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Reinventing Capitalism with Alex Edmans

A VERY unique guest

Alex Edmans is a distinguished Professor of Finance at London Business School, renowned for his expertise in corporate finance, responsible business, and behavioral finance. As a prolific author, speaker, and advisor, he is a sought-after authority in the field and has shared his insights at prestigious platforms such as the World Economic Forum, UK Parliament, and TED talks. Additionally, he contributes regularly to publications like the Wall Street Journal and FT.

unique INSIGHTS

Join us for another enlightening episode of "Business for Humanity," where we sit down with academic prodigy Alex Edmans to discover "Pieconomics" and discuss whether capitalism can be fixed!

Pieconomics advocates for a radical mindset shift poised to reshape business for the mutual benefit of investors and society alike: Explore how Pieconomics challenges the age-old dichotomy between profit and purpose, championing a holistic approach where investments in employee well-being, environmental sustainability, and innovation drive both profits and social value. Be intrigued by surprising academic research that solidifies the link between corporate social responsibility and financial success, while questioning the effectiveness of widely endorsed interventions such as CEO pay caps and restrictions on share buybacks or shareholder rights. Dive into the strategies for harmonizing stakeholder and shareholder interests through robust corporate governance, and uncover practical avenues for translating purpose into action within companies, investment portfolios, and everyday consumer choices.

✿ Grow The Pie By Alex Edmans

"Grow the Pie" by Alex Edmans is a pivotal read for anyone interested in the intersection of corporate profit and purpose. The author challenges the conventional either-or debate of profit versus purpose. Using robust evidence and diverse real-world cases, he illustrates how purpose-driven companies achieve greater long-term success.

Should companies be run to earn a profit, or to serve a purpose? In this ground-breaking book, acclaimed finance professor and TED speaker Alex Edmans shows it’s not an either-or choice. Drawing from the highest-quality evidence and real-life examples spanning industries and countries, Edmans demonstrates that businesses driven by purpose are consistently more successful in the long term.

But 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 greenwashing, 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.

Chapter Outline:

Part I: Why Grow The Pie? Introducing the Idea

1. The Pie-Growing Mentality A new approach to business that works for both investors and society
2. Growing the Pie Doesn’t Aim to Maximise Profits – But Often Does Freeing a company to take more investments, ultimately driving its success
3. Growing the Pie Doesn’t Mean Growing the Enterprise Three principles to guide trade-offs and what projects to turn down
4. Does Pieconomics Work? Data – not wishful thinking – shows that companies can both do good and do well

Part II: What Grows the Pie? Exploring the Evidence

5. Incentives Rewarding long-term value creation while deterring short-term gaming
6. Stewardship The value of engaged investors that both support and challenge management
7. Repurchases Investing with restraint, releasing resources to create value elsewhere in society

Part III: How to Grow the Pie? Putting it into Practice

8. Enterprises The power of purpose and how to make it real
9. Investors How to turn stewardship from a policy into a practice
10. Citizens How individuals can act and shape business, rather than be acted upon

Part IV: The Bigger Picture

11. Growing the Pie More Widely Win-win thinking at the national and personal levels

Based on: https://www.growthepie.net/book-description/nsustainable economic growth, offering a path towards a more sustainable and desirable future.

✿ About Alex Edmans

Alex Edmans is a distinguished finance professor with an extensive academic and professional background. He currently teaches Corporate Finance at London Business School (LBS), where he has won numerous teaching awards, including the Excellence in Teaching Award in 2018 and the Best Teacher Award for the MFA program. He previously held teaching positions at Wharton and MIT Sloan, where he also received multiple teaching accolades. Alex has contributed significantly to academia through his role as Managing Editor of the Review of Finance and his editorial work for several other prestigious finance journals.

Alex is a prolific author with several influential publications in top academic journals and has authored notable books such as "Grow the Pie: How Great Companies Deliver Both Purpose and Profit," which has been translated into multiple languages and received several awards. His research focuses on corporate governance, executive compensation, and sustainable finance. He has also written extensively for practitioner outlets like the Harvard Business Review and the Wall Street Journal, discussing issues like CEO pay, sustainable investing, and the intersection of corporate purpose and profit. His work has been featured in numerous media outlets, including BBC, Bloomberg, and CNN, sharing his insights on finance and economics.

