February 19, 2014
From the MIT Sloan Management Review
It’s an old idea: If you want to build a company that truly motivates its employees, it has to have a sense of purpose. Purpose, according to Ratan Tata, the recently retired CEO of the Tata Group, is “a spiritual and moral call to action; it is what a person or company stands for.”1 When such a purpose exists, it provides employees with a clear sense of direction, helps them prioritize and inspires them to go the extra mile — which, the argument goes, should ultimately be good for profit.
Purpose, by its nature, transcends making money: It is about people coming together to do something they believe in and allowing profit to follow as a consequence, rather than as an end in itself. But there is a paradox here. It is hard to fulfill a purpose in the absence of money, so purpose-driven organizations either must rely on donations or benefactors to sustain themselves (as most charities and aid organizations do), or they must become self-funding through their own profits.
Is it possible for a company to strive for a higher purpose while also delivering solid profits? Some have argued that pursuing goals other than making money means, by definition, spending on things that aren’t profit-maximizing. Others have countered that by investing in worthwhile causes, the company is doing something intrinsically valuable that will generate a long-term payoff to all parties.
But, ultimately, this is a well-rehearsed and tired debate, with plenty of evidence available to support both sides of the argument. The important question is not whether there is some tension between purpose and profits; there is. Instead, the question to ask is: How can the tension between purpose and profits best be managed? What structures does a company need to put in place to ensure that its higher-order purpose isn’t squeezed out by short-term profit seeking? How can executives ensure that employees keep these dual goals in mind on a day-to-day basis? And how can this balance be achieved on a long-term basis?
This article is based on research that we have conducted over the last five years looking at the organizational challenges involved in managing two different objectives at the same time. (See “About the Research.”) We have discovered that there are a few fundamental organizing principles that help a company sustain its sense of purpose over time while still achieving a solid level of profitability.2 These principles, in turn, are built on a perspective known as goal-framing theory. Goal-framing theory provides a deep understanding of why pursuing what we call “pro-social” goals — which we define as goals that involve working towardcommon causes that go beyond just making money and staying in business — creates a stronger motivational basis for working in organizations than pursuing self-interest goals that emphasize financial gain or personal enjoyment.
The article is structured as follows: We provide a brief overview of goal-framing theory, then describe three companies that have sustained a balance over time between purpose and profits. Based on this combination of theory and evidence, we then describe some practical ways of applying these insights inside your own company.
How Company Goals Influence Employee Behavior
Understanding how a company’s goals influence its performance requires understanding what motivates employees’ behavior on a day-to-day basis. That individuals are motivated to do their own work well is important, but a company with a higher-order purpose is typically asking them to also take a broader view and influence their joint effort toward common goals. Collaborative effort of this type involves a lot more than just doing a task well; it also takes understanding of and commitment to the common goal, and it takes the flexibility to use one’s wits, especially when new situations arise. For this kind of work, employees must be motivated in a special way.
There are numerous, partly overlapping views on what drives motivation in companies.3However, most have little to say about the links between company goals and individual motivations, that is, what motivates employees to behave in ways that help — or don’t help — the company or group to which they belong. A less well-known but highly relevant view that speaks directly to these issues is goal-framing theory.4
Goal-framing theory starts from the idea that, at any moment, people have a major area of concern that makes them focus on specific aspects of their work and neglect others. When employees are concerned about feeling good, they will look out for the fun parts of their job, for the one activity in their job that really excites them, and they will neglect things that feel boring or a bit uncertain. This is called a hedonic goal. When the major concern is income and/or promotion, an employee will focus on opportunities to earn extra money or make a good impression that helps raise the odds of getting promoted and will neglect other aspects of the job. This is called a gain goal. And when the major concern is to realize a common goal, such as getting a product launched on a tight timeline or delivering on a fundraising campaign, employees will attend mainly to that goal and will downplay concerns for relaxation, making more money or getting a better position. This is called apro-social goal.5 The essence of a pro-social goal is that it motivates the employee to ask, “What should I do to make us succeed?” rather than “What should I do to get ahead?” or “What will be the most enjoyable thing to do?”
