CHAPTER FIVE

Reframing Economics

By “organizational higher purpose,” we mean a prosocial goal that transcends the usual pursuit of business goals but intersects with those goals. That is, decisions are made that are in line with prosocial goals as well as the business goals.

John Sculley quotes Steve Jobs about higher purpose: “Great companies must have a noble cause. Then it’s the leader’s job to transform that noble cause into such an inspiring vision that it will attract the most talented people in the world to want to join it.”²⁷

We are not interested in examining the consequences of corporate social responsibility or charitable giving. The pursuit of a higher purpose is not a goal—like charitable giving—that is distinct from generating traditional outcomes like profits and shareholder value.²⁸ Rather, we examine the pursuit of higher purpose that is integrated with the pursuit of business and organizational goals, as in the case of a biotech company working to find a cure for cancer, or the Walt Disney Company creating Disneyland as “a place for people to find happiness and knowledge.”²⁹

Richard Leider defines higher purpose for individuals this way: “Purpose is the deepest dimension within us—our central core or existence—where we have a profound sense of who we are, where we came from and where we’re going. Purpose is the quality we choose to shape our lives around. Purpose is a source of energy and direction.”³⁰

Leider’s observation leads us to ask, How does the adoption of an authentic higher purpose enable an organization to connect to the purpose of its employees? How can the fundamental self-interest assumption of the principal–agent model be modified to produce expanding effort inputs and relaxing budget constraints in a way that leads to superior performance? In answering these questions, in this chapter we will formulate an economic theory of higher purpose, something that Kenneth Boulding called for 50 years ago in his presidential address to the American Economic Association.³¹

Unconventional People

While many people behave in accordance with the predictions of the principal–agent model and do not organize themselves and others to a higher purpose, some, like Ricardo Levy, do, and they acquire a unique kind of influence. The conventional mind-set tells us that people are self-interested. As we saw in previous chapters, our normal experience tends to confirm this. When we encounter a person of higher purpose, someone like Rabbi Sacks, the experience captures our attention. For example, here is an entry that Bob wrote in his personal journal.

A Woman of Higher Purpose: My daughter-in-law Lisa and my granddaughter Keely went to a mall. In the early evening we received a shocking text: “There are shooters in the mall, pray for us.”

This message led to several tense hours. Eventually, Lisa and Keely were able to safely exit.

At dinner the next day, I asked them to tell us the entire story. Lisa shared the account of she and Keely and about 80 other panicked people locking themselves in a back room of a department store. The people pushed a table against the door and spent their time trying to understand what was going on and what to do if the shooters came to the room.

As Lisa told the story, I felt upset, not with just the specifics but with the evil that seems to be growing in the world. Then Lisa added a side note.

Lisa said that as the people in the room made sense of what was happening and considered what to do, a person of her age engaged her. This other woman said, “If they get in the room and start shooting, you stand in front of your daughter and I will stand in front of you.”

Lisa was shocked and asked why. The woman said, “You are her mother and you need to raise her, if I can help that happen, I will.”

I stopped eating. This was so unexpected I asked for clarification. Lisa had little other information about the woman except to say, “You could tell she really had her life together.”

This woman was willing to lay down her life, not for her friends but for two strangers. Why? She was orienting to a higher purpose. The woman was willing to die for posterity or the good of future generations. It was not even her direct posterity, but for the posterity of someone else. She wanted a little girl to be raised by her mother and if someone needed to die for it to happen, she was willing to be the one.

I suddenly felt involved in the story in a new way, and I was not sure why. As I was writing this journal entry, an insight came. In her willingness to die for Lisa and Keely, the woman was willing to die for my posterity. Without knowing me, the woman of higher purpose was willing to die for my granddaughter. This means she was willing to die for me.

I was not only grateful that Lisa and Keely were safe; I was also grateful for a stranger who was living for a higher purpose. Prior to our dinner conversation, I only knew of a story that I interpreted to be about the spreading evil in the world. After the dinner conversation, I knew a story I now interpreted to be about the profound good in the world. I am grateful for a stranger, a woman of purpose who really has her life together.

Often people “get their life together” because they have found a higher purpose or learned to live for a higher purpose. As we have seen, a purpose is higher when it transcends immediate self-interest, when you transition from a contract to a covenant. A higher purpose is a contributive goal, or what social scientists call a “prosocial goal,” meaning the focus is on contributing to the good of the whole.

