed, by breaking it down into three parts: embedding, structuring and governing. Lastly, the realization of how to capture the realization of purpose in for-profit firms will be addressed by identifying three crucial outcomes, namely, value creation, value appropriation and multistakeholder impact. This section will be concluded by discussing the institutional context, which is an essential factor that both enables as well as constraints the realization of purpose.¹⁶

2.1 Internal Drivers of Purpose

The internal drivers of purpose in for-profit firms stem from the inspirational beliefs and commitments of organizational leaders, often the founders. Founders’ values and beliefs can have a lasting impact on the organization, long after they have retired from leadership. One way in which founders maintain their influence is by creating systems that embed their beliefs within the organization.¹⁶ Studies such as that of Akroyd and Kober show that the quality of founder-to-employees attachment, and employees’ alignment with the founder’s vision predict whether the founder will install management control systems, like hiring practices and cultural controls, that will strive to create a family feeling. Those controls also limit how much bureaucratic structures can damage the culture. However, such hiring practices may not be common with only 28% of CEOs reporting that their organizations prioritize attracting employees who seek meaning in their work.¹⁷ These findings may be surprising, as strong employee engagement is an important internal driver of organizational purpose. Bode and Singh state that employees often participate in corporate social initiatives even when their salaries are lower than those at competing organizations, motivated by potential personal benefits such as skills development and enhanced career prospects.¹⁸ Participation in these initiatives also increases motivation and commitment of employees within the company. Furthermore, organizations that encourage employees to increase in or lead social initiatives can engage employee identification with the organization,¹⁹ improve recruitment,²⁰ and increase retention.²¹ Employee engagement is critical to translating purpose into action. However, many companies struggle to achieve this: half of CEOs report that their employees find it difficult to connect their work with the company’s purpose and values, while 67% say their organizations lack clarity on how to translate those values into specific actions and behaviors.¹⁶

2.2 External Drivers of Purpose

External drivers of purpose are discussed in several “theories of external influence”, such as ecological responsiveness, stakeholder theory and demand-side research.²² Such theories see firms as having to respond proactively to pressure outside the firm in order to protect and ideally enhance their capacity to create and capture value. Ecological responsiveness highlights the importance of firms responding to environmental pressures in order to gain legitimacy,²³which in turn provides them with a social license to operate.^{24, 25}  Similarly, demand-side research highlights the need for firms to meet the diverse demands of consumer groups by adapting their internal processes and resources in line with downstream market pressures.^{26, 27, 28} More broadly, stakeholders play a role in shaping how a firm defines and understands its purpose. In its original form, the stakeholder theory was based on a duty-based view, emphasizing a firm’s responsibility to protect disenfranchised and affected communities under its influence.²⁹ Later, developments have introduced a more instrumental approach, suggesting that firms should prioritize stakeholders based on their power, legitimacy and contributions.³⁰ Stakeholders also express their concerns through social movements, causing companies to reassess or reaffirm their purpose. Long-term environmental dependencies can instill specific values in a company that shape its operations.³¹ In contrast, sudden environmental shocks, such as a pandemic, can challenge a company’s purpose or force it to rediscover, reassess, or even redefine it.^{32, 33, 34} Gradual environmental changes can also prompt companies to reassess their purpose. In the US, institutional changes such as the partial withdrawal of government, cuts in federal spending on social services, reduced funding for NGOs and rising costs of social-ecological programs have created a context in which social enterprises and purpose-driven organizations have emerged to fill these gaps.³⁵

2.3 Implementing Purposeful Organizing

Achieving corporate purpose requires more than the internal influence of founders and employees or the external influence of stakeholders. While these forces may spark its development, corporate purpose must be implemented across all levels of the organization to be fully realized. This involves three key dimensions of activity: 1) framing purpose in a clear mission, vision and compelling narrative that integrates both goal- and duty-based elements; 2) formalizing purpose by embedding it in organizational practices, processes and governance structures; and 3) realizing purpose by dedicating resources to it, going beyond traditional value creation or appropriation and generating impact for multiple stakeholders.¹⁶

2.4 Framework of the Purpose

A key factor in framing a meaningful and effective purpose is engaging members of the organization to create a distinct and actionable vision of what that purpose should be. For most purpose-driven organizations, this process begins with defining a set of values, often originating from the company’s founders.³⁶ Whether these values are hedonistic, as suggested by Stengel,³⁷ or duty-based, as suggested by Hollensbe et al.,³⁸ is less important than the firm’s active efforts to frame and communicate them as part of a cohesive organizational identity.³⁹ While founders, in some cases other leaders and significant events may imprint these values onto the organization,^{40, 41} they serve as foundational elements of corporate purpose rather than representing purpose itself. Purpose emerges when companies translate their values into a clear mission statement that defines their immediate goals, as well as a broader vision that sets aspirational long-term goals and guides strategic decision-making. For instance, Patagonia, the outdoor clothing company, embodies values such as quality, environmental stewardship and innovation, giving rise to unique programs such as the Worn Wear program, which pays customers to return used Patagonia items in exchange for a credit towards future purchases. This initiative aligns with Patagonia’s mission statement, “We’re in business to save our home planet”, and reflects the company’s commitment to reducing its carbon footprint.¹⁶ To effectively guide action within an organization, values, mission and vision must merge into cohesive narratives that convey the organization’s story. These narratives, whether complete or fragmented, help both employees and stakeholders make sense of their environment and guide them towards action.^{42, 43} It’s important that these narratives are perceived as credible when shared externally. Companies that engage in greenwashing or misleading advertising risk serious backlash, while those that are honest about their environmental shortcomings can actually build trust and be rewarded.^{44, 45, 46}

