Does stating what your company stands for affect your bottom line?
Respect, integrity, communication and excellence: these were Enron’s self-professed values before accounting fraud brought down the firm. So you’d be justified in thinking that the values listed on corporate websites don’t really matter.
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But researchers at INSEAD and IMD business school weren’t so sure. Yes, talk is cheap and public proclamations aren’t the same thing as living up to one’s values. (The Enron example is included in their paper.) Still, stated values might also represent a firm’s aspirations, the type of company it strives to be. If that’s the case, maybe the values on a company’s website are meaningful after all; perhaps Enron is the exception rather than the rule.
The upshot from the researchers’ paper, published earlier this year: don’t dismiss the corporate values statement. It seems to be linked to financial performance.
The paper, published in the European Management Journal, isn’t the first to look at the values firms list on their websites; a 2013 paper tried something similar but found no correlation with performance.
But Charles Galunic of INSEAD and Karsten Jonsen, John Weeks, and Tania Braga of IMD did a few things differently than the earlier researchers.
First, they looked not just at which values are listed but at the total number of values each firm includes. Second, they compared firms’ values to the values of their competitors. Finally, they considered how values change, the idea being that firms that don’t shift their values over time may fall behind more agile competitors.
They measured all this for the Fortune 100 in 2005, and compared each measure to the firm’s return on assets over the
subsequent three years.
They found that the more values a firm lists on its website, the better its financial performance. And the more those values differed from competitors’ values, the better the company performed.
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These relationships might not be causal, the authors caution, but they offer a plausible reason for the link. “One could argue that espoused values are the calling card to recruit talent and to show good citizenship,” they write.
If firms that take recruiting seriously are more likely to post more values, that could help explain the relationship.
Why does listing different values than competitors correlate with performance? The authors argue that this reflects a timeless principle of competitive strategy: differentiating yourself is one classic way to stay profitable
These results suggest that values do matter, and that when firms state those values publicly, they’re saying something meaningful about who they are. That’s likely no surprise to HBR readers. As James Collins and Jerry Porras wrote in their 1996 classic, “Building Your Company’s Vision”:
Core values are the essential and enduring tenets of an organisation. A small set of timeless guiding principles, core values require no external justification; they have intrinsic value and importance to those inside the organisation.
The Walt Disney Company’s core values of imagination and wholesomeness stem not from market requirements but from the founder’s inner belief that imagination and wholesomeness should be nurtured for their own sake.
But the new paper’s third finding contradicts the idea that values should be timeless. Companies that changed their values between 2005 and 2008 had higher return on assets than those that did not.
You might argue that this is merely capturing short-term financial performance and that more stable firms — the Disneys, with their timeless principles — will win out in the end. Maybe. But the paper hints at another explanation.
Companies that changed their values also tended to have more differentiated values, a key part of strategic advantage. So perhaps the lesson isn’t quite that dynamic values beat stable ones. It’s that even timeless values aren’t a substitute for good strategy. HBR/GB.