In addition to his academic achievements, Alex has served on advisory councils for organizations such as the Federal Reserve Bank of Philadelphia, the World Economic Forum, and Novo Nordisk. He is a Fellow of the Academy of Social Sciences and the Financial Management Association, and a distinguished fellow of the Kenan Institute. Edmans received an honorary doctorate from Open Universiteit and the Finance for the Future Jeffrey Unerman award.

THE PARADIGM

PIECONOMICS

“Pieconomics is about growing the pie, not fighting over how to slice it. When business focus on creating valuefor society, the benefits will be shared by everyone.”

Find here our initial analysis of values, institutions and theory of change.

Introduction to the approach

"Pieconomics" refers to a "new approach to business that works for both investors and society". It proposes a framework for corporate governance and investment that aligns the interests of all stakeholders with the overarching goal of growing the economic pie for the benefit of society as a whole. In Pieconomics, companies seek to create profits only by generating long-term sustainable "social value", focusing on strategies that benefit not only shareholders but also employees, customers, communities, and the environment. The concept emphasizes a focus on the growth of the economic pie, rather than zero-sum splits of the pie that pit the interests of different stakeholders against each other.

Core Values and Beliefs

Pieconomics advocates for purpose-driven companies to prioritize social value creation over profits, suggesting purpose and profit are not in conflict. It suggests that maximising social value often maximises profits, based on a number of empirical studies that demonstrate the correlation of corporate financial and social profitability in the long term. It also emphasizes the "comparative advantage" of businesses in generating profitable social value and critiques the traditional focus on merely avoiding harm through CSR.

Pieconomics identifies the primary failure of companies as their inability to generate sufficient social value, or worse, their destruction of value due to inefficiency or negligence ("error of omission"), rather than the over-benefitting of CEOs or investors ("error of commission"). Enterprises serve stakeholders not by giving them a larger slice of the pie, but by growing the pie through business excellence. Pieconomics underscores the importance of profit maximization as socially desirable whenever it stems from benefiting society - while profits are merely the by-product of creating value, social value creation is inherently good business. The approach emphasizes collaborative efforts among stakeholders to create social value and opposes excessive regulation, while empowering leaders and and above all investors to drive social value. In terms of externalities, shareholder interests are primary but due considerations of externalities is necessary to earn the public's trust and maintain a social license to operate.

Notably, an unequal distribution of benefits is considered acceptable if it leads to greater overall societal benefit. Furthermore, where trade-offs are necessary, game theory appears to illustrate the instrumental rationality of pursuing even minimum gains over zero outcomes. In practice, distribution is not considered exploitative when stakeholders attain at least equivalent benefits to their "exit option".

institutions

Political/Economic Institutions
While generally critical of regulation, Pieconomics advocates for regulatory frameworks that address externalities, redistribute benefits from pie growth, and facilitate the dissemination of best practices. It suggests some regulatory reforms aimed at reducing short-termism in financial markets, such as changes to accounting standards, taxation policies, and corporate reporting requirements. Furthermore, it underscores the collective responsibility of the investment management industry in promoting social stewardship, emphasizing the role of shareholders, proxy advisors, financial analysts and asset managers in driving positive change through long-term financial incentives and dedicated stewardship resources.

Corporate Governance
Pieconomics underscores the significance of robust corporate governance mechanisms, advocating for active investor engagement to enhance governance standards and ensure management decisions prioritize long-term value creation and accountability to stakeholders.