2.5 Formalization of the Purpose    

Once an organization has framed its purpose, the next critical challenge is formalizing it. Because modern understandings of purpose extend beyond profit maximization, purpose-driven companies must design their core activities, structures, and processes to reflect their hybrid nature,⁴⁷ which can be complex. This requires embedding purpose in organizational routines and practices, aligning the business model, partnerships, organizational structure, and legal status with the firm’s purpose, and implementing governance practices that integrate purpose into management control systems and decision-making processes.¹⁶ Embedding purpose in a company’s internal routines, daily interactions and recruitment practices reduce ambiguity about how employees should behave and influences how they are rewarded. For example, former Barclays CEO Anthony Jenkins revealed that the bank removed sales incentives from its branch network because they conflicted with the bank’s purpose.⁴⁸ Implementing a business values scorecard can also steer organizational behavior by ensuring that internal processes and routines align with the company’s values and overarching purpose.⁴⁹ In addition, companies can use training programs and, where appropriate, enforcement mechanisms to ensure compliance with ethical standards.⁵⁰ Another important step is to set diversity targets that align with and advance the company’s purpose.⁵¹ When these targets are established at the top, they create positive trickle-down effects throughout the organization.⁵²

In terms of structuring, the goal is to ensure that the implementation of corporate purpose is a responsibility shared across the entire organization rather than confined to specific departments. Recent research by Battilana and Lee showed that new forms of organizations and hybrid forms are emerging that address the challenges of integrating purpose into organizational structure. Hybrid organizing is defined as “the activities, structures, processes, and meanings by which organizations make sense of and combine multiple organizational forms.” ⁴⁷ This allows companies to embed purpose within their business models, partnerships, organizational structures and legal frameworks. But this integration is not without challenges. Business models that create different types of value and are grounded in cross-sector partnerships tend to have higher coordination costs and experience more internal tensions in terms of logic.^{53, 54}While new organizational forms may arise due to their better alignment with specific environments or their ability to reduce welfare-depleting transaction costs, they may struggle with legitimacy until they are fully institutionalized.^{55, 56, 57} Finally, the formalization of purpose has implications for firm governance, as purpose can act as a control system that minimizes the need for extensive monitoring.⁵⁸ In general, diversity within a firm’s governing bodies has been shown to have a positive impact firm value.^{59, 60} Beyond the board, effective governance of organizational structures can incentivize resource allocation that aligns with a broader range of objectives beyond mere profit.⁶¹ However, this practice remains uncommon in many companies, as evidenced by the limited number of CEOs who consider cultural alignment between their company’s purpose and that of potential merger or acquisition targets as a key decision factor.^{62, 63}

2.6 Realization of the Purpose

Realizing corporate purpose requires moving beyond “the classical notion of value as the result of the difference between willingness to pay and cost.” ⁶¹ Some scholars advocate “ecological centrism”, arguing that “the natural environment is the foundation on which society lives and the economy operates.” ⁶⁴ Building on the definition of purpose before, one could argue that realizing this purpose requires both private and public value creation. At times, this may require foregoing opportunities to extract value from activities that do not align with the firm’s defined and formalized purpose. Purpose-driven for-profit enterprises seek to achieve multiple objectives and prioritize them differently depending on the context and time.¹⁶ Delivering on purpose involves creating value by excelling in the execution of the firm’s stated objectives. Barclays, for example, defines its purpose as “helping people achieve their ambitions in the right way.” ⁴⁸ Although the phrase “in the right way” is somewhat vague, the explicit inclusion of a moral clause helps to guide the firm on how value creation should occur. In the business model literature, value creation and value appropriation are seen as distinct goals for a firm.^{65, 66} Some companies willingly accept lower levels of value appropriation in order to remain true to their purpose. For instance, Southwest Airlines, though a low-cost airline, doesn’t charge for checked baggage because charging for checked baggage would undermine its mission to connect people to what’s important in their lives through friendly, reliable, low-cost air travel.⁶⁷ A final requirement of purpose is that a company must consciously consider its impact on multiple stakeholders. For example, a regional bank in the United States decided to eliminate fees on its debit cards. Although the fee was waived for customers who maintained a sufficient balance, this policy inadvertently disadvantaged less affluent customers. The company recognized this discrepancy and acknowledged that it was inconsistent with its purpose of promoting strong financial well-being.⁶⁷

How is purpose translated into action? Firms increasingly move beyond mere narratives to formally embed purpose within their organizational routines, behaviors and practices. Failure to do so can be dangerous, exposing companies to accusations of deception and hypocrisy. The rise of the purpose paradigm has sparked a new wave of activism by purpose sceptics, who critically examine companies’ purpose claims and highlight apparent inconsistencies. Indeed, the fear of being labelled hypocritical or inauthentic, such as being called a social or green washer, has significantly moderated the claims made by purpose-driven companies.⁶⁸ The question of how to formalize purpose is an important issue that deserves the attention of management researchers. A key consideration is the governance practices that firms can implement to foster purpose-driven strategies and ensure that organizational members comply with the expectations tied to these strategies. Finding the right balance between formal incentives and other approaches is essential. This challenge is compounded by the fact that purpose-driven initiatives often originate not from senior managers but from individuals at various levels within the organization, as well as from external stakeholders and key partners throughout the supply chain.⁶⁹

To promote purpose effectively, governance practices are likely to involve a mix of top-down initiatives by senior managers and bottom-up advocacy by different stakeholders. Exploring the factors that influence this balance could significantly enhance research on purpose in for-profit firms.¹⁶ Another question of practical relevance would be how human resource policies help firms to achieve their collective sense of purpose, especially in large multinational firms operating across different jurisdictions. A key issue in international human resource management research is the extent to which multinational firms adhere to globally standardized practices or adapt to local conditions.⁷⁰ Such tensions tend to be particularly pronounced in purpose-driven firms, where the need or desire to meet or exceed international best practices may conflict with other institutional norms at the local level. Human resource scholars have highlighted the significance of both in-role and extra-role behaviors in supporting corporate responsibility and fostering organizational citizenship.⁷¹ However, it remains unclear how these roles can be effectively constructed and sustained across multiple and often rapidly evolving contexts. Exploring how role development interacts with other human resources practices to advance purpose, and how these practices need to be tailored to different jurisdictions, is an important area for future research.¹⁶

