MIT SMR Strategy Forum
In 1970, Milton Friedman published his landmark essay “The Social Responsibility of Business Is to Increase Its Profits,” ushering in the viewpoint that companies’ only social responsibility is to maximize returns for shareholders. Half a century on, Friedman’s ideas still influence the corporate world in significant ways, but, notably, cracks have begun to show.
In 2019, 181 top CEOs participating in the Business Roundtable redefined the purpose of a corporation to incorporate participation in stakeholder capitalism, which includes the interests of employees, communities, suppliers, and customers in addition to shareholders. (Whether these CEOs and companies have lived up to the new definition in the intervening years is up for debate.)
In a 2019 McKinsey survey of more than 1,200 managers and front-line employees at U.S. companies, 82% of respondents affirmed the importance of corporate purpose, but less than half (42%) said their company’s purpose made a difference.
Today, it’s far easier to poke holes in Friedman’s ideas of a business’s purpose, but when it comes to offering a succinct alternative, things get trickier.
In this month’s MIT Sloan Management Review Strategy Forum, we asked our panel of strategy experts to respond to the following statement: The field of strategic management has overlooked the role of corporate purpose in driving business performance.
Strongly Agree and Agree
Fifty percent of respondents agree, to some extent, that the role of corporate purpose has been overlooked. Many of the panelists point to the difficulty of measuring nonfinancial outcomes for businesses as a contributing factor. As Melissa Schilling of New York University notes, the field of strategic management prefers “to focus on financial outcomes for simplicity and ease of comparison across a wide range of firms, but it limits our perspective and insight.”
Similarly, Jin Li of Hong Kong University notes that the lack of research in this field “may have more to do with supply than demand,” given that data on corporate purpose can be difficult to collect.
“Purpose, when it is clear, authentic, and integrated into the business, can enhance financial performance but equally may also require the firm to forgo profitable opportunities. We urgently need to understand better how corporate purpose relates to corporate performance.”
Others, such as Anita McGahan of the University of Toronto and Timothy Simcoe of Boston University, point to the far-ranging impact of Friedman’s doctrine. As Simcoe writes, “Perhaps because that view became so entrenched, management scholars have not produced much credible knowledge about how firms define purpose-beyond-profit, or whether it matters for performance.” Simcoe, along with others on the panel, points to Claudine Gartenberg’s contributions to this area of scholarship in recent years but notes that it’s important to “develop new and better ways of measuring social impact” for contemporary scholarship to gain wider prominence.
“For decades, scholars in the field of strategic management considered the purpose of the corporation as maximization of profitability primarily in the interests of shareholders. This reductionist view gutted understanding of the opportunities faced by firms to create prosperity and, ultimately, to generate value for a wide range of stakeholders.”
University of Toronto
Just over 11% of respondents fall somewhere in the middle. As Monika Schnitzer of Ludwig Maximilian University of Munich writes it may be true that individual firms have overlooked the role of purpose, “it is not [true] for others and not for the field of strategic management as a whole.”
Richard Holden of the University of New South Wales points out that scholarship in strategic management often follows in step with the presiding paradigm in business. “Since there is now more discussion about shareholder value (the Friedman paradigm), shareholder welfare (the Hart-Zingales paradigm), and stakeholder value (the Elizabeth Warren view), it is natural that the field of strategic management will explore the implications of different objective functions for organizations and business strategy,” Holden says.
Neither agree nor disagree
“‘Corporate purpose’ seems like a squishy term that would need to be defined within some measurable boundaries to be studied rigorously.”
University of California, Berkeley
Disagree and Strongly Disagree
A good number of panelists (38.5%) disagree that the role of corporate purpose has been overlooked. Several note that there is good consensus that corporate purpose plays a role in business performance and that many notable scholars are pushing the work forward to study this relationship.
Olav Sorenson of UCLA points to the relationship between organizational culture and performance: “Strong organizational cultures have often been seen as a source of competitive advantage, through either better coordination among employees or through exerting more effort.”
“The field of strategic management has increasingly acknowledged the importance of corporate purpose in, for instance, attracting and retaining talent and building long-term relationships with suppliers and customers.”
University of Lausanne
Across the spectrum, most panelists agree that more clarity on the definition of purpose and better frameworks for assessing its role in financial performance are important. As Scott Stern writes, despite long-standing interest, “there is no agreed-upon framework for how to choose a corporate purpose or the role of corporate purpose in shaping financial performance.”
Indeed, for many on the panel, it’s not that corporate purpose has been “overlooked” — it’s that there are more questions to be answered. Both Aflonso Gambardella and Nicolai Foss point to the issue of whether corporate purpose is a substitute or complement with respect to firm value. As Gambardella writes, “We then need to understand better what are the relevant issues and why, and what are the implications.”