So living with a higher purpose is focusing on and sacrificing for something bigger than yourself. Research indicates that doing this leads to the development of the following personal characteristics: taking initiative, assisting others, persisting in meaningful tasks, being open to negative feedback, motivating others, stimulating new ideas, and inspiring creative action.³² This is a reasonable list of leadership characteristics. As you begin to live a purpose-driven life, virtuous characteristics tend to ignite. You become a better version of yourself.

The woman who volunteered to die for Lisa and Keely demonstrated many of these qualities. In doing so, she was leading. Leaders with a higher purpose are focused on the common good. This transcendence of self-interest gives rise to moral power. Moral power is the influence that emanates from a person or persons who self-lessly pursue the common good. As with selfishness, moral power is contagious, and it can spread. It draws attention and invites new behaviors. When people of authentic, higher purpose act, they tend to bring out the best in others. If they continue over time, they bring forth a high-performance culture.

Organizational Higher Purpose

An example of a focus on higher purpose comes from Eric Greitens, a former Navy Seal and governor of Missouri. Here is an excerpt from our interview with him:

I believe that people can have very strong internal motivations that can drive them toward achievement. But I think that is related to but different from your sense of purpose. Part of what you have to do to help somebody to see their sense of purpose is to actually communicate to them that they have something to offer. What we’re doing in many ways with our Mission Continues Fellows is that we are asking them to serve. We’re forcing them into a situation where they then have to see that they have something to contribute.

As a Navy Seal lieutenant commander, Eric was awarded a Bronze Star and Purple Heart, among other decorations. Following his military service, he founded The Mission Continues, a nonprofit organization that helps reintegrate disabled war veterans into society. This is how Eric described the higher purpose of The Mission Continues:

Our mission is to challenge veterans to serve and lead in communities across America. That’s our mission. We also have a purpose, which is to make it the case that every veteran who comes here thinks of their military service not in terms of the time when they were in the field. What’s interesting is that these people have a sense of purpose from the beginning. Some veterans think of having a higher sense of purpose as being part of a team, being devoted to something larger than yourself, and something that they did in the military. We want to change that to something that they learned in the military and that they apply to the rest of their lives. . . . Our objective at The Mission Continues is to make sure that the story becomes one so that 10 years from now, people will look back on this generation and say that they came home and they continued to serve. They came home and they made their country stronger. So that’s kind of our larger purpose.

After we interviewed Eric Greitens, he admitted to an extramarital affair prior to becoming governor. He was investigated for having allegedly threatened the woman in question (prior to his public admission) if she went public with that information, although no complaint was ever filed by the woman. He subsequently resigned as governor of Missouri after only six months in office. Given this situation, we were advised to drop the example of The Mission Continues. Our response is that it is crucial to keep the example. All human beings are flawed. We feel it is crucial to keep the account presented here and for the reader to consider the notion that moral power is a dynamic phenomenon that ebbs and flows.

Another example of organizational higher purpose is provided by Walt Disney. On the pitch statement to obtain funding for the Disneyland park in California, Walt Disney wrote: “In these pages is proffered a glimpse into this great adventure—a preview of what the visitor will find in Disneyland.”

Later in the pitch, Walt Disney articulated a higher purpose that has influenced the company’s business strategy time and again:

The idea of Disneyland is a simple one. It will be a place for people to find happiness and knowledge.

It will be a place for parents and children to share pleasant times in one another’s company: a place for teachers and pupils to discover greater ways of understanding and education. Here the older generation can recapture nostalgia of days gone by, and the younger generation can savor the challenge of the future. Here will be the wonders of Nature and Man for all to see and understand.

Disneyland will be based upon and dedicated to the ideals, the dreams and hard facts that have created America. And it will be uniquely equipped to dramatize these dreams and facts and send them forth as a source of courage and inspiration to all the world.

Disneyland will be something of a fair, an exhibition, a playground, a community center, a museum of living facts, and a showplace of beauty and magic.

It will be filled with the accomplishments, the joys and hopes of the world we live in. And it will remind us and show us how to make those wonders part of our own lives.³³

An Economic Theory of Higher Purpose

Our economic theory of higher purpose:

The adoption of an authentic higher purpose creates a bond between employees and the purpose and motivates them to work harder, be more entrepreneurial, and subordinate their self-interest for the common good, all in order to help the organization serve its higher purpose. This results in better economic performance. However, these things happen only if employees believe that the purpose is authentic.

