Professor George Serafeim

Why investors and middle managers may hold the key to reimagining capitalism

About the event

Harvard Professor George Serafeim explores performance, purpose, and ESG issues

The idea that businesses can do well by doing good is gaining traction. But there is sometimes still the sense that caring about environmental, social, and governance (ESG) issues is a bit of a luxury, something for small, private, family-owned companies – and not for large, public corporations with profit-focused shareholders.

Indeed, until about a decade ago this would have been a fair analysis. Research by Harvard Business School Professor of Business Administration George Serafeim has revealed that companies that historically had relatively good ESG scores typically used to receive more pessimistic investment recommendations, as Wall Street analysts interpreted ESG concerns as ‘a waste of shareholder resources.’

But by the end of 2008 that pessimism had diminished: ‘It had become basically zero,’ concluded Serafeim. And attitudes are continuing to change. The United Nations-backed Principles for Responsible Investment (launched in 2006) now have over 2300 signatories; more than a quarter of companies have appointed Chief Sustainability Officers; and businesses regularly talk about their role in responding to problems such as environmental damage and social inequality.

Ways of thinking can be deeply entrenched, however. Delivering the Kim B Clark Fellowship Lecture at Oxford Saïd on 2 May 2019, Serafeim described how he attempted to enthuse one student about his then new elective course, Reimagining Capitalism: Business and Big Problems. ‘The student raised his hand and asked me if I had any established frameworks. I said, “No but it’s going to be great. It will be a journey of collaboration and co-discovery. It will be about innovation. It will be exciting …” He just stood up and left.’ Even when Serafeim sent out research papers for review, he said, a common response was, ‘I don’t know what you’re talking about.’

ESG policies and long-term performance

These people, and those pre-2008 analysts, were missing something. In another study, Serafeim and his colleagues looked at the corporations and organisations that were making significant commitments to addressing social and environmental issues. They discovered that early (voluntary) adopters of environmental and social policies tended to have made these issues the responsibility of the board. In their internal management accounts and control systems they typically had many more non-financial metrics. And they were much more likely to be long-term oriented both in their decision-making and how they communicated with their stakeholders.

More importantly, they outperformed their low-sustainability competitors over the long term. While the analysts and investors were dismissing sustainability efforts as a waste of shareholders’ resources, these organisations were in fact building their brands, relationships, and loyalty among their customers. This may not have paid off immediately, but over 20 years it did – and in spades. Companies that care about their carbon footprint, for example, or about creating more diverse workforces, were once trading at a discount. Now they are trading at a premium.

There are many executives who are very well-intentioned but they are unable to diffuse that sense of purpose in their organisations.

So to progress further in the job of reimagining capitalism, Serafeim suggested, we need to find ways to ensure that more sustainability issues are seen as financially material issues so that markets can take them into account – in other words, so that investors become even more invested in ESG issues.

The role of organisational purpose

CEOs who are keen to promote ESG policies and socially responsible organisations have often embraced the idea of corporate purpose. A strong sense of purpose is thought to help organisational members derive meaning from their jobs, encourages them to be more productive, and thus drives firm performance.

Except, of course, it is not quite as simple as that. Serafeim studied about 2 million employees in slightly more than 100 organisations to measure their beliefs about the meaning and impact of their work. ‘The first thing we discovered was that the further down you look in organisations, the less people feel a very great sense of purpose,’ he said. ‘If you go to the CEO and senior executives, they will perceive great meaning in their work. Look further down the organisation, however, and that sense of purpose and meaning drops. Go to front line workers and it declines even further. There are many executives who are very well-intentioned but they are unable to diffuse that sense of purpose in their organisations.’ What is more, ‘We found that a sense of purpose among senior executives has zero correlation with organisational performance. None.’

But where they did find that purpose mattered, and had a strong relationship with performance, was within middle management teams. ‘This is an important level: it’s where strategy development becomes strategy execution.’

And they also found that there were a number of factors that seemed to correlate with a diffused sense of purpose – some of which could be influenced by senior executives, and certainly by shareholders. Ownership matters: a sense of purpose is greatest in private firms, and slightly lower in private equity-owned firms. It drops when it comes to public companies, and drops still further if there is a concentration of ownership amongst hedge funds. Compensation has a role: there is a weaker sense of purpose in the firms where there is a very high gap between the compensation of the CEO and that of the median worker. And purpose is diffused more widely if the leadership has come up through the organisation, rather than being appointed from outside.

Finding personal purpose

Serafeim concluded the lecture with a slightly different perspective on individual purpose in work, acknowledging that many of the students in the audience were likely to harbour ambitions to ‘make a difference’ in their future careers. In more or less every job and every organisation you can have a positive impact, he reassured them – it’s just a matter of scale and depth. ‘If you work at Disneyland’, he said, ‘you are not going to change people’s lives, but you are going to give them a great weekend. If you work in healthcare you may not reach a million people, but you could save the lives of one or two. That is a trade-off worth making. It is not true that people who want purpose and impact have to work for a social enterprise or NGO. You can get impact and purpose from every sector and in every career.’

George Serafeim