Long-term oriented stewardship: Pieconomics highlights the value of investor engagement and monitoring in driving positive outcomes for society. It suggests that purposeful and concentrated hedge funds, backed by substantial resources and incentivized for long-term performance, can effectively provided specialist engagement with and monitoring of companies to promote (social) value creation and discipline underperformance. Additionally, it acknowledges the role of mutual funds in offering generalised engagement, and of large long-term investors or blockholders in shielding companies from short-term pressures. It suggests that protection from shareholder pressure may have varying impacts depending on the circumstances, suggesting a need for tailored investor rights.
Alignment of Incentives: Pieconomics advocates for aligning the interests of managers and shareholders with long-term value creation through strategies such as offering restricted long-term stock, which would be held even after retirement. It critiques the negative effects of LTIPs, complex bonuses, and performance conditions, suggesting that they can hinder long-term value creation. Additionally, it argues against limitations on CEO pay, asserting that compensation are relatively small compared to enterprise value and are not detrimental to employee compensation or effective in addressing social inequality.
Share buybacks: Pieconomics offers a nuanced perspective on share buybacks, highlighting their potential benefits when used strategically, such as investing in own stock during periods of low investment opportunities and surplus cash. It suggests that buybacks can be a preferable method for returning surplus cash compared to dividends, as they are flexible and can target investors with less long-term orientation. However, Pieconomics acknowledges evidence suggesting that buybacks can destroy value, particularly when driven by short-term earnings forecasts or equity vesting considerations.
Transparency and Disclosure: Pieconomics emphasizes the importance of transparent reporting and disclosure practices, particularly regarding environmental, social, and governance (ESG) metrics, to enable investors and stakeholders to assess a company's long-term sustainability and societal impact accurately. It advocates the use of qualitative indicators next to quantitative ones and it cautions against some practices such reporting of quarterly earnings which tend to strengthen short-termism.

Organisations
Pieconomics advocates for businesses to prioritize operational excellence as the best form of service over philanthropic efforts. This requires businesses to set and communicate a clear and shared purpose. A purpose statement should define the company's reason for existence and who it serves, extending beyond just customers while being focused and selective to enable the prioritization of investments and efforts. The purpose should be both deliberate and emergent, integrating top-down and bottom-up perspectives. Additionally, enterprises should establish long-term targets for each stakeholder purpose and incorporate purpose into various aspects of their operations, including strategy, operating models, culture, reporting, and governance.

Stakeholder Engagement: Pieconomics advocates for companies to actively engage with a diverse array of stakeholders, viewing them as partners in enhancing stakeholder capital. He proposes implementing a "say-on-purpose" mechanism for investors and establishing a dedicated board committee focused on corporate responsibility.
Measuring Impact: Pieconomics recommends that companies measure their societal impact alongside financial performance. This entails developing metrics for ESG factors alongside financial outcomes. Initiatives like the Embankment Project for Inclusive Capitalism offer frameworks for assessing impact across various stakeholder groups, which should be seamlessly integrated with narrative and company-specific data.
Employee Ownership and Engagement: Emphasizing the pivotal role of employee ownership and engagement in driving organizational success, Pieconomics suggests empowering employees through ownership, investment, and rewards such as company shares. When employees feel a sense of ownership and are actively involved in decision-making processes, they are more inclined to positively contribute to the company's performance.
Leadership and Culture: The approach underscores the significance of leadership and culture in shaping a company's approach to balancing purpose and profit.

Investment decisions
Pieconomics acknowledges the importance of profits as societal indicators but emphasizes leaders' intrinsic motivations to serve society, recognizing the limitations of instrumental and quantitative financial decision-making, particularly in uncertain or intangible contexts. It warns against a profit-maximizing mindset that may result in minimal investment for social value, failing to differentiate the company positively. While some actions may not directly maximize profits, Pieconomics contends that most value eventually translates into financial value in the long run, particularly if material stakeholder interests are taken into account.

Under Pieconomics, value creation hinges on ensuring that the benefits of investments outweigh their costs, with companies deploying societal resources only when they generate greater benefits than alternative uses, thereby maximizing overall social value. Leaders are urged to adhere to three investment principles: a) multiplication: ensuring that social value surpasses company costs, b) comparative advantage: that it social value exceeds opportunity costs (compared to other companies utilizing equivalent resources), and c) materiality: that investments are relevant to the core business (e.g. deploying "materiality maps"). This approach acknowledges that companies typically have comparative advantages in their own activities or specific areas of expertise, although tough prioritizations may at times be necessary, potentially involving compensating "losing" stakeholders. Overall, the company should deliver a "net benefit" to society, adding up the positive and negative effects on each stakeholder, weighed by materiality.