Finally, it might be interesting to ask if formalizing purpose changed the focus of investor attention. This is a critical question as investors are increasingly seeking to incorporate Environmental Social Governance factors into how they judge business performance, in addition to traditional financial metrics. For example, recent research by Fatemi et al. suggests that effective Environmental Social Governance practices can increase firm value.⁷² However, the methods investors use to evaluate these practices and distinguish between rhetoric and reality often remain ambiguous and inconsistent. Future research that investigates how investors think about purpose formalization and are integrating that into their assessment represents a promising next step. An interesting approach might be to conceptualize purpose as a real option. Scholars are already in the process of framing certain forms of corporate social responsibility, particularly those that create opportunities for future growth. In this sense, such work offers the materials for a more general theory of value.  Furthermore, investigating the effect of purpose from an agent-theoretic perspective might also provide a useful theoretical framework to consider investor behavior in a way that might reduce moral hazard and more appropriately align interests.¹⁶

3 Moral Leadership and Stakeholder Responsibility

The literature on stakeholders and Corporate Social Responsibility makes it seem as though there would need to be a moralizing of decision-makers’ reasoning processes for them to engage in this kind of decision-making. However, an ethical focus on stakeholders would foster moral judgments whose influence on decision making arises from reasons that a decision maker cannot or does not provide as an account of why they acted in a particular way. Stakeholder theory, for instance, seeks to instill in corporate decision makers a concern for directing the organization away from harming those it affects and towards promoting higher value ends in the work it does. This ties in with the leadership literature, where ethics and morality have traditionally not been seen as central to leadership.^{73, 74, 75} However, moral leadership styles such as servant leadership,⁷⁶ ethical leadership,⁷⁷ and authentic leadership,⁷⁸ have gained prominence following recent business ethics scandals. Servant leadership is an overtly moral leadership style that aims to serve stakeholders and aligns leadership approaches with extended stakeholder models. Ethical leadership evaluates the behavior of leaders by moral standards, while authentic leadership operates based on self-knowledge as a means to success. These forms of moral leadership suggest that leaders within organizations should focus on defining, comprehending and embodying organizational purpose. Leaders play a key role in this process.⁷⁹ However, these approaches often present an idealized view of leadership, overlooking how employees interpret and respond to purpose and moral, environmental and societal expectations.⁸⁰ Other leadership research shifts the focus to employees, such as followership theories,^{81, 82} or the relationship between leaders and employees, as in leader-member exchange theory. While this theory gives more importance to organizational members, it overlooks purpose and morality.^{83, 84} By focusing on leader-employee interactions, it relies mostly on interest-based exchanges and ignores social norms and morality. In fact, transactional approaches to leadership can lead to ethical concerns, creating inequalities ^{85, 86} and undermining shared beliefs about fairness and equality within the organization.⁸⁴

In summary, moral leadership styles emphasize a higher purpose and give leaders a moral agenda, but do not take into account how employees might interpret and respond differently. On the other hand, some leadership theories focus more on employees but fail to include morality in leader-employee interactions or aim for a higher organizational purpose.¹⁵

4 The History of “Corporate Purpose” and “Purpose of the Corporation”

The discussion of purpose-driven organizations appears from two traditions: the “Corporate Purpose” tradition, which focuses on the role of purpose in managing organizations, and the “Purpose of the Corporation” tradition, which focuses on the objective function of the organization from itself. While these concepts are often confused and misunderstood, they are not the same. What follows is an overview of these concepts.⁸⁷

4.1 Corporate Purpose

Corporate Purpose arose in the early to mid-20th century among organizational theorists, Weber, Barnard, Mayo and Selznick, who were mostly concerned about the functioning of organizations and the related role of leaders. In these early studies, purpose was at the core of organizations. Organizations were described as systems of consciously coordinated activities of the forces of two or more people⁸⁸ or adaptive social structures.⁸⁹ The essential aspect that sets organizations apart from markets and unstructured activities is, as Barnard described it, the type of cooperation among individuals that is conscious, deliberate and purposeful,⁸⁸ or what Ghoshal and Moran referred to as purpose adaptation. Purpose should be seen as a compass that guides coordinated behavior.⁹⁰ The need for purpose is fundamental to coordination and cooperation.⁸⁸ In other words, organizations differed from markets by being unified by a common purpose, which directed the coordinated behavior of their members in contrast to market signals and individual self-interest. It is important to note that even in these early studies, purpose extended beyond simple organizational objectives. Barnard goes on to argue that leadership is the critical social essence that gives shared meaning to shared purpose. The responsibility of leaders is to strengthen the will of their employees by reflecting their attitudes, ideals and hopes.⁸⁸ In this view, purpose reflects humanity’s word of meaning, and leaders are those who harness this will.⁹¹ Despite these early studies, the importance of purpose faded in management and strategy research.^{92, 93} In the 1980s and 1990s, however, Ghoshal and Moran challenged the centrality of efficiency and agency theory with extensive research.^{90, 94}  While the discussion of purpose did not become central to strategy and diminished in organizational theory, its significance increased in practice. Since the end of the 1990s, the public discourse on purpose has increased fivefold,⁹⁵ and several articles have been published in practitioner-oriented outlets such as the Harvard Business Review. A Harvard Business Review survey of nearly 500 executives found that 80% believe purpose is important for companies, but less than 40% agree that their own company’s purpose is effective. To fill this gap, consulting groups have developed practices to help companies implement purpose. These firms have seen significant growth in these practices over the past five years.⁸⁷ In recent years there has been a resurgence of interest in corporate purpose. Studies have examined the role of leadership,^{92, 96} its relationship with financial performance,¹ innovation^{97, 98} and corporate strategy.^{99, 100}