What factors influence the relative strength of these three types of goals? Obviously, innate differences between individuals plays a part, but a much stronger influence is typically the immediate stimuli employees receive from those around them in their working environment and from their superiors. If all the talk is about the size of the annual bonus, the gain goal will immediately dominate others. But many companies want their employees to help the organization realize common goals, rather than to prioritize personal gain or fun on the job. So the challenge becomes how to make such common goals more salient and meaningful to employees across the company. To a large extent, this is a matter of trying to convey the purpose of the company to employees so they can see how their efforts fit with those of other employees to fulfill its overall purpose. This works best if the purpose is pro-social, because that provides a very direct link from the company goals to a pro-social orientation of the employees.6
Unfortunately, and this is a key point, the motivation to pursue pro-social goals is inherently fragile. It takes a great deal of effort to establish and maintain such goals, and they are easily displaced by gain or hedonic goals.7 There is no simple solution, because gain and hedonic goals cannot be abandoned entirely. Working toward company goals without being rewarded and without feeling good is not a stable long-term proposition. So there is a delicate balance needed here, and goal-framing theory provides some valuable insights into how it might be maintained.8
As a first guideline, the company’s statements should prioritize pro-social goals ahead of financial goals. For example, if a medical-products company is seeking to “put patients first,” then this goal should be center stage in all external and internal communications. Financial goals, in contrast, should be approached in an oblique or indirect way; they should be seen as the natural consequence of achieving the pro-social goals, rather than as ends in themselves. If financial goals are given too much prominence, they will typically displace the pro-social goals.9
Second, the fragility of pro-social goals means that they need reinforcing and supporting on a consistent and regular basis through incentive and reward systems, through informal conversations and discussions, through symbolic management and through formal structures that we call counterweights.10 For example, individual rewards should be linked to the performance of the group, operating unit or company as a whole, rather than just to individual outcomes. And managers should seek to acknowledge and highlight behaviors that support the pro-social goals of the company by, for example, building them into annual reviews and publicly celebrating and rewarding employees who successfully strive to meet the company’s pro-social goals.11 Without such reinforcement, employees will see a disconnect between the demands of their immediate job and the espoused goals of the company, and the pro-social goals will end up being displaced in favor of gain or hedonic goals.
Enduring Pro-Social Management Models
Goal-framing theory provides a useful new way of looking at the challenges companies face in aligning behavior around goals. Our research found many companies with a clear sense of purpose, typically expressed as a set of pro-social goals such as putting employees first or investing in local communities. But, in the majority of cases, there was no discernible impact on the way employees actually behaved. Sometimes the pro-social goal was just a set of words — in effect, a veneer on top of a gain-driven company.12
Sometimes the pro-social goal had been genuine at some point in the company’s history, but over time, its meaning atrophied as other goals became more salient. However, we also found a small number of highly successful companies whose pro-social goals seemed genuine. (See “About the Research” for a list of the 15 companies interviewed.) In talking to employees at multiple levels and in looking at the way they behaved and the things they valued, we could see evidence that these companies’ pro-social goals were influencing employee motivation and behavior. We focus on three cases here.
How has Handelsbanken been so consistently successful? Its pro-social goal is not very original: It is simply to be customer-focused. As the company declares on its website: “Since the early 1970s, Handelsbanken’s organization has been strongly decentralized and operations are always based on the customer’s requirements. This means that all business decisions regarding individual customers’ relationships with the Bank are taken close to the customer.”13
But rather than just talk about customer focus, Handelsbanken has built a management model that supports its goals. First, the bank’s structure is highly decentralized. Managers of individual branches have much more discretion regarding loans and employee salaries than is customary in the industry. This reduces the cost of information transfer and supports rapid responsiveness to changing market conditions. The company was also a pioneer of the “beyond-budgeting” movement: It has moved away from setting budgets on a top-down basis, and instead it expects branch managers to set their own targets.14
There is no emphasis on maximizing returns or shareholder returns; the goals are simply to track a moving target by always having higher customer satisfaction and profitability than a weighted average of the competition. These goals are then linked to a combined profit-sharing and employee stock ownership scheme called Oktogonen. Profits are shared equally across the organization (rather than on an individual basis), and when the bank’s after-tax return on equity is higher than the industry average, shares are issued to all employees. This model has been employed since the 1970s, so that today employees own more than 40% of the total equity, and many long-term employees have become millionaires. The equal profit-sharing scheme is an excellent example of how financial rewards can strengthen a pro-social goal rather than displace it.
