For years, the business sector has been under increasing pressure to recognize and assume its responsibility to society and to contribute to solving major challenges such as climate change and social inequality. Business is still often done at the expense of the environment and people. At the same time, firms have more resources and power than ever before to address the problems society is facing today – a potential that should not remain unused. But the idea that social responsibility comes at the expense of profitability is still widespread among business leaders and in society in general.
Alex Edmans, finance professor at London Business School, believes the time has come to fundamentally rethink the purpose of companies: Business leaders should set the creation of social value as their primary purpose. According to Edmans, profits are important but should be a by-product of service to society rather than the ultimate goal. Based on rigorous empirical research he argues that enterprises that seek to create profits only through creating value for society are more profitable in the long run than those pursuing profits directly.
We have invited Edmans to present his 2020 book “Grow the Pie: How Great Companies Deliver Both Purpose and Profit”, followed by a discussion with Raji Jayaraman, associate professor of economics at ESMT Berlin and Jörg Rocholl, president of ESMT Berlin.
The pie Alex Edmans is referring to in the title of his book represents the value an enterprise creates for society, that is for colleagues, customers, suppliers, the environment, government, communities and investors. Business does not have to be a zero-sum game, he argues, if a pie-growing attitude is adopted that aims to increase the value that an enterprise creates for society, for example through inventing new and better products, developing and nurturing its workforce, or renewing the environment. This is argued to be a more realistic mindest, rather than thinking of a fixed pie where one member’s slice can only be increased by reducing others’. Accordingly, Edmans sees the major way that enterprises fail to serve society not in errors of commission (such as overpaying their leaders) but errors of omission (failing to grow the pie by coasting rather than innovating). In his view purpose does not mean to “do no harm”, but rather to “actively do good”.
The discussion following the book presentation dealt with incentives for managers and employers and why the convergence of purpose and profits has not been implemented on a larger scale, the role government regulation has to play, and how to avoid greenwashing.