Change and Transformation Approach

The transformation towards Pieconomics is primarily driven by a shift in mindset among leaders, investors, and stakeholders. This involves recognizing the value of purpose-driven decision-making, prioritizing social value creation alongside profits, and redefining success metrics to include broader societal benefits. Additionally, Edmans advocates for increased transparency, collaboration, and accountability within organizations, empowering leaders to make decisions that prioritize long-term value creation for all stakeholders. Through education, advocacy by citizens, employees and consumers, and practical implementation of Pieconomics principles, the transformation can be gradually realized, leading to a more sustainable and inclusive form of capitalism.

Key Issues

Pieconomics seeks to prove that the challenges of contemporary capitalism can be addressed within the current system. It challenges a prevailing "pie-splitting" mentality and the perception of capitalism as being inherently rigged, instead advocating for a "pie-growing" mindset shift that aligns profit motives with broader societal interests and positions stakeholders as natural partners. It challenges conventional wisdom in the field of finance by demonstrating that social performance leads to positive long-term effects on productivity and share performance or as Edmans explains "considering a financially material factor such as social performance isn't the exclusive domain of 'responsible' investing - it's plain and simple investing. It also offers evidence-based counterarguments to (allegedly) populist measures, such as limiting CEO pay or share buybacks, as well as questioning the effectiveness of nationalisation or increased regulation.

the Webcast

Join The Interactive Exploration

Find here all live video recordings within 7-14 days after the event.

Plus, additional materials, comments and answers to Q&A questions.

Watch the recording by section

Find here the videos from our live session in four parts:

Introduction: agenda setting and warm-up questions
Guest Presentation: introduction of our guest and main presentation
Exploratory Q&A: open discussion about values, institutions and change theory
Meta Inquiry: see more information below

Watch the full recording on YouTube (1:26h)

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Practitioner's Forum

Here you can find the most memorable comments, questions and shared resources from the plenary conversation.

KEY QUESTIONS FROM Practitioners' Forum

Here you can find the most memorable insights, comments, questions from you, the community. Simply select from the drop down menu on the right -->

Questions from the community

Francoise Orlov: A question for Alex, why would move out of banking to teaching? What's Alex definition of harm?
Paul Lazo: Did Vodafone do this because it saw an opportunity to make money or help people?Maybe another way to look at it is if Vodafone did not see it could make enough money, they would have never done it?
I agree the Mafia is a good example of a purposeful organization. They just have a moral compass pointing in another direction.
Matyas : What was / is vodafone's Purpose here? If they had an articulated Purpose, are they still pursuing it since then? It feels like a "seen an opportunity, grabbed an opportunity" on ist own.
Is - in this context - the purpose the implementation of "fall in love with the Problem, not the solution"? Giving you a direction, but also flexibility to approach the challenge while staying connected to your customers? Any thought on this?
That was the essence of my Question. Do we expect a purposeful Company to be also morally positive?
Paul Barnett: How many directors would know what the stated purpose of the company they are directing is? And how often does the stated purpose reflect the real purpose - the latter evidenced by when it does?
What was Vodafone's stated purpose? Was it the same as their REAL purpose?

Presentations and Core Concepts

Here you can download all available presentations for free!

Definitions

Social Value

Social value is "the pie", the value a company creates for society. It is long term "net" value, beyond profits for shareholders, which a company creates for its stakeholders.

Corporate Governance

Is a system of rules, practices, and processes by which a company is directed and controlled.

Enlightened Shareholder Value (ESV)

ESV (Enlightened Shareholder Value): a corporate governance concept advocating for long-term value creation for all stakeholders, not just shareholders. The aim of this paper is to ascertain and then evaluate the impact of ESV. The concept was seen by many as ground-breaking. Has it lived up to that billing? What effect or influence has ESV had on company life?

Creating Shared Value (CSV)

Creating shared value is a framework for creating economic value while simultaneously addressing societal needs and challenges. When businesses act as businesses—not as charitable donors—they can improve profitability while also improving environmental performance, public health and nutrition, affordable housing and financial security, and other key measures of societal wellbeing. Only business can create economic prosperity by meeting needs and making a profit, creating infinitely scalable and self-sustaining solutions.