One of India’s biggest conglomerates, Tata Group had revenues of more than $90 billion in 2012, spread over such sectors as IT services, steel, cars, chemicals and hotels.15 The group was founded in 1868 by Jamsetji Tata, and it has always been strongly influenced by the Tata family. Family-founded trusts hold 66% of the equity capital of Tata Sons, a holding company. Below that sit various Tata operating companies, some wholly owned by Tata Sons, others public companies where Tata Sons has a minority stake.
Tata’s pro-social goal is “to improve the quality of life for the communities we serve.” As stated on the corporate website, “the community is not just another stakeholder in business, but is in fact the very purpose of its existence.”16 As with Handelsbanken, this is not a highly original statement of purpose, but it is backed up with supporting mechanisms that ensure it is taken seriously.
The charitable trusts that own 66% of Tata Sons spend their profits on charitable causes such as clean water delivery, literacy and health care. The Tata operating companies are then expected to put significant investments into the local communities they serve. For fiscal 2009, the total social expenditure across the group was estimated at $159 million.17
The Tata Group wields influence over the operating companies in a number of informal ways. Group functions provide training and education and quality management services, and Tata Sons’ executives sit on the boards of the operating companies. The Tata Group is also highly visible in its commitment to community development in, for
example, its launch of the Nano car and the low-cost Swach water purifier.
HCL Technologies, with headquarters in Noida, India, was a second-tier player in the highly competitive IT services sector when Vineet Nayar became president in 2005. Nayar, who became CEO in 2007, decided to differentiate HCL through the quality of its management — by putting his employees first and by enabling them to create value in their relationships with customers. He embarked on a major transformation program, first pushing everyone to accept that the company was underperforming and needed to change and then putting in place a series of specific initiatives that were designed to help employees service their clients better. For example, he pushed all managers to place the results of their 360-degree appraisals online to make them more accountable to their employees; he also created a “service ticket” scheme, so that if an employee wasn’t happy about something he could open a ticket to get the attention of the relevant manager. Nayar tracked the number of tickets opened, and the speed with which they were closed, as an indicator of employee well-being.
As these initiatives began to take hold, Nayar captured his philosophy with the slogan “employees first, customers second,” which he announced — with some trepidation — at the annual global customer meeting. Further initiatives were added, such as the Employee Passion Indicator Count (EPIC) survey, which was used to identify the key “passions” of employees and to steer them towards jobs where these could be put to use.
By 2012, HCL had recorded an industry-leading compound annual growth rate of 24%. In our discussions with HCL employees, it was clear that many (though admittedly not all) had bought into Nayar’s “employees first” model and saw the company as a highly attractive employer. Turnover rates were lower than in competitor companies, and the highest ratings on the EPIC survey were around collaboration and client service. (Nayar stepped down from his role as CEO in 2013.)
Making Pro-Social Goals Pay
So what are the insights from these three brief case studies? The basic premise is that what motivates employees consistently to realize company goals also makes economic sense. The companies discussed are in very different industries, and the length of time they have been pursuing their pro-social goals varies enormously. But nonetheless there are some underlying principles here, and from goal-framing theory more generally, that can be applied in many other settings.
Pro-social goals don’t have to be elaborate or novel. The first point is that there are only a limited number of pro-social goals that a company can meaningfully target. For Handelsbanken, it is all about the customer; for Tata, it is about the communities in which the company operates; and for HCL, the pro-social goal is employee well-being. Other common pro-social goals involve a focus on employee safety (mining company Rio Tinto) or the natural environment (consumer products company Seventh Generation). We did not find evidence that companies thrived because they dreamt up a highly unique pro-social goal that nobody else had thought of. Rather, the evidence suggests the successful companies are the ones that were able to translate pedestrian-sounding pro-social goals into consistent and committed action.
