INSIGHT by Alex Edmans


Grow the Pie: How Great Companies Deliver Both Purpose and Profit

A Financial Times Book of the Year for 2020

 

Capitalism is in crisis. The consensus among politicians, citizens and even executives themselves – on both sides of the political spectrum and throughout the world – is that business just isn’t working for ordinary people.

The 2007 financial crisis cost nine million Americans their jobs and 10 million their homes. The economy has recovered since then, but the gains have largely gone to bosses and shareholders, while ordinary incomes have stagnated. In 2018, just 26 tycoons owned the same wealth as the 3.8 billion poorest citizens in the world.

Corporations affect not only people, but also the planet. The environmental costs created by business are estimated at $4.7 trillion per year. Notable examples are the Deepwater Horizon disaster, which spilled five million barrels of oil into the sea, and Volkswagen’s dodging of emissions tests, which caused an estimated 1,200 deaths in Europe alone.

Citizens, and the politicians who represent them, are fighting back. The precise reaction varies – occupy movements, Brexit, electing populist leaders, restricting trade and immigration, and revolting against CEO pay. But the sentiment’s the same. “They” are benefiting at the expense of “us”.

While radical calls to reform business drum up significant support, they risk throwing out the baby with the bathwater and ignore the positive role that businesses can play in society. 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. Merck’s drug Mectizan has substantially reduced river blindness worldwide; Vodafone’s mobile money service M-Pesa has lifted 200,000 Kenyans out of poverty; and Google’s maps, search engines and shared documents make millions of lives easier each day. Moreover, successful businesses generate profits. Profits aren’t evil value extraction, but serve a crucial role in society, providing returns to parents saving for their children’s education, pension schemes investing for their retirees and insurance companies funding future claims.

Viewing business as “them” and society as “us” is an example of the pie-splitting mentality (see Figure 1). It sees the value that a company creates as a fixed pie. Thus, any slice of the pie that goes to business reduces the slice enjoyed by society. In this view, the best way to increase society’s take is to straitjacket business so that it doesn’t make too much profit. Sadly, the pie-splitting mentality is practiced by many CEOs, too. They think the best way to increase profit is to reduce society’s slice by price-gouging customers or exploiting workers.

 

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Business and society, in this view, are enemies. And the battle they’ve been fighting has been around for centuries. Think of the late 19th century robber barons who created giant monopolies such as Standard Oil; policymakers responded by breaking some of them up. Or trade unions in the 1970s, followed by legislation that caused their decline. Or the rise of big banks in the early 20th century which culminated in the 1929 financial crisis and their regulation by the Glass-Steagall Act – itself partially reversed since the 1980s, contributing to another crisis in 2007. Unless we can come up with another way, this movie will keep on being replayed.

 

 All opinions expressed are those of the author and/or quoted sources. investESG.eu is an independent and neutral platform dedicated to generating debate around ESG investing topics.

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