Stakeholder Theory

Stakeholder Theory is a view of capitalism that stresses the interconnected relationships between a business and its customers, suppliers, employees, investors, communities and others who have a stake in the organization. The theory argues that a firm should create value for all stakeholders, not just shareholders.

Downloads

Business for Humanity Presentation

Download full presentation with the session slides as PDF file

meta inquiry for experts

Reflecting Deeper From Multiple Perspectives

Expand your horizons by engaging in critical reflection on each paradigm within the context of fundamental philosophical, political or economic questions

Glean deeper insights through comparative analysis across various approaches to enrich your journey forward.

Watch the Meta Inquiry

In this section, we take on the role of "transformation scientists" to explore the proposed alternative theory from a broader perspective. Using a standard inquiry framework, we focus on three key areas: a) core values, b) institutional changes, and c) change and transformation strategies. This approach allows us to analyze each aspect in greater detail, identifying its unique features while also comparing it to other frameworks and theories to gain deeper insights.

Executive Summary

The Meta Inquiry

Let's step into the role of "transformation scientists" and examine Pieconomics from a broader perspective, attempting to categorize it within existing frameworks and seeking out its specificities to extract deeper insights.

Overall categorisation

Overview of Economic Flows (slide 1): The graphic represents familiar economic flows inherent in capitalism. It illustrates resource allocation to businesses, production of goods and services, profit generation, and interactions between the private sector, government, and financial institutions. Green arrows signify maximized flows, while red denotes minimized costs.
Compared to the Economy of the Common Good, Pieconomics suggests very few explicit interventions in the economic system. It proposes that by reorienting the economy towards social value (defined mainly as profit plus externalities), an acceptable relationship between purpose and profit can emerge. This shift needs to be actively supported by purposeful investors, who must steward companies to create social value, as well as management and employees, customers and citizens. Furthermore, state-led redistribution remains necessary to protect social welfare and correct market failures, especially where externalities are not fully included in long-term share prices.
Pieconomics does not seek to reform but rather to reinterpret capitalism. As such it remains closes to a classical liberal position.

a) Core Values

In our comparison of political ideologies, we apply our standard framework to confirm that Pieconomics aligns predominantly with classical liberalism, represented by the yellow paradigm at the bottom. To delve deeper into its placement concerning corporate governance approaches, we propose a comparison (slide 2) between Pieconomics and three other models: Enlightened Shareholder Value (ESV), Stakeholder Capitalism, and Creating Shared Value (CSV).
ESV advocates for shareholder primacy and profit maximization, often treating sustainability considerations as a risk mitigation strategy for long-term business viability. It emphasizes maintaining the company’s profitability over time while adhering to minimum legal standards to avoid reputational repercussions.
Stakeholder capitalism asserts that businesses should consider the interests of all individuals or groups affected by their operations, not just shareholders. This approach grants additional rights to other stakeholders, curbing the supremacy of shareholders. It places strong emphasis on social justice, including employee welfare and environmental sustainability, with mandatory disclosure.
Creating Shared Value (CSV) posits that companies can simultaneously create economic value for themselves and social value for society by addressing societal needs and challenges through their core business activities. In the “updated version” proposed by Kramer, CSV arguably shifts toward a more communitarian approach, emphasizing shared purpose, mutualistic care, and collaboration among local and global actors.
While Pieconomics employs terminology spanning multiple categories, we contend that its focus aligns most closely with ESV (yellow). Although it differentiates itself by emphasizing social value over profit, this social value remains primarily expressed in terms of long-term profitability. Pieconomics allows for more intrinsically motivated decisions but does not fundamentally challenge the primacy of investors. Furthermore, it arguably does not advocate for minimum rights for stakeholders (as in the Orange model) nor explicitly endorse the more systemic and mutualistic engagement seen in later versions of CSV.

b) Institutional Changes

Institutions: Edmans emphasizes that "first and foremost, responsible investment is simply good investing." Therefore, significant institutional changes are deemed unnecessary. The book's central thesis is that if corporations prioritize delivering social value by leveraging their comparative advantage, they can at the same time achieve long-term shareholder value and profits. What is needed primarily is a mindset shift from pie-splitting to pie-growing, which then naturally leads to further developments. To explore the institutional suggestions of Pieconomics, we have created a follow-up slide illustrating recommended changes in market liberalization, the mixed economy, and civic empowerment
Market liberalisation: Removing market failures is key. First pieconomics suggests a number of measures to reduce short-termism such as abolishing quarterly reporting. Second, pieconomics suggest to prohib practices whose negative externalities outweigh any benefit and to mandate practices whose positive externalities outweigh any cost.