Pro-social goals need supporting systems if they are to stick. We know that people take cues from those around them, but people are fickle and easily confused, and gain and hedonic goals can quickly drive out pro-social goals.18 So a key insight is that these three companies have built a wealth of supporting systems to help them operationalize their pro-social goals at different levels, and thereby make them stick. At Handelsbanken, the supporting systems are relatively formal: the highly decentralized branch structure, the removal of budgets and the equal profit-sharing system. At Tata, the supporting systems are more informal and are reinforced through the visible initiatives and pronouncements of the top executives. At HCL, the supporting systems were, initially, Nayar’s personal promotion of the “employees first” agenda plus a set of innovative practices designed to reinforce it. And in the first two organizations, in particular, there has been consistency in these systems over many years, which further reinforces their value. Such consistency matters because it signals that management is sincere.
Support systems are needed to reinforce goals. One important form of supporting system is to incorporate tangible manifestations of the company’s pro-social goals into the day-to-day work of employees. For example, IBM sends future managers to work with NGOs on development projects in Nigeria, Ghana, Tanzania and the Philippines to put substance behind its Corporate Citizen’s Core program.19 We have also seen health care companies bring patients into their offices to talk about how the company’s products have helped them. The world leader in insulin production, Novo Nordisk, requires that all new employees spend a day with a diabetes patient. For employees working on the front lines of their company, such systems are unnecessary, but many back-office employees lose touch with their company’s raison d’être, so this is a good way of making it visible.
Another important supporting system is to find ways of measuring progress on pro-social goals and to report them publicly. For companies that see customer focus as their goal, the Net Promoter Score has become a popular measure; for those that seek to put their employees first, engagement scores are often used; and for those that focus on safety, lost-time injuries are typically a preferred metric. Unfortunately, there aren’t yet established measures for community or environmental pro-social goals, though some companies are experimenting with them; one example is Guardian News & Media’s annual sustainability report. Regardless of the measure used, what matters is that the information is shared in a transparent and consistent way with the relevant stakeholders. HCL’s initiative to share feedback on how well managers are doing for all employees to see is a good example.
Pro-social goals need a “counterweight” to endure. Goal-framing theory shows how easy it is for pro-social goals to be driven out by gain or hedonic goals, so even with the types of supporting systems described above, it is quite common to see executives bowing to short-term financial pressures. Thus, a key factor in creating enduring pro-social goals is a “counterweight,” by which we mean any institutional mechanism that exists to enforce a continued focus on a nonfinancial goal. For Handelsbanken, the Oktogonen profit-sharing system is the counterweight. For Tata Group, it is the family-endowed trusts. At U.K. retailer John Lewis, the counterweight is the employee council, which represents the employees as ultimate owners of the company. At the Guardiannewspaper, the counterweight is the editor, who is appointed by the ultimate owner of the newspaper (the Scott Trust Limited) and is free to exercise editorial control over content, regardless of the company’s commercial priorities. The counterweight holds the power of the executive office in check and ensures that the long-term interests of the organization are not sacrificed for short-term benefits. The key is that the counterweight has real influence; it must hold the leader to account.
Alignment works in an oblique, not linear, way. In most companies, there is an implicit belief that all activities should be aligned in a linear and logical way, from a clear end point back to the starting point. The language used — from cascading goals to key performance indicators — is designed to reinforce this notion of alignment. But goal-framing theory suggests that the most successful companies are balancing multiple objectives (pro-social goals, gain goals, hedonic goals) that are not entirely compatible with one another, which makes a simple linear approach very hard to sustain.
So an important mental leap to make is the notion that long-term profits are often best achieved obliquely, or indirectly.20 As Ratan Tata, former CEO of the Tata Group, has observed, “Profits are like happiness in that they are a byproduct of other things … [companies] need sustainability strategies that recognize that you can make money by doing good things rather than the other way around.”21 In their best-selling business book Built to Last, Jim Collins and Jerry Porras argue that “visionary” companies with pro-social goals had better long-term profitability than their benchmark competitors, which typically opted for narrower financial goals.22
What does this mean in practical terms? If you want your employees to align around a pro-social goal, you have to eschew narrow, linear thinking, and instead provide more scope for them to choose their own oblique pathway. This means emphasizing the pro-social part of the story on a consistent basis — the intention being that by encouraging individuals to do “good,” their collective effort leads, seemingly as a side-effect, to better financial results. The logic of “pro-sociality first, profitability second” needs to find its way deeply into the collective psyche of the company.
