Purpose is not a luxury and matters more than ever in a crisis – Interview with Professor Alex Edmans of London Business School

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Today’s interview is with Alex Edmans, a Professor of Finance at London Business School who focuses on responsible business. He has just published a new book called: Grow the Pie: How Great Companies Deliver Both Purpose and Profit and joins me today to talk about the book, how it came about, what we can learn from it and why it matters.

This interview follows on from my recent interview – Innovative brands are using direct mail to improve customer engagement – Interview with Dan Frohnen of Sendoso – and is number 350 in the series of interviews with authors and business leaders that are doing great things, providing valuable insights, helping businesses innovate and delivering great service and experience to both their customers and their employees.

Here’s the highlights of my chat with Alex:

  • The book is about how it is critical for a company to have a purpose to serve wider society.
  • Many CEOs have a pie splitting mentality where they are only trying to maximise profits and minimise what they’re giving to society.
  • However, Alex says that if you try to create value for society, treat your workers better, treat your customers better that this isn’t at the expense of profit. It actually supports profits.
  • Often investors when evaluating a company still only look at how much profit they make and they don’t really care about these non financial factors. What Grow The Pie is doing is showing that these non financial factors are actually financial in the long term.
  • Growing the pie is a different approach to business that is not only good for society, but it is also profitable for companies.
  • It involves a growth mindset approach and is all about innovation and actively creating value.
  • We often lambast companies if they do bad stuff. But, we don’t lambast a company for failing to innovate.
  • But, actually failing to innovate could have massive consequences. Take Kodak, for example, who never received the same media backlash as other failed companies because their CEO didn’t line their own pockets. But, that’s no consolation to the 150,000 workers who were made redundant because Kodak failed to innovate and invest in digital cameras and technology.
  • But innovation might be driven to create social value rather than just innovation to create and drive profit.
  • For example, Merck chose to innovate and launch a drug to cure river blindness. Now, a company focused purely on profit would have never done that because river blindness is suffered by people who live in Africa and may of those can’t afford massive amounts for drugs. But, Merck wanted to innovate because river blindness is a huge social problem and even though it clearly wasn’t going to be profitable they wanted to do this to serve wider society.
  • The heartbeat of the book is the evidence that supports this approach.
  • As an example, one of Alex’s studies looked at 28 years of data to show that companies that treat their workers better actually beat their peers by 2.3-3.8% per year which is 89-184% compounded.
  • Other studies cited in  the book show that treating people better leads to better performance.
  • People think about purpose as being a luxury.
  • But actually what the evidence suggests is that it is not a luxury. It’s something that really does matter and may matter even more in a crisis.
  • Another paper by one of Alex’s LBS colleagues shows that returns to being purposeful are particularly important in a crisis. Why? Because in a crisis there’s a loss of trust and so companies which have developed trust through being purposeful over many years are the ones that are gonna be performing particularly strongly right now.
  • An example of a company that is delivering both purpose and profit: Unilever, the consumer goods company.
  • Unilever launched a sustainable living plan to measure its contribution to wider society. That included reducing its environmental footprint and reducing the calories in its products etc. However, they did this in a very holistic way and also included their progress in their financial statements.
  • In fact, Paul Polman, the CEO who was behind this idea, said, I’m going to stop reporting quarterly earnings because the true value of my business is not in the short term numbers, it’s in how we’re doing things like the Sustainable Living plan. That included how they also pay their CEOs.
  • What Paul Polman did was instil purpose throughout the company so that it would still stay there even after he retired.
  • Purpose should be targeted.
  • Purpose is the answer to the question: How is the world a better place by your company being here?
  • The importance of being targeted is that it is critical that people understand what purpose means at the personal level.
  • So a company should first find its purpose and then think about what milestones and key performance indicators they can measure in order to find out if they are genuinely putting this into practise.
  • Alex’s Punk CX word(s): Unorthodox or unconventional.
  • Alex’s Punk CX brand: Barry’s Boot Camp.

About Alex

Alex Headshot 450x676 1Alex Edmans is Professor of Finance at London Business School and Academic Director of the Centre for Corporate Governance. Alex graduated from Oxford University and then worked for Morgan Stanley in investment banking (London) and fixed income sales and trading (New York). After a PhD in Finance from MIT Sloan as a Fulbright Scholar, he joined Wharton in 2007 and was tenured in 2013 shortly before moving to LBS.

Alex’s research interests are in corporate finance (corporate governance, executive compensation, investment/growth/innovation, and M&A), behavioural finance, and responsible business. His research has been covered by the Wall Street Journal, Financial Times, New York Times, The Economist, and The Times, and he has been interviewed by Bloomberg, BBC, CNBC, CNN, ESPN, Fox, ITV, NPR, Reuters, Sky News, and Sky Sports. Alex has spoken at the World Economic Forum in Davos, testified in the UK Parliament, presented to the World Bank Board of Directors as part of the Distinguished Speaker Series, and given the TED talk What to Trust in a Post-Truth World and the TEDx talk The Social Responsibility of Business with a combined 2 million views. He has written op-eds for the Wall Street Journal and Financial Times, writes regularly for Harvard Business Review, Huffington Post, World Economic Forum, and CityAM, and runs a blog, Access to Finance, that aims to make complex finance topics accessible to a general audience.

Alex serves on the Steering Group of The Purposeful Company, a UK consortium of leaders in responsible business, on Royal London Asset Management’s Responsible Investment Advisory Committee, and as an Advisor to Research Affiliates. The UK government appointed him (jointly with PwC) to conduct a study on the effect of share buybacks on executive pay and investment. Alex also serves as Mercers’ School Memorial Professor of Business at Gresham College, giving free lectures to the public. His 2019/20 lecture series is on Business Skills for the 21st Century and his 2018/19 series was on How Business Can Better Serve Society. His book, Grow the Pie: How Great Companies Deliver Both Purpose and Profit, was published in March 2020 and headed the list of the Financial Times Business Books of the Month.

At Wharton, Alex won 14 teaching awards in six years. At LBS, he won Best Teacher awards for both the MBA and Masters in Financial Analysis programmes and the Excellence in Teaching award for best professor across all programmes. He has been named to Poets and Quants Best 40 Professors Under 40 and Thinkers50 Radar.

Find out more about Alex at his London Business School page or via his personal website. Grab a copy of the book here, feel free to say Hi to Alex on Twitter at @aedmans and connect with him on LinkedIn here.

 

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