Empirical Analysis: the Impact of Mission Statements on Financial Performance -Based on World’s Largest 50 Banks

Research Proposal

Empirical Analysis: The Impact of Mission Statements on Financial Performance
-Based on World’s Largest 50 Banks

Executive Summary
This proposal is for analysing the impact of mission statements on financial performance of bank industry. We propose two hypotheses: mission statement components and firm performance have a significant positive correlation and the number of components of mission statement in bank industry has an inverted U curve relationship with firm performances. We use Bart’s 25-components classification to quantitatively analysis each mission statement and mark components from 0-3. As to another variable, we choose 8 ratios to reflect financial performance and then calculate their mean from 2010 to 2012. We will make a regression between mission statements and financial performance. We hope the results can prove our hypotheses.

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Part 1: Background and objectives

Background and relevance of the research topic
A mission statement is a statement of the purpose of a company, organization or person. The content of mission statement always includes aims of the organization, how to create value to stakeholders and a declaration of core purpose. Silkunas and Steven (1995) pointed out that mission statement illustrates the target, prospect, behavior, culture and strategy of the company. Robert A. Goldberg (1998) proposed the mission should be thought of as the what of an organization - its strategic objective, its tactical goals, and its subsequent action to achieve its objective. According to Bart (1997), a mission statement answers three questions for an organization: 1. Key market – who is your target customer? 2. Contribution – what product or service do you provide to that customer? 3. Distinction – what makes the client want to choose your product or service? Ireland and Hirc (1992) thought mission statement is basis of strategic formulation. It describes the unique purpose of the company and reflects the value and provides motivation, direction and image for the organization. A mission statement should be the soul of company and inspiration for all employees.

The effective mission statements have two main functions. Mission statements act as control mechanism and source of motivation. Mission statements are one of the most important communication tools between shareholders and managers. According to agency theory, shareholders always have less information than managers have. Shareholders may bind to the action performed by managers. To better control this situation, the board may propose organizational constraints that prevent some delegations decision rights. It is necessary that these constraints are public known as informal contract and they should be clear and easy to understand. The formulation of a mission statement can be the vehicle for this constraint. So throught the mission, the formulation of future is a way for shareholders to control the behavoir of management and keep the company on track. In addition, the publication and execution of a mission statement contribute to increase the external reputation of the company. Mission statements also provide motivation to the whole organisation. Employees could feel a sense of responsibility when they are fully informed by the value, ambitions and objects of the company. Bartkus, Glassman and McAfee (2000) proposed mission statements encourage employees to place purpose ahead of their own self-interests.

The mission statements are widely used among lots of firms as an effective control tool, but the quality of mission statements varies from firm to firm. How mission statements effect the performance of companies? what is the relation between mission statements and financial performance? What is the most components of an efficient mission statement? These questiones are still under consideration. This topic is worth studying because it helps firms to confirm what kinds of mission statements are effective and how to formulate or modify the content of mission statement. This study also will make mission statements exert better function and so that, managers could make better decisions.

Brief review of the literature and literature gap
Recent twenty years, many people study the mission statement effects on firms. They focus on both financial and non-financial performs. Christopher K. Bart (2000) confirmed mission statements are essential for strategic planning and innovativeness in airline industry. He compared the content of mission statement of innovative and non-innovative airline and found 7 of 23 components are significant more often used in the innovative airline. So he thoughts a good mission statement could improve the potential of innovation for a company. Bart (2001) considered that mission statements affect human intellectual capital (HIC) construct. He overcame the difficulty in measuring HIC and improve mission statements have positive effects on success of business. But even if every employee understands the meaning, that does not mean they can be influenced by mission statement. Bartkus (2004) suggested informal mission statements have a negative impact on firm performance and development. Sidhu (2003) focused on 38 firms in media industry in Netherlands and analysed the relationship between mission statement and performance. The result shows they have significant positive correlation.

The previous study has developed many approaches of the quality of measuring mission statements among which the most important methods are 9 components classification approach, 10 components classification approach and 25 components classification approach. David (1989) developed a model using sample survey of 75 companies from Fortune 1000 in Business Week. He carried out classified statistic and refined 9 key factors in the mission statements including customers, products or services, geographic location, technology, concerning existence, business philosophy, self image, public image and concerning employees. He thought a completed mission statement should contain the 9 components above and the quality can be reflecting from the degree of mention. But there is a big limitation in this method: mission statements contain more than 9 elements, which are not been considered into analysis. To improve this approach, Baetz (1996) collected 135 companies’ mission statements in Canada Fortune 500 using statistic method to construct a 10-elements model. This model is better than David’s because shareholders are introduced as an independence variable. The basis of empirical analysis is statistical sample, so this will cause diversity of conclusion because of different sample. For example, Klemm (1991) invested 59 British companies and suggested mission statements include 4 elements: purpose, strategy, planning and business orientation. Mliller (1998) thought the responsibility to shareholders and competitive advantage should be contained into mission statement. Dalrymple and Parsons (1995) decided products, market, development direction and technology as the most important components. Until 1996, Bart regarded special behaviour standard as another component and he assembled all the literature conclusions to construct a 25-elements model. This model includes all the possible components in mission statements. He collected all the mission statement from 44 enterprises in USA and tested every component. So Bart considered mission statements as a strategic management tool play little function in real business environment. These thesis analysis the components in mission statements to help managers construct a reasonable and appropriate strategic tool to improve competitive power of enterprise.

