As sustainable investing becomes mainstream, does it create more wealth or just divide the same money differently? Barron’s recently sat down with scholar and researcher Alex Edmans to help answer that question.
Edmans is known for his pioneering work on corporate social responsibility, dating back to his 2011 article, “Does the stock market fully value intangible assets? Employee satisfaction and stock prices.” Today he is professor of finance at the London Business School and author of the book “Growing the Cake: How Great Companies Offer Both Purpose and Profit.” An edited version of the conversation follows.
Barrons: A belief you often come across is that sustainability is about dividing the pie differently between shareholders and other stakeholder groups. What does sustainability mean to you and what does your pie look like?
Edmans: Sustainability is about creating value for society at large. So caring about workers and customers and the environment etc. Now, where I differ from a lot of people is that people think well, the only way to care about all these things is to sacrifice profits to do so. So they have a fixed cake in mind. And the only way to help your workers is to pay them more and so on.
The reason I think that’s a limited perspective is that there are a lot of things companies can do to help their employees, to help society, without sacrificing profits. It is therefore enough to treat your workers well, by delegating to them, by empowering them. This is something that is not only good for the employees but also increases the productivity of the business because you are able to ensure that you are leveraging the strengths of the employees, you are using them to generate ideas, rather than simply to implement your own instructions. And now, this idea of win-win: win-win where employees and shareholders will benefit may seem like wishful thinking. That’s why the core of the book is driven by evidence to show that it is.
Do you encounter a lot of resistance to the idea of making the pie bigger rather than dividing it?
Yeah, I think it’s because the zero-sum mentality is pretty inherent, like when we play games as kids, if one person wins, the other loses. And often people think well, if you can say how much you sacrifice to help your employees, it’s just a much bigger gesture than saying no, I treat them well and I support them. And that’s why I think the cake-sharing mentality is prevalent.
What is the current discourse on sustainability? Has he changed?
Yeah, so it’s changed a lot in the 15 years I’ve been in the business and the change is really profound. When I started doing this, nobody cared. So if you went to a conference, the investors there wouldn’t be the BlackRocks of the world. They would be investment companies, which would have a specific social mission, but they would not be a consumer company like
What we’ve really seen now is that traditional investors like BlackRock are getting into it now, but I feel like the pendulum has swung too far the other way, in that there’s now has a lot of focus on sustainability as if profit is an afterthought profit is a dirty word companies should only care about sustainability and they should do everything they can to fight change climate and improve racial and ethnic diversity. So these are clearly causes close to my heart, I myself am an ethnic minority, but we have to realize that businesses have to be profitable. Why? Because profits are important to provide returns to investors like pension funds, insurance companies, etc.
And so it’s very easy for investors or companies to say that we serve society at large. I think it’s so reversed that now companies and investors are making these really blunt statements, which are very one-sided, not realizing that we have to balance both purpose and profit, which is the approach of cake growth that I’m trying to highlight.
What is a determined CEO?
What people think of as a truly determined CEO is wrong in at least two dimensions. The first is a misunderstanding of what intentional means, so people think of intentional as meaning altruistic. A determined CEO is one who cares about employees and the environment, customers, suppliers, communities, etc. If you think of the useful word etymologically, purpose means to be focused. If I wish to have a useful meeting. It’s one with a clear agenda. If I do something on purpose, I do it deliberately. Purpose means focusing on a few really important issues.
A determined CEO is someone who is determined to create value for society at large, even if that value creation is not immediately visible and cannot be trumpeted.
You are a big proponent of the business case for sustainability.
What really interests me about this topic is the business case for sustainability and its purpose, and so many people think about the moral and ethical argument for doing this because it’s the right thing. And some advocates are sort of corporate guilt and say do it because you have a moral obligation to serve society at large, but the problem with that is twofold:
First, what is your moral obligation? Different people say it’s different things. So someone might say it’s your moral obligation not to test on animals, and other people will say no, it’s absolutely moral because I care more about humans. So different people have different morals. This is why it is difficult to examine the moral argument.
And second, if you’re just basing it on a moral argument, then any stubborn CEO will realize that’s secondary. I need to make profit. It’s not because I’m callous, but my business has to survive.
So what I’m trying to do is bring out a business case that yes, these things are moral and ethical, but also these things are just good business.
Thank you Alex.
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