01 Jun 2017
Research Brief: Profit with Purpose—and Middle Managementby Erin PetersonTopics:
The idea of corporate purpose—a responsibility that goes beyond dollars and cents—can seem like little more than platitudes tucked into a mission statement. But new research shows that with the help of middle management, corporate purpose can propel an organization’s accounting and stock market performance.
According to a recent working paper coauthored by Associate Professor George Serafeim and Claudine Madras Gartenberg (MBA 2006, DBA 2011), the finding upends the common assumptions about the relative importance of middle management. “For the past decade, middle management has taken a beating—often portrayed as an unnecessary resource inside an organization,” Serafeim says. “But [this research shows] that when you can motivate this layer of an organization and align them with the top-level vision, there are likely to be beneficial effects in performance.”
To study the issue, the authors analyzed more than 450,000 survey responses from employees at hundreds of large US companies. They looked specifically at companies whose employees ranked them highly when it came to corporate purpose. Within this group, the researchers found that companies with a strong purpose came in two main forms: those with high camaraderie among its employees, and those with high clarity from management about worker expectations and future plans.
This latter group saw improved financial performance, Serafeim says. In terms of stock market returns, companies ranked in the top quarter of the two qualities of clarity and purpose outperformed the bottom quarter by about 6 percent annually.
Serafeim suspects that this link has to do with developing strong, informal “relational contracts.” When managers have both a larger purpose directive from executives and a road map for achieving it, employees feel confident that their specific actions will be recognized and rewarded. It’s this bridge that middle managers create—translating a top-level mandate into everyday business activities—that drives success.
“Middle management is where purpose gets real,” says Serafeim. “Top executives must have a vision, but it’s the implementation by middle management—the space between where strategy gets formed and where it gets executed—that is so important.”
“Corporate Purpose and Financial Performance,” by Claudine Madras Gartenberg, Andrea Prat, and George Serafeim, HBS Working Paper.
Class of MBA 2006, Section G