Mixed economy and redistribution: The overall direction is to use regulation and redistribution with some restraint and only on a strict evidence-based basis.

Civic empowerment. Pieconomics suggests several key elements to drive the needed mindset shift: purpose has to be embedded throughout the entire organisation and needs to owned by employees, stewarded by investors and guarded by customers and influencers. The most significant mindset shift he advocates for is within the finance industry. Edmans emphasises the crucial role of investors in practising stewardship and holding companies accountable for their purpose.

c) Change and Transformation Strategy

Pieconomics is focused on incremental change rather than a complete overhaul of the system. The narrative is based on current market dynamics and aims to reinterpret rather than reinvent capitalism. The philosophy is geared towards fixing the system, not fundamentally changing it. From a motivational perspective, Pieconomics proposes that actors are intrinsically motivated to create both financial and societal value. This intrinsic motivation applies to employees, CEOs, and investors alike, encouraging them to add value and, consequently, create broader benefits. Pieconomics outlines a clear set of key actors within the business community: investors, employees, customers, and CEOs, with the dynamic interaction between these players being a driving force. The strategy for collective action among these change-makers, though, remains unclear.
We have searched for some studies, to explore how these assumptions are met in practices:

Motivation of Actors: Pieconomics relies very strongly on well-intentioned actions of the financial industry. Yet research seems to suggests that the finance industry is in general more materially oriented, while prosocial motivation and integrity tend to be rare. The article on the left demonstrates through well-conducted experiments that the prevailing business culture in the banking sector can be problematic and is associated with increased dishonesty. Such culture is said to weaken and undermine the honesty norm. The article on the right seeks to demonstrate that finance professionals are less risk-averse, less trustworthy, show higher levels of psychopathy, and are more competition-oriented than the general population. These findings are troubling, especially given the emphasis Pieconomics places on these groups to perform beyond their self-interest.
Role of Consumers as Key Actor: Pieconomics also places significant emphasis on the active role of customers. It assumes that customers will react positively to grow-the-pie companies. Although studies indicate a higher willingness to pay for such companies' products and services, a frustrating paradox remains: few consumers who report positive attitudes toward these products and services actually follow through with their wallets.
Obstacles to collective action: Finally the recent pushback against ESG (Environmental, Social, and Governance) initiatives may act as warning for those who believe that collective action for social value is a natural thing to occur. ESG, encompassing “sustainable,” “responsible,” and “impact” investment, is now facing significant criticism and consequences from overreach. In the U.S., ESG faces outright hostility from political opponents, particularly in Republican states. This pushback is also emerging in Europe, where newly emboldened sceptics are challenging ESG’s principles and promises. This trend is particularly concerning given the anticipated growth of populist right-wing politics in the Netherlands and Europe in general. Recent headlines, such as Unilever stepping back from their proposed sustainability efforts, highlight the potential significance of this development. All these political initiatives will undermine successful collective action in the direction of pieconomics.

Pieconomics vs ECG

The table compares Pieconomics and the Economy for the Common Good (ECG) across several dimensions.

Pieconomics focuses on creating social value and financial returns, emphasizing responsible capitalism, long-term thinking, and voluntary collaboration between investors, corporations, and governments. It proposes changes to corporate governance to align financial interests with social value and encourages purposeful, long-term investment. Transformation is driven by a mindset shift among key stakeholders.

In contrast, ECG prioritizes social and environmental sustainability, ethical business practices, economic democracy, and corporate responsibility. It advocates for political reforms, alternative economic indicators like the Common Good Product (CGP), and legal frameworks that reward contributions to the common good. ECG also calls for financial reforms to prevent speculative activities and promote responsible investment, with a focus on grassroots movements and legal reforms to transform economic systems.

