Transforming capitalism - purpose and profit, Alex Edmans'
Should companies be run to earn a profit, or to serve a purpose?
Professor Alex Edmans' joins Purposely Podcast to talk about his ground-breaking book, The Pie-Growing Mentality A new approach to business (and indeed capitalism) that works for both investors and society.
The book lays down the argument that “Great Companies Deliver Both Purpose and Profit” and that it is not an either or choice. Drawing from his research evidence and real-life examples spanning industries and countries, Edmans' demonstrates that businesses driven by purpose are consistently more successful in the long term.
He describes how a purposeful company must navigate difficult trade-offs and take tough decisions. Edmans' provides an actionable roadmap for company leaders to put purpose into practice, and overcome the hurdles that hold many back. He explains how investors can discern which companies are truly purposeful rather than green washing and engage with them to unleash value for both shareholders and society. And he highlights the crucial role that citizens can play as employees, customers and investors, in reshaping business to improve our world.
What is the pie and what is 'pieconomics'?
‘The pie is the total amount of social value. It's not just financial value, but it's the amount of total happiness or welfare that a company creates. You can think about that pie as being divided between profits to investors and value to society. So often when people think about businesses becoming more responsible, they think about well, should we split the pie differently? So should we reduce profits in order to pay higher wages? or should we reduce profits in order to charge fair prices to customers?
Similarly, if you're a CEO, many CEOs think about how to split the pie in their favour. So they might think the way to maximise profits is to charge as much as they can get away with or to pay workers as little as possible. So what pieconomics argues is that the relationship between business and society is not a zero sum game and the pie is not fixed. When a company chooses to invest in its workers or to become better stewards of the environment or to treat customers better. They're not just sacrificing profits, instead they're growing the pie, ultimately enhancing profits.
For example, if you treat your workers better they'll be more motivated and productive and more likely to stay, similarly, with the environment and customers. So while there might be trade-offs in the short term but in the long term, a responsible company is not just being more ethical it is being more commercially savvy and boosting its long term returns.’
Where did the idea for the ‘pie and pieconomics’ come from?
‘I actually got the idea a long time ago, 15 years ago in fact. I was doing my PHD in finance and it was based on research I had carried out that focused on companies that treat their workers well. So why did I look at workers rather than let's say the environment or customers. It's because in nearly every industry workers are the key asset. The environment clearly matters, however, it might matter for an energy company more than it does for a tech company. So what I looked at in that research is companies that go above and beyond in how they treat their employees. Do they perform better or are they just fluffy companies who are distracted from the bottom line.
I looked at the list of the 100 Best Companies to work for in America. Companies that are at the top of their game in how they treat their workers and I found that they beat their peers by 2.3 to 3.8% per year over a 28 year period, that's 89 to 184%, compounded. So they're being good corporate citizens but they were also being business savvy and they were investing in their greatest asset.'
So connecting that back to the concept of the 'pie and pieconomics', 'it is an example that you can look after your employees and add to your bottom line and grow profits. Instead of splitting the pie you actually advocate for growing the pie so everyone wins. It doesn’t have to be an either or choice.
Shareholder value, has been badged as something that is a bit evil versus companies who focus primarily on purpose, but I love that you can aspire to have both.’
I have really enjoyed the book and it has been thought provoking, what was it like to write?
‘I really enjoyed the process of writing, I get into the flow and time just passes – I very much get into the writing zone. That's what I felt like when I was working on the book. Before I started it I thought there was going to be such a temptation to procrastinate but that wasn’t the case. I loved writing so much that I would just wanted to lock myself away and write. I had to discipline myself to deliver my other duties as a professor and as a researcher.’
What has the response been like? I know you've done some TED talks, does that promoting the book bit come naturally to you?
‘So often as Professors we think about the creation of knowledge and doing the research only. However I think that if you just do the research and it ends up in a paper stuck in a library somewhere, then you really haven't made any impact. So what I love doing is not only the research and putting a lot of thought to it but also the communication of the ideas’
‘I haven't seen much or have any negative reaction. I think what the book has suffered from is the lack of, let's say, positive momentum that it might have got if the book was really one sided. So there are other books on responsible business, which argue that companies are completely evil, that ESG is a scam or things like that. Those books have typically had a lot of forward momentum with people tweeting and sharing it to get a reaction, whereby my book is much more in the middle. Yes, it recognises that companies need to serve wider society. But it also recognises that they need to provide a return for their investors. So it's not so much the negative momentum, but the lack of this forward momentum, the positive momentum that you would get if you were more extreme’