For example, while Carlsberg A/S, a brewing company based in Copenhagen, Denmark, has pursued ambitious profitability and growth ambitions, the majority of its shares are owned by the Carlsberg Foundation. What’s more, the foundations associated with the brewing company have shaped Danish cultural life for more than 100 years. This subtle linking of beer and high-brow culture is very much part of the company’s identity.
Pro-social initiatives can be implemented at all levels. Who is responsible for pursuing a pro-social agenda? If you head up a division or business unit, it is clearly your job to define what your pro-social goals are and to put in place the supporting structures and systems described here. But what if you are lower in the corporate hierarchy? It is tempting to think this is “someone else’s problem,” but actually there is no reason why you cannot follow your own version of the same process. We have seen quite a few mid-level managers make a real difference, and often quite quickly, using the principles outlined here. (See “Pursuing Pro-Social Goals in an Operating Unit.”)
Corporate Purpose and Profitability
In a famous article in Time magazine, Robert Ajemian reported George H.W. Bush’s exasperated reaction to friendly suggestions that he invest time in carefully thinking about his prospective presidency: “Oh, the vision thing.”23 Many CEOs react in much the same way: They know they are supposed to have a corporate vision or purpose, but they secretly think that wordy statements about the purpose of their business are just empty rhetoric. And it doesn’t take long for employees and other observers of the company to figure this out.
The purpose of this article is to help you to understand why and how a corporate purpose matters and to show how it can be realized without sacrificing profitability — and indeed may result in higher profitability. Goal-framing theory shows that a company’s goals make a difference only when they work on the beliefs of employees, and that the most valuable goals are those that support collaborative work — what we have called pro-social goals. However, these goals compete with other goals for individual mind share and are easily driven out by gain and hedonic goals. As a result, corporate executives have to work doubly hard to affirm pro-social goals and to develop systems and structures that reinforce them. And, most fundamentally, establishing pro-social goals requires developing a tolerance for obliquity — that is, the paradoxical notion that if we follow pro-social goals we aren’t actually getting rid of gain goals. Instead, we are realizing them more effectively.
1. R. Tata, S.L. Hart, A. Sharma and C. Sarkar, “Why Making Money Is Not Enough,” MIT Sloan Management Review 54, no. 4 (summer 2013): 95-96.
2. We acknowledge other studies have provided useful advice to social enterprises, particularly around the notion of shared value, such as M. Pfitzer, V. Bockstette and M. Stamp, “Innovating for Shared Value,” Harvard Business Review 91, no. 9 (September 2013): 100-107. This study starts from a theoretical perspective on human motivation and as a result it offers somewhat different, though complementary, recommendations about how organizations of all types — not just social enterprises — can balance competing objectives.
3. As a research field, this is often called “work motivation research.” G.P. Latham has an excellent summary of the various work motivation theories. On goal-setting theory, E.A. Locke and G.P. Latham also emphasize the importance of goals but mainly focus on the effects of having goals explicitly stated by the organization, rather than on the changing salience of major concerns. The same can be said of the work of Adam Grant: Even though it has put much emphasis on pro-social behaviors and is thus in some ways akin to our perspective, it does not deal with the dynamics of competing concerns. See G.P. Latham, “Work Motivation: History, Theory, Research and Practice” (Thousand Oaks, California: Sage, 2012); E.A. Locke and G.P. Latham, “Building a Practically Useful Theory of Goal Setting and Task Motivation: A 35-Year Odyssey,” American Psychologist 57, no. 9 (September 2002): 705-717; A.M. Grant and S.K. Parker, “Redesigning Work Design Theories: The Rise of Relational and Proactive Perspectives,” Academy of Management Annals 3, no. 1 (2009): 317-375; and A.M. Grant, J.E. Dutton and B.D. Rosso, “Giving Commitment: Employee Support Programs and the Prosocial Sensemaking Process,” Academy of Management Journal 51, no. 5 (October 2008): 898-918.
