Disclaimer: The following transcript is the output of an audio recording. Although the transcription is largely accurate, in some cases it is incomplete or inaccurate due to inaudible passages or transcription errors. Every possible effort has been made to transcribe accurately. However, neither Beautiful Business nor The Wow Company shall be liable for any inaccuracies, errors, or omissions.
Peter Czapp
So big question to start, tell us how businesses can maximise profit and be purposeful at the same time.
Alex Edmans
I think businesses can do that by being guided by purpose. So what does that mean? Well, first, what will happen if a business would not be guided by purpose, it would still do some great things for society. So let's say you're considering building an electric car factory, even if you don't care at all about climate change, you will still build that factory. Why? Because the economics is officially attractive, you can forecast that the profits that you're going to make from this are going to be positive because electric cars are the future. So firstly, to understand and acknowledge that purpose isn't everything, even without a purpose, company will do a lot of positive things. But despite that, I do think purpose is really powerful, why? There are many decisions that you could not reduce to a financial calculation like you could do predicting the cash flows of a car factory. If I was to choose to give my employees more parental leave, how can I calculate how much more productive and motivated they will be and turn that into some sort of forecast? I couldn't. And similarly, if I'm Vodafone, which 20 years ago, developed empezar, a mobile money service in Kenya, how can I calculate how much that will deliver in terms of profits, particularly because we're serving some of the poor was people well, so the idea of purpose is you do things just because it's the right thing to do, because it will create value, I'm gonna give my employees parental leave, because I care about them as people, not because I want to make them more productive. And I want to launch this mobile money service in Kenya, because I want to provide financial inclusion. And what that does is it inspires us to make some investments that we might not have done otherwise, if we had to justify everything with a profit calculation. And by freeing us to do more investments than what we otherwise whites might have, that then leads to profits that you can indeed deliver. But
Peter Czapp
perhaps you have a very particular definition of purpose and lots of businesses will be seeking to define their own purpose. What's your guidance for, for how they should should do that? What should they be thinking about?
Alex Edmans
Thank you to my guidance is that purpose is about being focused and targeted. And that's important, it's somewhat counterintuitive, because some companies think well, my purpose is to solve all the world's problems, it's to tick off all 17 Sustainable Development Goals, or to satisfy customers and employees and the environment and suppliers. That sounds great. And if your company with that purpose statement, people share it. But it's unrealistic because companies have limited time and limited resources. So just like a person's purpose might be to be a doctor, not a doctor, and a teacher and an entrepreneur, and the charity worker, somebody a company's purpose should focus on the specific social challenges that it has unique expertise and solve. And so going back to Vodafone, why did they choose to launch as mobile money service, because their expertise was in tech. And so that's why they chose to focus on that, rather than one of the world's many other challenges, like climate change, or other issues such a biodiversity. And so I think that's important for any company. It's a thing. Yes, there's lots of issues in the world. But I'm not the only company in the world. So I My goal is not to try and serve everything. But to try to focus on what issues I can really move the needle.
Peter Czapp
And you have this this lovely definition encourage businesses to think why they exist, who it serves, their reason for for being and also the role it plays in the world. What do you see some examples of businesses who are doing that really well? Yeah,
Alex Edmans
so just go back to that definition. So why you exist, who you serve, and that all has to be targeted what you can't try and serve everybody. So if you go back to Vodafone, it was to build a digital society that enhances socio economic progress. And that is targeted, right. It's focused on digitalization, but not digitization to make money, but in order to enhance progress, and so that's why it enabled them to move outside of their core business of just telephone services to something like mobile money. And I myself as a finance professor, I tried to define my own purpose is to use rigorous research to influence the practice of business. And so for me, that means why am I doing research it not stressful academic intellectual stimulation, but to influence the world the way the world acts and does business which is why I love to do interviews like this one, but I will accept this maybe over a academic seminar at a prestigious university, again, because my purpose is focused specifically on the use of reset for real world problems.
Peter Czapp
So what what influence do you want to have on businesses then what do you want your legacy to be?