4.2 Purpose of the Corporation

The discussion of Corporate Purpose has primarily centered on organizations and executives as the focal point of analysis. In contrast, the discussion of the Purpose of the Corporation has evolved mainly into a debate about the role of the corporation as a general entity within society. This discussion focuses on the social contract under which for-profit organizations operate: What is their purpose? Who do they serve? To whom are they accountable? What are their rights and responsibilities? These questions have financial, legal, regulatory and political implications, making the debate historically relevant across these fields.⁸⁷

Berle and Means led one of the earliest discussions of the purpose of the modern corporation. This foreshadowed agency theory, particularly in its emphasis on the separation of ownership and control. Their larger objective was more ambitious: to explore the appearance of the corporate system. Questions of the Purpose of the Corporations in society, what purposes they should serve in society, what goals ought to be their objectives, and what regulation should guide and constrain the corporations arise accordingly. Corporations had become large and powerful enough to significantly reshape social power structures. This commentary on the Purpose of the Corporation contributed to the emergence of the field of corporate finance and sparked the ongoing debate about shareholder primacy. Berle and Means themselves took part in this debate. In their 1968 reprint, they added that profit is an essential part of the corporate system. The exclusive use of corporate power for the benefit of stockholders is unlikely to serve the public interest. What changes would be needed to ensure that actions taken by management in their own interests are also in the public interest? Corporations are social institutions, and their existence is based on a civic agreement established by corporate law and regulation. By the mid-20th century, though, it had become clear that the externalities generated by corporations were not appropriately regulated. This debate continued in finance, economics and corporate law, with the key question being: “Is the purpose of the corporation to serve shareholders, stakeholders, or the public good as a whole?” The traditional shareholder perspective views the Purpose of the Corporation in relation to the division of responsibilities between corporations, legal frameworks, and legislative bodies.¹⁰¹ 

Edward Rock has described this perspective as providing a framework for corporations to achieve constrained optimization as their goal. In the traditional view, corporate structure and corporate law focus on solving a specific set of related problems. Much of corporate law focuses on agency costs. According to this view, other social problems have their own solutions: environmental regulation manages environmental externalities, labor law regulates the relationship between workers and firms, and competition law protects competitive markets. As different areas and regulations address these other challenges, corporate managers face a constrained optimization problem: maximizing the company’s value while complying with the constraints imposed by regulations and social and ethical norms.¹⁰² 

Within this shareholder framework, social welfare is not considered to be the responsibility of the company or a relevant concern for company activity. It is the responsibility of regulatory and legal bodies. Their role is to set appropriate restraints for companies, which must then maximize profits within these parameters. The debate on the Purpose of the Corporation has often positioned the shareholder perspective against the argument that regulatory constraints are inadequate. Thus, the overarching purpose of the corporation is to serve all its stakeholders, including employees, customers, suppliers, communities and capital providers.¹⁰³ Corporations need to deliver value to all groups affected by their activities to ensure their long-term survival and to maintain the legitimacy of capitalist institutions in society. Although this approach requires the balancing of multiple, sometimes conflicting stakeholder objectives, the stakeholder view argues that in the long run it is both economically and morally justified to generate net positive benefits for all stakeholders.⁸⁷ This perspective has recently been challenged on two fronts.¹⁰⁴ If a stakeholder focus is justified because it ultimately benefits the firm, it becomes indistinguishable from a shareholder focus with a long-term perspective. Alternatively, if a stakeholder approach requires real trade-offs between firm performance and stakeholder welfare, managers lack a credible framework for evaluating conflicting objectives. Moreover, even among stakeholders, decisions often involve trade-offs between their interests, for which there are no reliable criteria for evaluation.

Two approaches to the stakeholder theory have been proposed as a way of avoiding its supposed failings. The first is what Oliver Hart and Luigi Zingales refer to as “shareholder welfare”, according to which corporations should favor shareholders over other stakeholders, but should seek to maximize shareholder welfare rather than market value. Hart and Zingales argue that identifying shareholder welfare solely with market value is too restrictive. The ultimate shareholders of a company, especially in the case of institutional investors, are ordinary people who care about financial matters as well as ethical and social issues beyond money. In light of these concerns, the purpose of companies should be to enhance the overall welfare of their shareholders, rather than simply to pursue market value.¹⁰⁵ A second perspective, presented by Mayer, advocates embedding purpose directly into the structure of the company. According to this view, companies exist at the will of society and should therefore define their purpose based on their contribution to society. At a societal level, we should strive for a new consensus that the purpose of corporations is to serve society, with the specific purpose of each corporation formally written into its charter. Once the purpose is mandated as the basis for the incorporation of a company, it provides a framework for resolving conflicts between different profit and purpose objectives.^{8, 106}

While both perspectives on the purpose of the corporation are compelling, they face challenges. The shareholder welfare view raises the question of how to aggregate the social preferences of a company’s shareholders, especially when shares are widely held by many individuals or large financial intermediaries such as BlackRock. Meanwhile, the purpose view does not clarify how purpose can be effectively implemented as a regulatory construct. As a result, the purpose debate is part of an ongoing and vigorous debate about the appropriate objective function of firms, with little consensus. These objective functions range from constrained profit maximization to stakeholder value, shareholder welfare and mandated social purpose, each with its own advantages and limitations. These parallel debates about Corporate Purpose and the Purpose of Corporations turn on the same essential question of purpose from two perspectives. The first perspective focuses on the organizational level: What role does purpose play in organizations? How do organizations infused with purpose differ from those that lack it? The second perspective looks at regulation and policy, considering corporations as a generic form within society. The aim of research from this perspective is to explore how the positive social spillovers of private enterprise can be harnessed while minimizing social costs. At the intersection of these two debates, three fundamental questions arise: What defines purpose-driven organizations? Are purpose and profit complementary or substitutive? Do purpose-driven firms also qualify as sustainable organizations? Now these questions will be addressed further.⁸⁷

