People + profit

As published in Scotland on Sunday on 15^th March 2020 as a preview to Prof. Alex Edmans presentation at GEFI’s inaugural Radical Old Idea event in Edinburgh. Please click here to read the original article and click here for details of the event. 

The consensus among politicians, citizens, and even executives themselves, is that capitalism serves only to enrich the elites while ignoring ordinary people. Companies are making outsized profits and CEOs are raking in exorbitant salaries, while paying scant attention to – and even exacerbating – the world’s major social problems in 2020. Climate change, income inequality, population growth, resource usage, automation – the list is endless.

So it’s urgent that companies take action. If they don’t, not only may customers and workers walk away, but also politicians may pass regulations that overturn capitalism as we know it – as Bernie Sanders is currently proposing, and winning support for.

But many popular proposals to reform business may not actually be in the best interest of society. Many are based on the pie-splitting mentality. They assume that the value that a company creates is a fixed pie. Then, the only way to increase the slice enjoyed by society is to reduce the slice that goes to business – slash CEO pay, restrict dividends, and donate profits to Corporate Social Responsibility initiatives.

But viewing the relationship between business and society as a fight between “them” and “us” is deeply flawed. Profits don’t just go to nameless, faceless capitalists but pension funds investing on behalf of citizens – not “them”, but “us”. So while it’s critical for companies to take seriously their responsibility to society, they also have a responsibility to deliver profits.

That’s the power of a different approach to business – the pie-growing mentality, which stresses that the pie is not fixed. The implications are profound. For CEOs, the best way to increase profits is not to take from society (cutting wages or price-gouging customers) but to create value for society – higher profits then arise as a by-product. For citizens, high profits need not result from value extraction, but successfully serving a social need. A company may improve working conditions out of genuine concern for its employees, yet these employees become more motivated and productive. A company may develop a new drug to solve a public health crisis, without considering whether those affected are able to pay for it, yet end up successfully commercialising it.

Importantly, the idea that both business and society can simultaneously benefit is not wishful thinking, but backed up by rigorous evidence. On 24 March, I will present this evidence – and the new approach to business underpinned by the pie-growing mentality – at the Global Ethical Finance Initiative’s (GEFI) inaugural Radical Old Idea event in Edinburgh.

The Radical Old Idea is a discussion platform inspired by the historic Scottish Enlightenment. By bringing together business and financial services representatives, it explores innovative ideas that deliver positive economic outcomes for the benefit of society. Indeed, solving the world’s major social problems of 2020 involves working with capitalism, not against it. Successful businesses design products that transform customers’ lives for the better, provide employees with a healthy and enriching workplace and preserve the environment for future generations.

But an idea can’t just remain an idea – it must be put into practice. I will present a framework for implementing responsible business, and tackling the difficult trade-offs that often hold companies back.

Leaders of today’s companies are in a privileged position, as their global scale gives them more power to create social value than ever before. But they’re also in a challenging position, because the world’s social problems are more serious than ever before.

Yet the idea of serving both business and society is not a too-good-to-be-true pipe dream, but realistic and achievable. We have the evidence to back us, the examples to inspire us, and the tools to put it into practice. Let’s make this vision a reality.

Alex Edmans is Professor of Finance at London Business School and author of the book Grow The Pie: How Great Companies Deliver Both Purpose and Profit.