Alex Edmans
It's to try to highlight purpose and profit are not in conflict with each other, which is why I really appreciate your opening question. So often we view the value that a company creates is given by a pie. And you can split that pie between investors in the form of profits and society in the form of fair wages, fair taxes and fair prices. And often what people think is that the more you give to wider society, the less you have in terms of profits. And so that's why many companies either will be quite sceptical about purpose, or they'll claim it, but not put it into practice. And why would you put into practice if it reduces my profits, but what a lot of my research and my involvement with companies are trying to highlight it, these things are often in conjunction with each other and supportive, is that purpose does not split the pie differently. It grows the pie for both investors and society, because a purpose that allows you and encouraged you and inspired you to take some investments that you might not have done otherwise, then that's not only good for society, it's also good for your long term profits.
Peter Czapp
And you mentioned Vodafone. And obviously, as an academic, I know that this will be backed up by research talkers, some of the research some of the data behind this this conviction that you have. Absolutely.
Alex Edmans
So if you want to find that purpose has some positive outcomes, how do you measure purpose to begin with? Now, you might think, let's look at a company's purpose statement. But you can say some nice stuff without actually putting it into practice. So maybe you might think, Well, let's look at who put their money where their mouth is, how much do you give to charity? Or how much do you pay your workers. But even that's not perfect, because it could be you're spending a lot of money, but not actually delivering outcomes, like any football fan, will know that the teams that spend the most money might not actually deliver the best results. So what I care about is not how much a company spends, but what value they deliver. So I looked at a measure of the 100 Best Companies to Work For in America, which is a list of companies that go above and beyond in how they treat their employees. Now, some of that might involve spending money on fair wages. But some of it might be just a great boss to provide meaningful work and mentorship and delegation. And those aspects also captured. They might think, Well, why do I focus on workers? Why not say climate change or water usage? It's because climate change is clearly really important. But it matters more for some industries, like energy than others, like tech, with employees, they matter in every company. So long story short, what I found was that these companies that treat their workers really well, they deliver long term shareholder returns, that beat their peers, by 2.3 to 3.8% per year, over a 28 year period. So that's 89 to 184% compounded. And so what that suggests is that companies who treat their workers well, they're not just being fluffy and nice. They're being business savvy. They're investing in their most important asset, growing the pie and ultimately benefiting shareholders. Now, there's other questions and concerns you might have visit colonisation, or is it causation? Is it treating my work as well leads to my company being better. Or once my company's already doing? Well, then I can spend money on my employees. So a lot of the research and the rigour I need to do is to tease apart those different explanations. But I won't bore you with that on today's webinar. But just the bottom line is that actually treating our workers well leads to superior performance, later, giving some rigour and some evidence to this idea of growing the pie, which might otherwise be seen as wishful thinking.
Peter Czapp
So there's a practical business benefit. Plus it's the right thing to do in terms of running a business with purpose. Why isn't everyone doing it? What what has traditionally stopped businesses doing it? And how have they overcome that?
Alex Edmans
I think there's two things which might have stopped them. So one of them is just the point splitting mindset is really ingrained in us. Right from when we're kids, right? If we play a game, how do you win, you make somebody else lose? And so you might think, well, what's the best way to increase my profits? It's to cut wages or charge customers as high prices as possible. So that's why while sort of the idea of win wins and purpose leading off, it might seem intuitive, it is actually quite counterintuitive to people who run businesses with the idea of a cut cut, low cost cutting and reducing investment. Now, the second and more nuanced answer is that even if a CEO is enlightened and believes in everything that you and I have been discussing, she might think, well, yes, the pie can grow. But it takes a long time to do that. And in the short term, if I'm going to invest in my employees or invest in reducing my carbon footprint, it will cut my profits. Yes, in the long term, it will pay off, but actually, maybe I'm evaluated according to short and profits. So what we need is a more holistic change. It's not just in the mindset of the CEO, but the metrics that a board will assess the CEO on the basis of, and also what investors will look at when they decide whether to sell or buy a company, or whether the to keep or remove the existing chief executive.
Peter Czapp
It's not just the chief executive, is it because you talked about the power of individuals and the power of individuals to create positive change? And have that great question, what is what is in my hand? What is the value that I can create? I know you have some stories around this, what? What can you share to illustrate this this point? Likely.
