The Value of Organizational Purpose

Abstract

Broadening the organizational purpose of a firm beyond narrow short-term profit maximization may enhance long-term shareholder value. This result obtains when firms generate unpriced externalities and face difficulties in achieving ex ante incentive alignment with stakeholders through contract or have the ex post possibility of altering stakeholders’ perceptions through virtue signaling (i.e., cheap talk or greenwash). As each of these conditions is ubiquitous in practice, discussion of organizational purpose (beyond narrow short-term profit maximization to encompass stakeholder’s harmonious pursuit of a common higher goal or meaning) should shift from why management might pursue it to how managers obtain and maintain it as well as the value creation and distribution implications of doing so. Drawing on a value-based stakeholder theory of strategic management, I argue that attentiveness to the most salient issues of a firm’s most powerful stakeholders related to the attainment of this higher goal more closely aligns stakeholder and shareholder value in the long term, thereby building and sustaining relational contracts with stakeholders. A firm with strong relational contracts across its nexus of stakeholder relationships increases the likelihood of harmony among its stakeholders, including shareholders. An important challenge to realizing this outcome is that of measurement. As a result, research on organizational purpose should turn its attention from legal and moral foundations to empirical research on externalities, stakeholder opinions, and managers’ self-representations of their organization’s purpose. The availability of such data lowers the transaction costs associated with a nexus of relational contracts and enhances societal welfare. History: This paper has been accepted for the Strategy Science Special Issue on Corporate Purpose.