4.3 What defines purpose-driven organizations?

To understand “purpose-driven organizations”, corporate purpose needs to be discussed first. Corporate purpose refers to a company’s “reason for being” or “the set of beliefs about the meaning of a company’s work beyond mere financial performance.” ¹ Bartlett and Ghoshal share a similar perspective, defining purpose as “a company’s moral response to its broadly defined responsibilities, not an amoral plan for exploiting commercial opportunities.” ⁹³ Microsoft’s purpose statement under Satya Nadella, “to empower every person and every organization on the planet to achieve more”, exemplifies this sense of purpose. Corporate purpose is often explicitly prosocial, but it can also emphasize sources of meaning that are not often prosocial, such as technological or creative excellence, as in the cases of Pixar, Apple and SpaceX. Corporate purposes vary widely among the organizations that adopt them. However, they share a common requirement: to effectively motivate and guide the discretionary actions of individuals within organizations, they must be broadly embraced. In other words, purpose is not just a statement made by senior management, nor is it limited to branding initiatives or philanthropic efforts that are disconnected from the core business. Purpose-driven organizations are those where members, from operational staff to the executive level, are inspired by the organization’s purpose and make decisions aligned with it.⁸⁷ As Barnard observed: An objective purpose which can serve as the foundation for a cooperative system is one which the contributors believe to be the determined purpose of the organization. Embedding belief in the real existence of a common purpose is a key responsibility of leadership.⁸⁸ Purpose cannot just be a nice statement to hang on the walls of an organization. For it to become a reality, there must be a fundamental understanding of its meaning and its link to decision making. Having a purpose statement is neither necessary nor sufficient for a company to be purpose driven. In fact, some of the most purpose-driven companies, such as Pixar and Apple, do not have such explicit statements. Instead, purpose-driven companies are characterized by members throughout the organization who possess a strong sense of why the company exists and whose actions are aligned with those beliefs.⁸⁷

4.4 Are purpose and profits complementary or substitutive?

The question of whether purpose and profit are complements or substitutes is central to the discussion of corporate purpose. If purpose and profit are complements, then there is no conflict between them and the main challenge lies in how to effectively include a compelling purpose within organizations. Conversely, if purpose and profit are substitutes, different challenges arise, namely managing this fundamental conflict for the firm. Almost a century after this question was first raised, it remains unsolved. This ambiguity probably stems from several factors. First, the variety of definitions of purpose, coupled with different measurement approaches, makes it difficult to draw general conclusions. Second, and perhaps more importantly, the relationship between purpose and profit is likely to be contingent, making it more appropriate to ask: “Under what circumstances can purpose and profit be complementary? Can leaders influence the shape of the purpose-profit frontier so that it need not be concave?” Interestingly, the two traditions discussed above, Corporate Purpose and the Purpose of the Corporation, have typically operated under different baseline assumptions about purpose and profit. Research in the Purpose of the Corporation tradition tends to see purpose and profit as substitutes, while research in the Corporate Purpose tradition tends to see them as complements.⁸⁷

4.4.1 The Substitution Argument

The challenge of simultaneously maximizing profit and fulfilling purpose is consistent with the constrained optimization framework described by Rock.¹⁰² In this perspective, the pursuit of purpose and profit are fundamentally in conflict, leading to the need to prioritize one over the other. Various organizational phenomena support the notion that profit maximization often requires trade-offs with purpose, particularly in significant contexts. For instance, the existence of non-profit organizations and government involvement in sectors like healthcare, education and the performing arts highlights the difficulties of pursuing purpose while also maximizing profit. In addition, there is increasing evidence that for-profit corporations in some instances compromise their mission for profit. While not explicitly using the term purpose, economic research by Gupta et al. has modelled this issue as a multitasking problem in sectors as diverse as private prisons, hospitals, skilled nursing facilities, schools and the arts, where profitability is readily observable, but quality is not.^{107, 108, 109, 110} This research parallels strategic work that examines misconduct and other welfare-reducing behaviors as moral hazard problems, where firms distort non-financial aspects of their operations to maximize profits.^{111, 112, 113}

This body of research mentioned before is consistent with traditional legal theory, which argues that corporations are not institutionally equipped to balance purpose and profit. Consequently, the role of legal and regulatory frameworks is to mitigate the negative social spillovers of firms.^{102, 114} In this substitutive view, different institutions specialize in different functions: for-profit firms focus on maximizing shareholder wealth, while not-for-profits focus on purpose-driven activities, and government regulates negative social impacts. The debate on the purpose of the corporation is fundamentally based on this substitutive relationship between purpose and profit. It is only under this premise that the discourse between shareholders and stakeholders, or between shareholder value and stakeholder welfare,¹⁰⁵ or mandated purpose,⁸ becomes relevant. However, other recent studies by Battilana et al. adopt a more optimistic perspective on the capacity of multi-goal or hybrid organizations to effectively manage multiple, and sometimes conflicting, objectives.^{115, 116, 117} Thus, even within this alternative framework, there is still no consensus on whether firms can successfully navigate multiple conflicting top-level objectives.