We begin our discussion of the theory with a simple observation: a major purpose of a leader is to recognize the common good and sacrifice for it so that others will follow.³⁴ We proceed to the following building block for an economic theory of higher purpose:

Self-interested people will remain self-interested unless there is a reason to change. In a purpose-driven organization, leaders continually orient to the common good and make personal sacrifices, and this unconventional behavior repels some but attracts others to do the same. Relationships change, and people at all levels begin to energize one another.

To use this building block and develop an economic theory, we first put in place assumptions. The first assumption is that employees care about two things—the pecuniary and nonpecuniary rewards they receive from the organization for the job they do, and the utility they derive from pursuing a prosocial goal that transcends their narrow self-interest. But many employees may be uncertain about how much utility they derive from a particular prosocial goal or organizational higher purpose, and also about how to integrate the pursuit of higher purpose into their day-to-day business activities and decisions. They may need to experiment and reflect to discover this. If an employee believes that the organization has an authentic higher purpose, then that employee will be willing to work harder than if the only motivation was the combination of pecuniary and nonpecuniary job rewards.

In other words, employees are willing to “sacrifice for the common good” because doing so provides them with satisfaction or utility beyond that provided by the wage and promotion rewards of working hard. Doing so serves as a covenant and generates utility-enhancing intrinsic rewards for the individual, something that does not happen when they are simply responding to a contract.

The key, of course, is that the employees must truly believe in the authenticity of the organizational pursuit of higher purpose. To create such belief, a leader must do the following:

   Discover and believe in an authentic higher purpose

   Communicate the higher purpose

   Integrate the authentic higher purpose with the business strategy

   Weave the authentic higher purpose into their execution of the strategy, that is, in their day-to-day decisions

The second assumption is that there are two kinds of leaders: those who authentically believe in a higher purpose (“true believers”), and those who are interested only in the pursuit of business goals but are willing to masquerade as true believers in order to get their employees to sacrifice for the common good and change their behavior (“manipulators”).

Only leaders know their own types; to others they all look the same. Moreover, suppose the sacrifices made by employees in the pursuit of higher purpose produce better outcomes regardless of what the leader does, but these gains are small relative to those produced when the leader commits wholeheartedly to an authentic higher purpose and continues to behave over time in a manner consistent with the higher purpose.

Both types of leaders have an incentive to say that they are true believers. But the employees, even though they may not be able to always tell who is a true believer and who is not, know that the leaders have this incentive to masquerade as true believers. This means that the embrace of higher purpose by the leader of the organization will be viewed with suspicion by the employees, and the leader will have to make a special effort to convince employees of authenticity. This is true even if the manipulator behaves exactly like the true believer and makes (short-term) sacrifices that are costly to them personally and to the organization.

However, a leader who is a true believer will always derive greater personal satisfaction and utility from pursuing an organizational higher purpose than a leader who is a manipulator. Thus, the net cost to the leader of pursuing an organizational higher purpose is smaller if the leader is a true believer than if the leader is a manipulator. So the true believer may be able to figure out the degree of commitment to purpose that is desirable for the true believer but too high for the manipulator.

If there is such a commitment to a higher purpose, then the employees will observe it and believe that it is authentic. But in order to do this, the leader has to first discover the higher purpose, one that makes sense for the organization given its business context. There is no formula for what constitutes a great higher purpose.

The examples we have provided thus far illustrate the great variety of authentic higher purposes. For Starbucks, the higher purpose was to “provide a third place between work and home.” For Eric Greitens of The Mission Continues, it was to reintegrate disabled veterans into society by instilling in them a sense that their service is larger than themselves and that they can pursue their passion while serving society away from the battlefield. For Walt Disney, it was to create “a place where people can find happiness and knowledge.” Organizational higher purpose is as varied as organizations themselves.

But any leader’s first step is to envision a purpose-driven workforce and discover a higher purpose for the organization, recognizing that this “noble cause”—as defined by Steve Jobs—can be anything prosocial but requires deep contemplation and discovery. This is not always easy. For example, we interviewed Jim Weddle, the CEO of Edward Jones, a large financial services company headquartered in St. Louis. He described to us a process that Peter Drucker took Edward Jones through to discover its higher purpose.

When they began, they described the purpose of the organization as making a profit. Drucker refused to accept that answer, asserting that profit was an outcome of the pursuit of a higher purpose. The question he asked was “Why does the organization exist?” After a painful discussion that went back and forth, the organization eventually discovered its higher purpose as helping their clients—individuals and families—make financial decisions to achieve their life goals, not just helping them make money but helping them achieve their lifetime financial goals. This is a higher purpose that is not distinct from the business of the company. Rather, it is an integral part of it and influences every aspect of how the company is run.

