Does social purpose drive profit?

4 Nov 2023 | A fact is not data, A statement is not fact, Evidence is not proof

Someone thoughtfully sent me a Harvard Business Review article, ‘How Your Company’s Social Purpose Can Also Drive Profit’, thinking I’d like it given my book Grow the Pie: How Great Companies Deliver Both Purpose and Profit, gives a similar message. My confirmation bias led me to want to lap up the evidence uncritically, but unfortunately it’s extremely weak, even for HBR’s standards. (I have written for HBR many times and it has many excellent articles, but there is no peer review so unfortunately there is a lot of chaff alongside the wheat). It makes several missteps up the Ladder of Misinference.

1. A statement is not fact: it may not be accurate

The article refers to a study of companies that ‘successfully achieved the dual goals of purpose and profit’. But it never explains how the study measures either purpose or profit. Purpose is notoriously difficult to measure. Some studies measure whether a company has a purpose statement, but having a statement is meaningless; a company might say something but not deliver. Other studies measure whether companies think that purpose is important, which is again different from actual delivery. Others still measure quantitative outcomes, which miss qualitative elements: for example, demographic diversity bears almost no relation to diversity, equity, and inclusion.

Profit is easier to measure, but there are a huge range of ways to do so, and it’s impossible to know what to take away from the study without knowing what measure was used. Is it short-term or long-term profit? If the former, this may be an undesirable outcome. Is it gross margin (subtracting only direct costs) or net income (the bottom line)? In my study on diversity, equity, and inclusion, we studied eight different performance measures, to ensure that our results were not driven by a single metric.

Even more seriously, the article provides no evidence at all that the companies achieved the dual goals of purpose and profit. It simply makes that statement without any substantiation – no graph or table is shown, and not even a number. Did profit increase by 1%? If so, it’s probably statistically insignificant – a product of luck. 100%? Then it’s too large to be plausible.

2. A fact is not data: it may not be representative

The study only investigated 12 companies. This is far too few to claim general conclusions such as ‘How Your Company’s Social Purpose Can Also Drive Profit’. While 12 might seem low, it’s actually not the worst. Business school case studies, best-selling books, and viral TED talks often use a single example which they overextrapolate to form a general conclusion. For example, Walter Isaacson’s HBR article, ‘The Real Leadership Lessons of Steve Jobs’, is subtitled ‘Six months after Jobs’s death, the author of his best-selling biography identifies the practices that every CEO can try to emulate’. But it’s impossible to draw general leadership lessons from a single person.

In addition, the time period is never stated. It’s not clear over how long these companies achieved both purpose and profit. If they outperformed on both dimensions over 20 years, then it might be noteworthy, but if it’s a couple then it could be a flash in the pan. Indeed, books like In Search of Excellence, Good to Great, and Built to Last take some leading companies and claim to identify the secrets to their success — yet many of them nosedived after the books’ publication suggesting that the authors hadn’t really found the magic formula.

3. Data is not evidence: it may not be conclusive

The article says ‘a common theme emerged. The companies that successfully achieved the dual goals of purpose and profit did so by adopting an advocacy-based business model’. This is a similar methodology to what’s used in In Search of Excellence, Good to Great, and Built to Last — and it’s deeply flawed. There is no control group. The researchers can’’t claim that the advocacy-based business model drove these companies’ success without studying how companies without such a business model performed.

These companies may have shared many common themes, not just an ABBM, and it could be that those other common themes were behind their success. Maybe they all happened to be in the tech industry, and the tech industry performed well. Or they happened to have high employee satisfaction, and it’s employee satisfaction that drove the superior performance.

By analogy, all 12 companies might have had white men as CEOs. But it would be ludicrous to claim that having a white man as your CEO sets you on the road to riches, without exploring alternative explanations. Here, the authors latched onto their preferred explanation —- the advocacy-based business model that their article is advocating —- and ignoring any other potential driver.

Unfortunately, even though I would love to believe the results of the study, it’s not even half-baked.

 

 

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