Meta Inquiry Presentation for Revision and Download

DIVING DEEPER

Looking for further insights?

Find here additional resources and books related to the session

Dive into further academic research on performance management.

FURTHER READINGS AND RESOURCES

Alex's Website

Would you like to find out more about the professor, author and popular speaker Alex Edmans? Then visit his website

London Business School Website

Learn more about Alex's academic work as Professor of Finance at the London Business School

Grow the Pie

To learn more about Alex's bestselling book Grow the Pie, which was the basis for this episode of Business for Humanity, visit this website

TEDx - Pie-Growing Mindset

Could it be possible that the pursuit of a pro-social purpose also happens to be the best way to generate profit over the long term? Alex Edmans will show us why there is a business and financial case for purpose, not just a moral and ethical case.

Company purpose and profit coexist?

The paper examines how company purpose and profit do not need to be in conflict with each other.According to Alex, however, this is only possible if we grow the pie.

An alternative to shareholder capitalism?

"Grow the Pie" provides an alternative approach to business called Pieconomics. Profits to shareholders play a critical role in Pieconomics (similar as in shareholder capitalism), but the goal of an enterprise is to maximize the socialvalue it creates (somewhat similar as in stakeholder capitalism). This review discusses and critically evaluates this thesis.

The End of ESG

ESG is both extremely important and nothing special. It's extremely important because it's critical to long-term value, and so any academic or practitioner should take it seriously, not just those with “ESG” in their research interests or job title. Thus, ESG doesn't need a specialized term, as that implies it's niche—considering long-term factors isn't ESG investing; it's investing.

Does the stockmarket fully value intangibles?

"This paper analyzes the relationship between employee satisfaction and long-run stock returns. A value-weighted portfolio of the “100 Best Companies to Work For in America” earned an annual four-factor alpha of 3.5% from 1984 to 2009, and 2.1% above industry benchmarks. The results are robust to controls for firm characteristics, different weighting methodologies, and the removal of outliers.

Executive Compensation

This paper reviews the theoretical and empirical literature on executive compensation. We start by presenting data on the level of CEO and other top executive pay over time and across firms, the changing composition of pay; and the strength of executive incentives. We compare pay in U.S. public firms to private and non-U.S. firms. We then critically analyze three non-exclusive explanations for what drives executive pay -- shareholder value maximization by boards, rent extraction by executives, and institutional factors such as regulation, taxation, and accounting policy. We confront each hypothesis with the evidence. While shareholder value maximization is consistent with many practices that initially seem inefficient, no single explanation can account for all facts and historical trends; we highlight major gaps for future research.

Governance through trading and intervention

Traditional theories argue that governance is strongest under a single large blockholder, as she has high incentives to undertake value-enhancing interventions. However, most firms are held by multiple small blockholders. This article shows that, while such a structure generates free-rider problems that hinder intervention, the same coordination difficulties strengthen a second governance mechanism: disciplining the manager through trading.

Book Review on Grow the Pie

We took our summary from this book review which delves deeper into the underlying ethical framework of Alex Edmans book and discusses critically some inconsistencies.

UNETHICAL CULTURE OF FINANCE INDUSTRY

According to popular opinion, unethical business practices are common in the financial industry; here, the employees of a large, international bank are shown to behave, on average, honestly in a laboratory game to reveal dishonest behaviour, but when their professional identity as bank employees was rendered salient, the prevalence of dishonest behaviour increased.

Does Finance Benefit Society

Academics’ view of the benefits of finance vastly exceeds societal perception. This dissonance is at least partly explained by an underappreciation by academia of how, without proper rules, finance can easily degenerate into a rent-seeking activity. I outline what finance academics can do, from a research point of view and from an educational point of view, to promote good finance and minimize the bad.

personality traits among finance professionals

Based on artefactual field experiments, we investigate whether finance professionals differ from a sample of the working population in terms of industry-relevant preferences and personality traits. When adjusting for socioeconomic characteristics, we find only few and less marked differences: finance professionals are less risk averse, less trustworthy, show higher levels of psychopathy and are more competitive than participants from the general population. In an additional survey, experts with hiring experience consider industry selection, self-selection and imprinting by industry norms as explanatory for the observed subject pool differences.