Once an organization discovers a higher purpose, the leaders have to understand that it cannot be a covenant unless it is authentic and employees are convinced that it is authentic. In other words, employees must believe that the leader is not a manipulator who is articulating a higher purpose as a public relations ploy.

Authentic leadership requires not only the appropriate personal and organizational financial sacrifices to signal authenticity but also clear and constant messages. You cannot assume that the employees will hear the leader the first time a higher purpose is communicated. The message has to be repeated over and over again, and its implications for business decisions and tradeoffs have to be continuously explored, debated, and explained.

Repeating the message will help employees internalize the higher purpose and believe in it, and it will stimulate each of them to learn how they can integrate the organization’s higher purpose into their decisions and actions. In this process, higher purpose becomes an arbiter of all decisions. They find that complexity is reduced, and freedom is increased. They can make the right decisions without asking for direction because they know the highest intention of the organization.

This learning process can energize employees. As they begin to live in the space at the intersection of organizational higher purpose and business decisions, they begin to make personal sacrifices that help to further the common good, and they become ambassadors for the higher purpose. In this way, midlevel managers are turned into purpose-driven leaders. As a result, intrafirm competition and self-interested behavior decline. Employees perceive less uncertainty about how their fellow employees will behave, reducing what economists refer to as strategic uncertainty. The lower uncertainty and the commitment to purpose permit the organization to change the wage contracts it writes for its employees. The organization does not rely on the expectation that all of the employee’s motivation will come from the explicit wage contracts they are offered. The organization has a higher purpose that substitutes partially for the high-powered incentives of explicit wage contracts that pay bonuses that increase steeply with output. The organization can shield its (risk-averse) employees from some of the risk associated with such contracts without worrying about employees shirking. Employees work harder and smarter not only because they will earn higher bonuses by doing so but because doing so will contribute to a higher purpose they believe in.

Over time, these purpose-driven leaders begin to connect others in the organization to the higher purpose. Employees begin to see their work as not only helping the organization achieve its business goals but as something larger than themselves. The covenant begins to take hold. Like the war veterans in The Mission Continues, employees see themselves as making large contributions to society. Leading this charge of connecting people to purpose will be the positive energizers—those whose boundless enthusiasm for the higher purpose radiates brightly and converts others. Leaders must make sure these positive energizers are unleashed.

Thus, our theory of higher purpose does not seek to negate the principal–agent model but to augment it. We recognize the power of incentives in overcoming effort aversion and the extent to which employee risk aversion impedes contractual resolutions. An authentic organizational higher purpose reduces the risk employees perceive, and it also helps overcome employee aversion to working hard.

Economics of Higher Purpose at Work in Practice: A Case Study

We can see how organizations that do what we described above behave, especially during times of stress. One of these organizations is Southwest Airlines.

Southwest Airlines has long been known as a purpose-driven, values-based organization.³⁵ Pursuing the purpose and living the values often leads to unconventional decisions and positive outcomes. The 2001 attack on the World Trade Center had a devastating effect on air travel. As passengers turned away, airlines were forced to downsize, and many did so with a purely economic mind-set. US Airways, for example, declared financial exigency. This allowed it to lay off more employees than any other airline, with no benefits and no severance for the laid-off employees, as union contracts became null and void.

Like US Airways, Southwest was also a short-haul airline, and such airlines were the most adversely affected. However, Southwest acted on the assumption that the trust and loyalty of employees was more important than responding to short-term financial pressures. Southwest risked being severely punished by investors for not making the right economic decision. Yet over the next 12 months, while all airlines, including Southwest, had negative stock returns, Southwest’s shareholders suffered the least among all major airlines. Southwest recovered more quickly that most of the other airlines.³⁶

Southwest retains its ability to perform under pressure. In April 2018 Southwest experienced a different kind of crisis: a passenger was killed when pieces of a failed engine damaged the wing and the fuselage of a plane.³⁷ The airline faced many technical, legal, and financial issues, as well as issues of dealing with the grieving family and the 148 others who were on the plane.

Employees across the country rushed to respond, but in a crisis a workforce cannot be managed centrally. While a few basic directives can be sent out, hundreds of decisions have to be made in each location, without direction from above. At such times the culture reigns, and, as we know, some companies have failed miserably.