Although the previous study has a systematic and sophisticated classification for components of mission statements and analysis impact on different enterprise, there is very little study for the specific industry. Since different industry could be affect by different components in mission statement, our aim is to show whether mission statements have some relations with financial performance and which components could influence in bank industry. In addition, we will propose reasonable explanations why do these components could affect financial performance and put forward some suggestion to managers which components are useful and unuseful.

Research questions and hypothesis development
The study of relationship between mission statement components and financial performance is focus on two major problems: which mission statement components are positively correlated to financial statement and which essential components should be included into corporate mission statement. The former provides an optional set for the design of mission statement content and the later offers a reasonable standard of number of components in an effective mission statement. Generally speaking, the firms elaborately design and publish the mission statements which could directly or indirectly improve business performance and enhance corporate performance. In addition, each of the components has different effects on business performance. Fewer components it contains and smaller the impact on firm performance. But too many components in a mission statement would reduce performance because of the potential goal conflicts.

Therefore, we propose two hypotheses:
Hypothesis1: Mission statement components in bank industry and firm performance have a significant positive correlation.
Hypothesis2: The number of components of mission statement in bank industry has an inverted U curve relationship with firm performances.

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Part 2: Methodology and Data

Regression Analysis Model
We intend to analysis the relationship between the quality of mission statements and corporate financial performance. We choose 50 largest banks in the world as sample and choose key financial indicators from 2010 to 2012 to analysis their performance for each company. Then we collect all the mission statements in the same period from annual report and official websites. Bart (1997) suggested classifying content of mission statement into 25 components. We measure each component using a three-point scale. Finally set regression model of average financial indicators and each component to determine the relationship of mission statement and financial performance.

Selection of dependent variables
We choose 8 financial performance indicators to study this topic. They are Gross Profit Margin, Current ratio, Quick ratio, ROA, ROE, Capital growth rate, Earnings per share, and Price earnings ratio.

Selection of independent variables
According to Bart (1997) classification approach, the 25 components of mission statements are 1. Statement of purpose 2. Statement of values/beliefs 3. Distinctive competence 4. Desired competitive position 5. Competitive strategy 6. Identify stakeholders 7. Behaviours standards 8. General corporate goals 9. One big goal 10. Specific financial objectives 11. Non-financial objectives 12. Business definition 13. Specific markets served 14. Specific products offered 15. Self concept 16. Desired public image 17. Location of business 18. Technology defined 19. Concern for survival 20. Concern for customers 21. Concern for employees 22. Concern for suppliers 23. Concern for society 24. Concern for shareholders 25. Vision statement.

The components which are not mentioned in the mission statement will be marked as 0; which are mentioned slightly will be marked as 1 scores; which are generally mentioned get 2 scores and clearly mentioned components will be graded 3 scores. “Slightly mentioned” means the components are mentioned but not the core content in the mission statement. “Generally mentioned” means the components are mentioned as core content but not the most important content in the mission statement. “Clearly mentioned” components are the most emphasised point in the mission statement.

Source and cost of data
We choose the data of world’s largest 50 banks from 2010 to 2012 as our sample. The financial performance indicators can be freely obtained from their annual reports. Mission statements are available on the official websites of banks. All the data is free on the Internet.

Timeline for completion

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Bibliography of key literature identified in this proposal

a) Bart, Christopher K. “Industrial Firms and the Power of Mission.” Industrial Marketing Management. Volume 26, Number 4, July 1997, pp. 371-383

b) Bart, Christopher K. “The relationship between mission and innovativeness in the airline industry: an exploratory investigation”, Journal of Intellectual Capital, Vol.2 No.3, 2001, pp.320-330

c) Bart, Christopher K. “Measuring the mission effect in human intellectual capital”, Int J. Technology Management, Vol.20, Nos. 5/6/7/8, 2000

d) Bart, Christopher K, Nick Bontis and Simon Taggar “A model of the impact of mission statements on firm performance”, Management Decision 39/1, 2001, pp19-35

e) Bartkus, Barbara, Glassman, Myron and McAfee, R. Bruce, “Mission Statements: Are They Smoke and Mirrors?”, Business Horizons; Nov/Dec2000, Vol. 43 Issue 6, p23, 6p

f) David.How Companies Define Their Mission [J].Long Range, Planning,1989,22(2).

g) Goldberg, Robert A., “A new lens on mission and vision” , Leadership in Action, 1998, Vol. 18 Issue 3, p6-12. 7p.

h) Mark C. Baetz. Developing Mission Statements Which Work [J]. Long Range Planning, 1996,29(4).

i) M. Klemm, S. Sanderson, G. Luffman. Mission Statements:Selling, Corporate Values to Employees[J].Long Range Planning,1991,24(3).

j) Sidhu, “Mission Statement: Is It Time to Shelve Them?”, European Management Journal, 2003, Vol.21, pp.439-446

k) Silkunas and Steven, 1995, “Economics – Say It and Live It: 50 Corporate Mission Statements that Hit the Mark by Patricia Jones and Larry Kahaner’, Library Journal, Vol.120, pp.109

Bibliography: b) Bart, Christopher K. “The relationship between mission and innovativeness in the airline industry: an exploratory investigation”, Journal of Intellectual Capital, Vol.2 No.3, 2001, pp.320-330 c) Bart, Christopher K d) Bart, Christopher K, Nick Bontis and Simon Taggar “A model of the impact of mission statements on firm performance”, Management Decision 39/1, 2001, pp19-35 e) Bartkus, Barbara, Glassman, Myron and McAfee, R g) Goldberg, Robert A., “A new lens on mission and vision” , Leadership in Action, 1998, Vol. 18 Issue 3, p6-12. 7p. h) Mark C. Baetz. Developing Mission Statements Which Work [J]. Long Range Planning, 1996,29(4).