4.4.2 The Complementary Argument

The view that purpose and profit can be complementary is often emphasized by industry leaders. José Viñals, Group Chairman of Standard Chartered, a major UK financial services company, reflected on the bank’s decision to exit coal markets: “In 2018, we decided to stop financing coal in emerging and developing economics. We expected this to reduce our revenues. Fast forward two years and that hasn’t happened… I have yet to encounter a situation where corporate purpose conflicts with financial performance and social responsibility.” For Standard Chartered, purpose-driven decisions, despite the short-term impact on clients and revenues, have not led to a reduction in performance in the medium to long term.⁸⁷

The research view that purpose and profit can be a complement dates to the mid-20th century institutionalists who argued that purpose is an important motivator for of individuals and a blueprint for organization. Organizations with a clear and effective purpose should therefore outperform those without. This perspective is supported by research on the meaning of work, which shows that individuals who find meaning in their work tend to perform better.^{118, 119, 120, 121}Furthermore, research on positive leadership, which frames leaders as meaning creators, particularly in successful organizations, further supports this view.^{92, 96, 122, 123} Large-scale evidence linking purpose to performance is limited. Measuring purpose in a comparable, statistically meaningful way across firms is challenging, which has limited large-sample empirical research on corporate purpose. However, a recent study by Gartenberg, Prat, and Serafeim offers an approach to overcome this measurement hurdle. Their findings show that a strong clarity of purpose within organizations, particularly when these beliefs are held by middle management, is strongly correlated with both accounting and stock performance.¹ This is consistent with more specialized studies. For example, Henderson suggests that purpose drives innovation, particularly of a systematic and disruptive nature.⁹⁸ Similarly, Edmans highlights a number of companies and studies that collectively suggest purpose and profit can be pursued together. Although no single study or book provides a definitive answer, there is growing evidence from various contexts that purpose and profit can be complementary and are grounded in solid research into human motivation.¹²⁴

How can one reconcile the two strands of research, one suggesting that purpose and profit are incompatible and the other that they are complementary? One possible explanation lies in the definition of purpose itself. Gartenberg argues that studies which find a trade-off between purpose and profit, purpose often refers to contexts where fulfilling a mission requires lower profits, such as incarceration, quality education, or other areas where high profit margins are difficult to achieve. On the other hand, research showing a complementary relationship tends to focus on situations where intrinsic motivation can lead to both purpose fulfilment and high profits. Thus, while both strands of research use the term purpose, they apply it to fundamentally different contexts and circumstances.⁸⁷ A second answer is that the boundary conditions that determine when purpose and profits substitutes and when they are complements are not fully understood yet. Consider, for example, the study by Gartenberg, Prat, and Serafeim, which examines nearly half a million employees. While the sample is large, the companies involved were self-selected, participated in the study to attract talent, and are likely to operate in industries where there is a high return to the intrinsic motivation that comes with a strong sense of purpose. In industries where this dynamic is less prevalent, it is unclear whether the observed positive relationship between purpose and profits would still hold.¹

5 Do purpose-driven firms also qualify as sustainable organizations?

Do profit-driven companies with corporate purpose survive longer than other companies? To answer this question, it needs to be explored what is meant by both terms. As described above, corporate purpose is a set of beliefs about the meaning of a company’s work that transcend quantitative measures of financial performance.¹ Corporate sustainability, although defined in different ways, is understood here according to Grewal and Serafeim as “an intentional strategy to create long-term financial value through measurable societal impact.” ² Consistent with this notion of long-term value, research by Flammer and Hawn and Ioannou shows that companies that prioritize sustainability tend to have higher stock performance.^{125, 126} Given these definitions of corporate purpose and sustainability, one might assume that the two concepts are essentially equivalent: purpose-driven companies, especially those with a prosocial purpose, should naturally be more sustainable, while companies that adopt sustainable practices do so because they are driven by a clear sense of purpose.⁸⁷

However, this claim faces two challenges. The first is empirical: it has yet to be tested empirically. Both corporate purpose and sustainability are difficult to measure, and large-scale studies have yet to develop independent, simultaneous measures to explore their relationship. The second challenge is conceptual, it concerns the underlying mechanisms that link purpose and sustainability. In particular, the idea of purpose as a set of beliefs about a company’s reason for being does not inherently imply societal impact. For example, companies such as video game producer Electronic Arts are driven by a strong sense of purpose but may not be considered sustainable by conventional standards. In some cases, purpose-driven companies have even reduced social welfare. Craigslist, a non-profit organization with a clear sense of purpose, arguably harmed the quality of local news by reducing demand for classified ads.¹²⁷ Additionally, organizations that invest in areas like supply chain transparency, fair employee wages or environmentally friendly practices do not always align these efforts with their stated purpose or “reason for being.” ⁸⁷

5.1 Corporate Sustainability reinforces Corporate Purpose

These are two viable ways that corporate sustainability can reinforce corporate purpose: first, it helps by lending credibility to the purpose if the company takes sustainability seriously. It helps make the purpose tangible and measurable. According to a recent study, commitment to corporate sustainability requires actual actions and results.¹²⁸Malik outlines a range of activities typically associated with sustainability efforts. It includes activities with key stakeholder groups such as employees by providing better healthcare and higher wages, the environment by cutting carbon emissions and reducing hazardous waste, and suppliers by providing a safe working environment. These activities are observable, measurable and often costly, making them credible signals to employees, investors, customers and other relevant stakeholders.¹²⁹ As these sustainable activities act as signals in an economic sense, they provide an opportunity to clarify what these signals represent. The implicit assumption in sustainability research is that these signals reflect a commitment to social responsibility, guiding a company towards actions that reduce negative social impacts and maximize positive ones. However, this idea can be refined to include corporate purpose. Sustainable actions can signal leadership’s commitment to the company’s stated purpose, rather than just a broad sense of social responsibility. Using sustainability initiatives as a signal of purpose helps to address a key challenge of purpose itself, namely its intangibility, which can lead to issues of “cheap talk.” Recent research by Henderson and Van den Steen highlights the need for costly, purpose-driven commitments that enhance credibility.^{100, 130} Thus, when sustainability actions are viewed as supporting the realization of corporate purpose, they can lend credibility to that purpose. Importantly, these actions may not always align with those selected through a traditional corporate sustainability framework. Managers should prioritize sustainability initiatives that are also relevant to the company’s values, selecting them based on their alignment with the company’s purpose.¹²⁸