Activist Hedgefonds the New Titans

Deploying more than $65 billion in capital globally and with more than 900 campaigns in 2018, activist hedge funds represent “the activist” in the capital market and have a significant influence on corporate governance and strategy and even the ownership of companies.

Hedge Fund Activism vs. Corporate Shareholder Activism

How do firms alter their strategic actions when targeted by different types of activist shareholders? We argue that hedge fund activists threaten firms in ways that lead them to conserve resources and to scale back and simplify their strategic actions, which refer to long-run competitive actions requiring substantial investment. By comparison, corporate shareholder activists bestow firms with new resources and freedoms that increase their flexibility to expand and complexify their strategic actions.

Activist Hedgefonds Targetting Socially Responsible Firms

We develop and test a theory of how unintended audiences create reaction costs for firms that use corporate social responsibility (CSR) as a signal. We introduce and define reaction costs as costs that signal senders incur when unintended audiences react negatively to a true signal that was intended for another audience. We argue that activist hedge funds—an unintended audience—treat CSR as a signal that firms have wasteful intentions and capabilities, which prevent firms from maximizing shareholder value in the short term. On that basis, we hypothesize that activist hedge funds are more likely to target firms with higher levels of CSR, thus imposing reaction costs on these firms

Creating Shared Value

The capitalist system is under siege. In recent years business increasingly has been viewed as a major cause of social, environmental, and economic problems. Companies are widely perceived to be prospering at the expense of the broader community.

Contesting the Value of Shared Value

This article critiques Porter and Kramer's concept of creating shared value. The strengths of the idea are highlighted in terms of its popularity among practitioner and academic audiences, its connecting of strategy and social goals, and its systematizing of some previously underdeveloped, disconnected areas of research and practice. However, the concept suffers from some serious shortcomings, namely: it is unoriginal; it ignores the tensions inherent to responsible business activity; it is naïve about business compliance; and it is based on a shallow conception of the corporation's role in society.

Do CEOs Get Paid too Much

In 2003, CEOs of the 365 largest U.S. corporations were paid on average $8 million, 301 times as much as factory workers. This paper asks whether CEOs get paid too much. Appealing to widely recognized moral values, I distinguish three views of justice in wages: the agreement view, the desert view, and the utility view. I argue that, no matter which view is correct, CEOs get paid too much. I conclude by offering two ways CEO pay might be reduced.

Meritocracy a Myth?

Work plays a crucial role in rising social inequalities, which refer to unequal opportunities and rewards for different social groups. Whereas the conventional view of workplaces as meritocracies suggests that work is a conduit for social equality, we unveil the ways in which workplaces contribute to the accumulation of social inequality. In our cumulative social inequality in workplaces (CSI-W) model, we outline how initial differences in opportunities and rewards shape performance and/or subsequent opportunities and rewards, such that those who receive more initial opportunities and rewards tend to receive even more over time.

Organisations and Societal Ecnomic Inequality

We review research on the organizational causes (how do organizations contribute?) and consequences (how are organizations affected?) of economic inequality

Future of the Corporation and the Economics of Purpose

This article examines the economic underpinnings of the concept of corporate purpose, which has gained increasing attention from business academics, practitioners and policymakers. It argues that there are fundamental reasons for reconceptualizing the purpose of business in the future which derive from the changing nature of business and the market failures to which it gives rise.

Changing the Purpose to Rebalance Capitalism

Solving the great problems of our time will require reimagining capitalism by balancing the power of the free market with capable, democratically accountable government and strong civil society. Changing the purpose of the firm has the potential to make this process of rebalancing significantly easier. Purpose-driven firms could be catalysts in the drive for systemic change by supporting transformation within their own industries, supporting cooperation in the public interest and modelling public/private partnerships, and supporting the strengthening of global democracy

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The Good Leadership Blog

Curious to see more from our inquiry? A good place to start is our blog with all recent leadership articles and posts.