Alex Edmans
So this is really important, because we thought we talked about companies creating value, but companies don't create value. People create value, its people within companies. Now you might think, Well, only the CEO or the top management team can actually do this because they have the power. But I think that's actually not true. So I'll share a story from when I was in investment banking at Morgan Stanley, I started up right at the bottom as a junior analyst. And you think, Okay, I'm just at the bottom of the totem pole. Nobody works for me, I work with the associate who works with the Vice President, and so on. But I realised people did work for me, there was my secretary, there was the IT departments and perhaps the most abused department in an investment bank is known as the graphics department. So you give them a scribble of some slides, and they turn it into some beautiful PowerPoint. Now, often analysts would shout at graphics for not doing what you wanted in that was your fault for not explaining it clearly enough. So if I got good work back from graphics, I call them up, then I just say thank you, this was a great job. I don't want to say I did not do this to be seen as a goody goody. And to get a reputation for being nice. I just did it and say thank you. But because I was so junior, I didn't have my own office, I sat on the open plan floor. And then other other analysts heard me. And they started saying thank you themselves. And so this highlights that Eve is the most junior person, what you still will have some indirect influence, because how you behave, it's something that other people will notice. So the phrase for us is be the thermostat, not the thermometer. So a thermometer reflects the temperature around you, if everybody else is cutthroat, then you need to be cutthroat to survive. But a thermostat is something that changes the temperature. And I believe that everybody even if you're a junior person, you have the power to be a thermostat. So you might think, okay, let's say we're working from home, maybe sees how I act. But even how you reply to an email and those things, those will have a an influence on what other people
Peter Czapp
think. So being a thermostat, as you describe it there. Sometimes it takes courage. So you talked about the decision around Short Term versus long term results to invest for those long term results to make that leap to change behaviour to be the outliers. It takes a lot of courage. When Where have you seen businesses get that that courage from to make that leap and say, Well, we are going to make a stand here we are going to lead with with purpose.
Alex Edmans
So I think it's many people are looking at the evidence and suggesting Oh, yeah, these things are not just good for society. It's also good for shareholder value. But I also think that people who run businesses might think, well, there is some benefit over and above the shareholder value benefit is that we want to make sure that we're not just delivering the highest possible profits to our shareholders, but also doing so in a right way. So why might that be? Because maybe investors themselves want something from a company other than just long term returns. So if I'm a pension fund, I care about my pensioners in retirement. And clearly one way in which they will be have higher wealth and retirement is if they have a greater income. But they also want the planet not to be two degrees warmer, they also don't want there to be a lot of social unrest. So there are many investors, which is signalling to companies, we actually would like you to go faster on issues such as climate change, or diversity and inclusion, because our objectives are not just financial performance. Now, the important caveat here is that if CEOs choose to produce something other than just financial returns, they do need a mandate by their shareholders. Because if you don't have that, you can pursue whatever pet causes you want to address. Or maybe you just love the Opera House and give millions of pounds to the opera house, even though your shareholders actually care about sort of different issues like climate change, but with that guidance from shareholders that I think investors set that executive so we do have legitimacy and do have the courage to pursue some purpose beyond just profit.