5.2 Corporate Purpose reinforces Corporate Sustainability

Corporate purpose can also shape corporate sustainability, though through different mechanisms. Two key channels to consider are: first, giving deeper meaning to corporate sustainability, and second, creating alignment among stakeholders in the implementation of these activities. Although corporate sustainability can be material to a company’s performance, the changes it brings appear to be uneven. For example, in the biotechnology sector, material sustainability issues include areas such as customer health and safety, access to healthcare, product labelling and disclosure, ethical advertising, employee development, product pricing, business ethics and competitive behavior.¹²⁸Without a clear corporate purpose, this diverse list of initiatives can appear disconnected from the company’s core business and more focused on reputation management. However, when understood in the context of the company’s purpose, these initiatives gain clarity and direction. The purpose clarifies the reason on which the various projects and activities of the company depend. Social psychology tells us that individuals seek meaning in their work.¹²⁰ By clearly articulating the corporate purpose behind its sustainability efforts, a company provides a framework for employees to understand why these initiatives are important and how they contribute to the company’s overall mission. In addition to providing meaning, corporate purpose also helps to align different stakeholders around the company’s sustainability initiatives. Organizations can be seen as systems of cooperation, with their main advantage over markets being their capacity for purposeful adaptation.⁸⁸ This allows the organization’s members to coordinate their discretionary actions around idealistic goals that are not incentivized by current market mechanisms. As a result, corporate purpose serves as a framework for firms to evaluate trade-offs, select projects, and direct members’ behavior in a unified way to achieve these goals. This perspective is consistent with Bartlett and Ghoshal’s view that leaders should inspire purpose rather than simply set strategy. The problem arises from the assumption that the CEO must be the company’s chief strategist, with complete control over the setting of goals and priorities. In a rapidly evolving environment, where the necessary knowledge and expertise is often at the front line, this assumption is flawed. Today, many employees may not even understand or care about their company’s purpose. In this context, leaders play a critical role: strategies can foster strong, lasting emotional connections when they are rooted in a broader organizational purpose.⁹³

Using this reasoning and replacing “strategy” with “sustainability”, the coordinating potential of corporate purpose becomes clear. The definition of the corporate purpose can come from the leadership, and the corporation’s members can use it as the point of reference to evaluate the sustainability initiatives. More specific sustainability initiatives can then be developed that better promote this purpose. Even though the idea of prominence is shared, corporate sustainability innovation can come from the bottom to the top with or without leaders’ involvement. Leaders can use this to further decentralize the corporation. Corporate sustainability and other innovations throughout the organization can come from anywhere. It’s important to note that this logic applies not only to sustainability, but also to innovation,⁹⁸ corporate strategy,¹⁰⁰ and strategy more broadly.⁹³ In addition, there may be sustainability projects that are important to the firm but are not specifically aligned with its corporate purpose. Therefore, while corporate purpose can enhance corporate sustainability, it does not have to apply to every initiative.⁸⁷

6 A judgment- and motivation-based approach to organizational purpose

Gartenberg, Prat and Serafeim highlight that purpose is embedded in organizational culture and varies across companies, but they do not address how individuals perceive and interpret purpose, nor their social motivations. To account for these personal differences, they propose a complementary perspective to the leader-centered and instrumental views of purpose. This reassures employees by helping them to see the link between their actions and the performance of the organization as a whole. It avoids treating all employees as uniformly and unconditionally following the organization’s purpose, and allows room for personal initiative, dissent, and for each employee to connect their own work and sense of purpose to the broader organizational mission. In addition, it must be considered not only how employees value the purpose and their leaders, but also their diverse motivations, particularly in terms of prosocial behavior. This reflects how employees encounter the environmental and social dimensions of work and beyond in the context of, or through, organizations. Gartenberg examines two scholarly approaches, legitimacy as judgment and prosociality research, which form the foundation of this new perspective on organizational purpose that they aim to clarify and pursue.¹

6.1 Legitimacy as judgment

Institutional theory and organizational studies have long recognized the advantages organizations gain from legitimacy, such as access to resources and long-term survival.^{131, 132, 133} Traditionally, legitimacy is viewed as a collective judgment of an organization’s right to exist based on its alignment with societal norms and values. For example, when a group agrees on an organization’s appropriateness, it gains access to resources.¹³⁴ Nevertheless, this perspective overlooks differences among individuals in how they might evaluate legitimacy. They suggest that legitimacy is not just a collective perception external to the organization but is also shaped by individual observers. Since organizations operate across various categories and institutional logics, the value of their legitimacy is less uniform.^{135, 136} As such, legitimacy is the sum of individual judgments, which can vary significantly between individuals.¹³⁷ This leads to the concept of legitimacy-as-judgment, a two-level construct that combines a collective dimension, known as validity, with an individual dimension, known as appropriateness. Validity refers to the perceived shared agreement about an organization’s legitimacy, while propriety reflects individual assessments of it.^{138, 139}

The difference between validity and propriety thus offers a more nuanced view of how legitimacy is produced and assessed. Various sources, such as CEOs, journalists, judges, experts, social media, and even casual conversations at work, shape people’s perceptions of what others think about their company’s purpose.¹⁴⁰ While these external cues can influence judgments of appropriateness, personal interests and moral beliefs ultimately guide individual judgments. Employees who believe that the sources which inform their judgments of appropriateness are flawed may make judgments of appropriateness that diverge from what they perceive to be the prevailing view.¹³⁸ This divergence is particularly noticeable when they witness decisions that contradict the organization’s purpose or their own values. Traditional views of legitimacy Suchman suggest that most, if not all, employees must agree with the purpose for it to be considered legitimate. In contrast, legitimacy-as-judgment recognizes that purpose can guide individual and collective behavior even if not all employees fully agree with it.¹³¹ Jacqueminet and Durand illustrate different combinations of validity and propriety in legitimacy judgments regarding the corporate social responsibility practices of the 70 subsidiaries of a multinational corporation. The enforcement or fading of these practices depended on the alignment, or lack thereof, between each subsidiary’s values and its validity and propriety judgments. However, like much of the previous research, Jacqueminet and Durand aggregate judgments at the subsidiary level without fully exploring individual judgments.¹⁴¹