4. See S. Lindenberg and N.J. Foss, “Managing Motivation for Joint Production: The Role of Goal Framing and Governance Mechanisms,” Academy of Management Review 36, no. 3 (July 2011): 500-525; and K. Keizer, S. Lindenberg and L. Steg, “The Spreading of Disorder,” Science 322, no. 5908 (December 12, 2008): 1681-1685.
5. Strictly speaking, goal-framing theory talks about normative goals that underlie employees’ motivation for joint production rather than pro-social goals. Normative goals are goals held by individuals. However, company goals with a normative orientation are often called “pro-social.” To simplify the terminology here, we use the term pro-social for both levels: Pro-social goals of companies activate pro-social (“normative”) goals in employees.
6. In a game where people would be individually better off (in terms of money) not cooperating, the experimenters saw a much higher percentage of participants cooperate when it was called “community game” compared to when it was called “Wall Street game.” Labeling the game with “community” or “Wall Street” simultaneously expressed the purpose of the game, what kind of behavior is expected and how other participants are likely to behave. See V. Liberman, S.M. Samuels and L. Ross, “The Name of the Game: Predictive Power of Reputations Versus Situational Labels in Determining Prisoner’s Dilemma Game Moves,” Personality and Social Psychology Bulletin 30, no. 9 (September 2004): 1175-1185.
7. See A. Fuster and S. Meier, “Another Hidden Cost of Incentives: The Detrimental Effect on Norm Enforcement,” Management Science 56, no. 1 (January 2010): 57-70; and S. Lindenberg, “Cognition and Governance: Why Incentives Have to Take a Back Seat,” chap. 3 in “Handbook of Economic Organization: Integrating Economic and Organization Theory,” ed. A. Grandori (Cheltenham, U.K.: Elgar, 2013).
8. See Lindenberg and Foss, “Managing Motivation.”
9. N.J. Foss and S. Lindenberg, “Microfoundations for Strategy: A Goal-Framing Perspective on the Drivers of Value Creation,” Academy of Management Perspectives 27, no. 2 (May 2013): 85-102.
10. See Lindenberg and Foss, “Managing Motivation.”
11. B.S. Frey, “Giving and Receiving Awards,” Perspectives on Psychological Science 1, no. 4 (December 2006): 377-388.
12. It appears that many companies use pro-social goals language in their annual reports as a smokescreen to hide unethical practices. See T. Loughran, B. McDonald and H. Yun, “A Wolf in Sheep’s Clothing: The Use of Ethics-Related Terms in 10-K Reports,” Journal of Business Ethics 89, no. 1 (May 2009): 39-49.
13. “Handelsbanken in Brief,” n.d., www.handelsbanken.us.
14. There is plenty of evidence that traditional budgeting processes are flawed. See, for example, M.C. Jensen, “Paying People to Lie: The Truth about the Budgeting Process,” European Financial Management 9, no. 3 (September 2003): 379-406.
15. The Tata Group case study is based on data collected through interviews with company executives as well as on A. Graham, “Too Good to Fail,” Strategy + Business 58 (spring 2010).
16. “Values and Purpose,” n.d., www.tata.com; and “The Quotable Jamsetji Tata,” March 2008, www.tata.com.
17. Graham, “Too Good to Fail.”
18. Keizer et al., “The Spreading of Disorder.”
19. M. Useem and S. Palmisano, “Always Put the Enterprise Ahead of the Individual,” January 18, 2013, http://knowledge.wharton.upenn.edu.
20. The concept of obliquity is developed more fully in J. Kay, “Obliquity: Why Our Goals Are Best Achieved Indirectly” (London: Profile Books, 2010); see also J. Birkinshaw, “Setting Objectives: From Alignment to Obliquity,” chap. 5 in “Reinventing Management: Smarter Choices for Getting Work Done” (San Francisco: Jossey-Bass, 2012).
21. Tata et al., “Why Making Money Is Not Enough.”
22. See chapter 1 of J. Collins and J.I. Porras, “Built to Last: Successful Habits of Visionary Companies” (New York: HarperCollins, 1994).
23. R. Ajemian, “Where Is the Real George Bush?” Time Magazine, Jan. 26, 1987, 20.
i. S. Sinek, “Start With Why: How Great Leaders Inspire Everyone to Take Action” (Portfolio/Penguin, 2009).