Peter Czapp
And your researchers look back over data over a long period of time over a quarter of a century. When when we look forward to a quarter of a century What do you think? don't know the next 25 years will hold. And if you or someone else is doing the analysis of businesses over that period, what are some of the things that they they might have observed? Do you think? Well, I
Alex Edmans
think what they we would hope for in the next 25 years is actually people to forget about the term ESG, or purpose or sustainability. Why? Because they become just so mainstream, that they are automatically integrated. So you learn in a finance 101 class, that what is the value of the company, it's the value of all its future cash flows, and maybe 50 years ago, what they understood is that what determines future cash flows, it's the size of your machine, or it's your tangible assets, then more recently, people have understood that it depends on intangible factors like management quality, your brand, your patents, and all we're doing now is we're further broadening this out to include your employee wellbeing, your relationship with the environment, your customer, trust your relationship with suppliers. And so what I want to stress is that this idea is is not hugely radical, but I would love to claim that I'm sort of a pioneer of a new way of doing business. But what we're doing is we're broaden the set of information that we use when valuing a company beyond the tangible and beyond just the intangible traditional stuff like management and Payton's towards other intangible factors. And so why is that so powerful? It means that a company which wants to pursue this is not doing a huge step into the unknown. But using principles that have always been the core of finance, right? When companies were, say, drilling for oil or gold centuries ago, they all had a long term mindset. And the successful companies were the ones who had that long term mindset over short term profits. Now, what we're drilling for is not oil and gold, but maybe human capital and customer trust, but the whole idea of long term mindset, they have been the drivers of successful businesses for centuries. And so just like nowadays, nobody would ever question somebody investing in a factory. Hopefully, in 25 years time, people never question companies investing in improving their corporate culture, or reducing their environmental footprint. Essentially,
Peter Czapp
you talk about value there, I mean, and some of the component parts of that value have been been broadened out to include things like your brand, and the good you do in the world. It sounds so obvious when you when you hear it back. And it's gonna be fascinating. I mean, you also it affects day to day decisions, right? You know, we see it with businesses looking when faced with choices, they look at what the suppliers or customers are doing, beyond just what it says on their website, they're looking at their their impact in the world. I have a question for you, in relation to businesses that want to start this this journey. So those that are just starting out? What, what are some of the first things that they can do on that journey? Do you think
Alex Edmans
the first thing is to define your purpose and to do so in a disciplined way, which is focused on target didn't realise is that purpose is as much about knowing what not to do as what to do? So I'm going to focus on x. But this definitely means that I will have to spend less time and why is that? So for example, for me, if I choose to use research for the practice of business, I will spend time less time with purely academic audiences. And I need to be comfortable with that, I need to be comfortable with the fact that maybe that means the number of publications I write is going to be lower. Then having thought about what your purpose is, what are the ways in which you can measure the extent to which you're putting it into practice. And what I mean by that is not looking at ESG metrics. Why? Because ESG metrics that often generic, they apply to every single company, let's say water usage, or carbon emissions or employee turnover. Now, that is not irrelevant. But the true worth of the company is not through reducing the harm they create for society, but to act through actively doing good. So let's say you're a bank, you might want to measure the number of loans that you give to entrepreneurs who had never received any loan from any other bank before. Because if so, then you are actually providing new capital, and allowing new businesses to start that might not otherwise have had done that. So I think just to think about not ESG metrics, I would just call them key performance indicators, or leading indicators, which again, should not be radical, because for decades, companies have already already thought about leading indicators and key performance indicators. But nowadays, they're not going to be just tangible things like market share, or revenues or number of customers, but maybe intangible things like customers who had previously been excluded from finance.
Peter Czapp
So I mean, what you're talking there are some of the ingredients of these impact reports you see businesses producing at the end of each year. They say, Look, this is the positive impact we've had on the world. Old, what are some of the things that you've seen in those impact reports that have made you smile have been, you know, some of the most innovative or creative ways that businesses have been making a positive impact.
Alex Edmans
I think they're always based on using their expertise and using their comparative advantage. And so this is based on idea that you shouldn't try to solve every problem, but to solve the problems where you have unique expertise and solving, and we saw that a lot in the pandemic. So I know that these pandemic pivots are somewhat hackneyed. But I would rather look at this positively and say, Well, this is a great idea of using your skills that might be a perfume company, or a beer company using its expertise and alcohol to make hand sanitizer. Or maybe it could be Mercedes, which use its expertise in precision engineering, to reverse engineer some off paitent, ventilators and mass produce them at scale. I also really like when I'm reading these reports, not just seeing the metrics, but companies have the boldness to move beyond the metrics. And that's why things such as processing, for example, diversity and inclusion, people will just look at the number of minorities on the board and senior management. But it could be you don't care at all about diversity, but you just put some minorities on the board to tick the box. So those metrics alone don't really tell you much. But if you say well, this is what we're trying to do to really ensure inclusion, create a culture that is psychologically safe and actively encourages dissent. I think that is much more informative than just a metrics. Otherwise, we might be in the situation that some schools are in for a couple of decades ago, where there a level results were being published and league tables, that people just focused on the A Level results rather than actually broad aspects of education, like extracurricular activities, and so on. And my fear is that if we're trying to go towards this very metric approach to purpose, then people will focus on just the numbers rather than the broader spirit of what it means to be purposeful. And that board spirit involves doing things that create value for society, even if you cannot immediately measure them.