6.2 Prosociality and intrinsic motivation

An important predictor of how people evaluate a business entity’s purpose development is its positive influence on others and society more broadly.^{142, 143} Prosocial orientation is basically the extent to which a person takes others’ interests and fair treatment into consideration while acting in their own interests.¹⁴³ This concept was developed to explain differences in the motivations behind individuals’ behavior in social interactions.¹⁴⁴ It distinguishes between “proselfs”, who focus primarily on their own interests, and “prosocials”, who also consider fairness and the welfare of others. These social motives are common and play a crucial role in shaping behavior and collective outcomes.^{145, 146} Prosociality is one of the most studied individual traits in relation to outcomes in social dilemmas.¹⁴⁷ While prosociality is a stable personality trait,^{146, 148} prosocials’ willingness to cooperate often depends on context, such as their expectations of others’ cooperation, in contrast to proselfs, who tend to be less affected by such factors.^{149, 150}The presence of different levels of prosociality among employees has been linked to collective value ¹⁴² and plays a role in how resources are secured from stakeholders.¹⁵¹ Prosociality is also related to social sanctions and influences participation in social exchange and knowledge sharing.¹⁵² It has been widely studied in the context of volunteering and is related to organizational citizenship behavior.¹⁵³ Unlike purpose, which is central to work and activities, organizational citizenship behavior involves voluntary behaviors that go beyond an employee’s formal job requirements and lack explicit demands. For example, the norms of reciprocity and fairness promoted by prosocial individuals improve outcomes in collective actions such as managing and protecting shared resources ¹⁵⁴ or driving innovation in companies based on incentive structures.¹⁴² Prosocial individuals are particularly sensitive to issues of fairness and justice.¹⁴³ Unlike proselfs, they are more likely to view cooperative and competitive behavior through a moral lens,^{155, 156} and moral emotions such as empathy are associated with prosocial behavior.¹⁵⁷ This greater attention to morality suggests that prosocial orientations might have an important part to play in identifying, embracing and implementing organizational purpose.

In summary, prosocial orientation serves as a vital and promising individual-level foundation that affects the recognition of organizational purpose through legitimacy judgments. Prosocial individuals show heightened sensitivity not only to moral issues and values, but also to social norms, influencing both personal and collective judgments. When companies and their CEOs establish a purpose focused on prosocial values that extends beyond mere profit, the legitimacy of that purpose becomes crucial for organizational members. Their evaluations of the legitimacy of the purpose are shaped by their prosocial orientation, which helps explain why some organizations may successfully fulfill their stated purpose based on the motivations of their members.¹⁵

7 Purpose as a dependent variable

Alongside questions that view purpose as an independent variable, such as how organizational purpose shapes organizational outcomes, including effects on performance, it also needs to be granted equal conceptual rigor to questions that treat purpose as a dependent variable, such as what causes purpose to emerge and sustain itself. The legitimacy-as-judgment framework, which acknowledges the potential divergence between collective and individual judgments of legitimacy, offers a valuable lens for understanding how organizational purpose develops and is maintained. Beneath the surface of an organization’s acceptance or rejection of purpose, underlying dynamics may be unfolding.¹⁵

In the following, two examples will be compared. In the first, employees collectively recognize a new purpose as legitimate due to management support. However, at the individual level, employees may not fully embrace the purpose, perhaps due to cynicism.^{158, 159} As a result, the expected organizational benefits tied to the purpose fail to materialize despite its collective legitimacy. If this tension between collective and individual acceptance persists, the organization may struggle when facing significant challenges, similar to the dynamics observed in the Arab Spring.¹⁶⁰ In the second case, in a highly prosocial organization, the purpose is recognized as legitimate both collectively and individually. However, this may create pressure on less prosocial members, leading to “citizenship fatigue”,^{119, 161, 162} which can reduce organizational performance. In this case, propriety judgments, individual perceptions of legitimacy, are weaker than collective judgments. Over time, entrenched behaviors may go unchallenged, threatening the organization’s survival, particularly in changing environments.¹⁴⁵

In both scenarios, focusing solely on the external effects of purpose without considering the individual level overlooks the dynamics that determine whether purpose is sustained or collapses. The legitimacy-as-judgment perspective highlights that shared beliefs do not necessarily lead to uniform interpretation or action by all individuals.¹⁶³ Thus, we can harness the mechanisms that generate purpose by studying motivational profiles and specifically prosociality in their organizations. Prosocial individuals base their judgments not only on what leaders say or do, but also on whether those leaders are seen as trustworthy. Leaders who are judged as authentic are more likely to align their behavior with organizational purpose, making it more credible and embodied. Whether an individual is prosocial or proself affects how they interpret, trust and act upon purposeful leadership. Members of an organization may or may not replicate the leader’s actions, which in turn affect whether they contribute to or detract from the legitimacy of the organization’s purpose, by sending consistent or conflicting signals to fellow members. Thus, both prosocial and proself individuals can stabilize or destabilize purpose depending on their expectations and how they respond to leaders and peers.¹⁵

From a management perspective, leaders need to get a clearer sense of how their messages and decisions are absorbed and translated. Identifying the mechanisms that make a purpose stick can help ensure its longevity. Academics and practitioners have cautioned against a purely top-down approach to purpose and sustainability.¹² While Gartenberg et al. emphasizes the importance of middle management employees in interpreting corporate purpose,¹ they do not explain why employees interpret purpose differently or why some organizations are better suited to implementing purpose than others.^{164, 165} Understanding these dynamics is crucial for effectively embedding and maintaining organizational purpose.

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