Southwest had two chief concerns: ensuring the safety of the rest of the fleet and caring for the affected customers. The company arranged a special flight, staffed by experienced crew, for the 148 passengers. The passengers later described the company as “friendly, understanding, concerned.” Afterward, employees stayed in contact with the passengers. The company sent $5,000 to each passenger for immediate expenses. It sent the money in a letter from the CEO offering “our sincerest apologies.”

The Southwest community felt sadness over the loss. Employees sent messages of compassion and support to one another and regularly checked on and cared for one another. As a former HR employee stated, “It’s a different culture. When there’s an issue, everybody feels it.”

Empirical Evidence on the Economics of Higher Purpose

Recent research provides evidence to support the observation that pursuit of an authentic higher purpose improves economic performance. Two Swedish economists studied the effect of higher purpose pursuit in a laboratory study of principals and agents. They hypothesized that the pursuit of an authentic higher purpose creates in employees a “warm glow” about the firm, thereby positively influencing employee behavior. In a laboratory setting in which some participants in the experiment acted as principals and others as agents, they asked the principals in the treatment group to donate their earnings to the Swedish Red Cross in the various treatments designed in the experiment. They found that agents work the hardest and economic efficiency is the highest in the treatment in which a portion of the principal’s earnings goes to charity. They concluded that the pursuit of higher purpose improves the efficacy of the contracts that principals and agents negotiate, and that this plays an important role in the higher effort agents provide.³⁸

As we indicated in our economic theory of higher purpose in chapter 4, behavior can be significantly influenced by the pursuit of higher purpose in part because even the explicit contracts that are negotiated may be affected by this pursuit. In other words, it is the entire ecosystem of contracts, effort, and output that is fundamentally altered.

A large-sample study by researchers at Harvard Business School, Columbia University, and the Wharton School surveyed nearly 500,000 people across 429 firms involving 917 firm-year observations from 2006 to 2011. The study found that an authentic higher purpose that is communicated with clarity has a positive impact on both operating financial performance and forward-looking measures of performance like stock price.³⁹

The authors found that high-purpose organizations come in two forms: firms characterized by high camaraderie between workers, and those characterized by high clarity from management. They document that firms exhibiting both higher purpose and clarity have systematically higher future earnings and stock market performance, even after controlling for current performance. They concluded that this relationship is driven by the perceptions of middle management and professional staff, rather than senior executives. Their findings are consistent with our economic theory of higher purpose: when midlevel employees believe that the organizational higher purpose is authentic and is communicated with clarity by top management, better economic performance results.

A study looked at the issue in the context of reward-based crowdfunding, in which creators of entrepreneurial projects solicit capital from potential consumers to reach a funding goal and offer them future products or services in return. The study examined consumers’ contribution patterns using a novel dataset of 28,591 projects collected at 30-minute resolution from Kickstarter.com.⁴⁰ It showed that consumers also have prosocial motives to help creators reach their funding goals. Projects were funded faster right before they met their funding goals than right after, presumably because consumers wanted to direct more funds to projects that needed to successfully finish their funding campaigns so they could commence pursuit of their prosocial goals. These findings suggest that consumers’ prosocial motives play a role in rewards-based crowdfunding.

Another study looked at an economic model of an industry equilibrium in which firms have a choice to engage in corporate social responsibility (CSR) activities.⁴¹ The CSR is modeled as an investment to increase product differentiation that allows firms to benefit from higher profit margins, so there is an integration of higher purpose with the business goals of the company. The model predicts that CSR decreases systematic risk and increases firm value, and that these effects are stronger for firms with high product differentiation. The authors found supporting empirical evidence for these predictions.

Conclusion

In a nutshell, our economic theory of higher purpose is as follows: By adopting an authentic higher purpose that intersects the organization’s business goals, employees are persuaded that their personally-costly effort has two effects—it contributes to their own economic well-being (through higher compensation, promotions, and other extrinsic rewards), and it contributes to a greater social good that they care about. This increases the value they perceive in their own hard work, making them willing to work harder, take more risks, and be more entrepreneurial than they would be otherwise. Thus, the power of extrinsic reward and punishment mechanisms in aligning the self-interest of employees with the larger good of the organization is enhanced. The key is that the economic sacrifice made by the authentic leader to pursue higher purpose must be great enough to convince employees that the purpose is authentic and not simply another tool to control and manipulate employees.

If higher purpose is so compelling, why is everybody not embracing it? We turn to this question in the next chapter.