Peter Czapp
And we've talked a lot about purpose. But of course, profit plays a key role in this, doesn't it? Because it's the fuel for the journey, the fuel for creating whatever value you want to create. What what do you think businesses should be thinking about when it when it comes to profitability? And what do you think their attitudes should to it should be,
Alex Edmans
I think profitability is really important for two reasons. One is it's a piece with the fuel that without profits, companies cannot fund the innovation of the future. They can't keep workers and jobs, but also eaten, you pay out that profit to shareholders, which is often seen as dirty, like, if you're doing a dividend, or buyback, we will win, that's evil. But the shell was like their pension fund saving for retirement, their insurance companies, which then can pay life insurance or health insurance, citizens, you've had a mishap. So this idea of providing returns to shareholders is positive. These are not nameless, faceless capitalists, we really need returns for a well functioning economy. So I think to see profit is as a good thing and not to be imbalanced and a company is profitable. But profits need to be earned the right way. And what I mean by that is rather than viewing profit, as the end goal, view, profit as the byproduct of being purposeful, so my goal is to create value for society and be an excellent innovative company that treats my work as well. And if I do that, I will become profitable, rather than let me focus on profits as the ultimate The first objective. As an analogy, what is the meaning of life, let's say you think the meaning of life is happiness. Now, if I directly pursue happiness, what might I do? I might eat lots of chocolate cake, I might get drunk every evening, I might be selfish and do things which are purely good for my own happiness. But if instead, I think maybe the meaning of life is to make a positive difference to my friends and family, and even people I've never met before just general neighbourhood, then as a result of being altruistic, I will ultimately become happy. But happiness is a byproduct of me serving my neighbourhood and serving my friends and family, rather than the end goal.
Peter Czapp
I love that byproduct. Profit is the byproduct of leading a purposeful business couldn't agree more. Now, beautiful business community is something that we're incredibly excited about this opportunity to bring together people who share this view that we have. And it's obviously a great opportunity for collaboration of like minded individuals. What have you seen when other people with similar views have come together around this philosophy? What collaboration Have you seen what ideas have have sprung out of it? Why do you think that's important sort of bringing people together around this this thing?
Alex Edmans
I think collaboration is really important that cause if we Do purpose as often what is in our hand? How can we use our resources and expertise in ways that we have not traditionally use them? It is collaboration and outside ideas, which see the potential for using them in different ways. So if I go back to Mercedes launching these, ventilators, they didn't just do it themselves. They partnered with University College London Hospital, who, who found the off patient ventilator and said, Oh, can you work with us to try to reverse engineer this? When we think about Vodafone, launching and paisa, which was my opening example. It wasn't just Vodafone noticing it themselves. But they had a partnership with debit the Department for International Development, who noticed that Kenyan citizens were transferring mobile minutes as a form of currency. And then Vodafone well thought, Well, what happens if we just allow them to transfer actual cash rather than mobile minutes as quasi cash? And then one other thing, which wasn't part of your question, but it was something in how you answered it. It's just the name of your organisation and beautiful business. I think this is really important. Because when we think about the world challenges and purpose, often people define purpose as solving problems. Let's solve climate change. Let's solve inequality. And that sounds great. Let's solve its problems. And let me not trivialise. This ones they do need to be solved. But I think if we view purpose as just solving problems that is too narrow. The purpose of business is to make life more beautiful, right? So how can you make life more beautiful? Clearly, if you preserve the environment, and biodiversity that makes life more beautiful, but there's many things which don't solve problems, but just make life fun. For example, let's say the Women's World Cup, that's not something that solved any problem, but inspire a lot of people to start exercising that was really positive agenda, diversity. Think about the Olympics, think about media, entertainment, concerts, and so on. If we only cared about solving problems at university, we should never learn history, or classics, or art or art history, we should just focus on climate science and economics and law and medicine. And this is absolutely not to trivialise the current gravity of all those problems, but to say that the goal of business is not just to solve problems, but to make life more beautiful, and that there's collaboration, which leads to some beautiful outcomes being achieved, which just make life more enriching than bad. absolutely consistent with purpose.
Peter Czapp
Wonderful, a great place to end on. Thank you for inspiring us to live a more beautiful life. Professor Alex Edmonds, thank you.
Alex Edmans
Thank you so much, Peter. It's great to be on.