Discover How Great Companies Deliver Both Purpose and Profit in Grow the Pie by Alex Edmans

In “Grow the Pie,” Alex Edmans brilliantly challenges the notion that companies must choose between purpose and profit. This groundbreaking book unveils a powerful framework that enables businesses to simultaneously deliver both, leading to unparalleled success. Dive into this transformative read to unlock the secrets of building a thriving, purpose-driven company while maximizing profits.

Continue reading to discover how you can revolutionize your business approach and achieve extraordinary results.

Genres

Economics, Management, Leadership, Corporate Culture, Career Success, Business, Corporate Governance, Social Responsibility, Sustainability, Economics, Ethics, Organizational Behavior, Strategy

“Grow the Pie” presents a compelling case for companies to prioritize both purpose and profit. Edmans argues that by focusing on creating value for all stakeholders, businesses can expand the overall “pie,” leading to increased profits and positive societal impact.

The book explores the limitations of the traditional shareholder-centric model and offers practical strategies for implementing a purpose-driven approach. Edmans draws upon extensive research and real-world examples to demonstrate how companies can align their actions with their purpose, foster employee engagement, and build trust with customers and communities.

He also addresses common misconceptions and provides guidance on measuring and communicating the impact of purpose-driven initiatives. Throughout the book, Edmans emphasizes the importance of authentic leadership, long-term thinking, and stakeholder collaboration in achieving sustainable success.

Review

“Grow the Pie” is a must-read for business leaders, entrepreneurs, and anyone interested in the future of capitalism. Edmans presents a persuasive and well-researched argument for the power of purpose in driving business success. The book is filled with actionable insights and practical frameworks that can be applied across industries and organizational sizes.

Edmans’ writing style is engaging and accessible, making complex concepts easy to grasp. He skillfully balances theoretical foundations with real-world examples, providing a comprehensive understanding of how purpose and profit can be harmonized.

The book’s central message is both inspiring and pragmatic, challenging readers to rethink traditional business models and embrace a more holistic approach. While some may find the book’s optimism about corporate social responsibility idealistic, Edmans provides compelling evidence to support his claims.

Overall, “Grow the Pie” is a valuable contribution to the field of business literature, offering a fresh perspective on the role of purpose in driving sustainable success.

Introduction: Discover how businesses can thrive while benefiting society and ensuring sustainable success

Grow the Pie (2020) shows how businesses can thrive by creating value for society while also achieving sustainable profits. It reveals that companies prioritizing the well-being of all stakeholders often outperform those focused solely on shareholder returns. By presenting extensive research and real-world examples, it makes a compelling case that long-term success comes from growing the pie for everyone.

In today’s world, the role of businesses extends far beyond profit-making. Increasingly, companies are expected to contribute positively to society while maintaining their financial health. But how can businesses balance these seemingly conflicting goals? The answer lies in adopting a way of thinking that values long-term, inclusive growth over short-term gains. By prioritizing the well-being of all stakeholders – meaning customers, employees, communities, and the environment – businesses can achieve sustainable success that benefits everyone involved.

In this Blink, you’ll learn about the pie-growing mentality – a philosophy where businesses strive to expand their overall value rather than merely redistributing existing value. You’ll explore real-world examples of how this approach can lead to better financial performance and societal benefits. From the impact of executive incentives and share buybacks to the power of purpose-driven excellence and citizen engagement, discover how aligning business practices with broader societal goals can create a more equitable and prosperous future for everyone.

Embracing the pie-growing mentality for business and society

Imagine discovering that a life-saving drug has increased in price by 5,500% overnight. This was the reality for physician Judith Aberg at Mount Sinai Hospital in New York when Daraprim’s price soared from $13.50 to $750 per pill. How did this happen? Well, the producer, Turing Pharmaceuticals, under the leadership of Martin Shkreli, made this drastic decision, prioritizing profits over patients’ health.

Martin Shkreli, a hedge fund manager turned biotech CEO, followed a strategy focused on maximizing investor returns by acquiring existing drugs and significantly raising their prices. This approach made essential medications unaffordable for many, particularly affecting patients with severe illnesses like toxoplasmosis, a parasitic infection. While legally permissible, Shkreli’s actions sparked widespread outrage and highlighted a significant issue in business practices.

Why do some businesses operate this way? We can call this the pie-splitting mentality, where businesses view value as a fixed pie to be divided. Shkreli’s strategy aimed at increasing investors’ share, even if it meant reducing the shares of other stakeholders such as patients and healthcare providers. This mentality often results in exploiting customers, workers, and suppliers to boost profits.

But there’s a better way to run a business. Consider Roy Vagelos, the former CEO of Merck, another pharmaceutical company. In the late 1970s, Merck discovered that ivermectin, a drug for livestock, could cure the parasitic disease known as river blindness in humans. Despite the high cost of distributing the drug to impoverished communities in Africa, Vagelos decided to give it away for free. Driven by a commitment to serve society, this decision saved millions of lives, enhanced Merck’s reputation, and attracted talent and investors, ultimately benefiting the company in the long run.

This is what we mean by the pie-growing mentality – where businesses aim to create value for all stakeholders, expanding their overall value rather than merely redistributing existing value. Companies with this mindset integrate social responsibility into their core operations, innovate continuously, and prioritize long-term societal benefits alongside profits.

So, how can businesses adopt this mindset? Well, it involves focusing on value creation across the board. This means paying fair wages, developing new and beneficial products, reducing environmental impact, and engaging positively with communities. But how exactly does this play out? Let’s find out in the next sections.

Growing the pie through effective incentives

Incentives play a crucial role in driving business success. In 2010, Bart Becht, CEO of Reckitt Benckiser, earned £92 million, breaking executive pay records and sparking public outrage in the UK. The backlash was so severe that he resigned in 2011, causing a £1.8 billion drop in Reckitt’s market value. This incident highlights the unintended consequences of focusing solely on high executive pay without considering the broader picture.

Becht’s leadership had been transformative. From 1995 to 2011, he led Reckitt through substantial growth, with significant annual increases in sales, operating income, and net income. His focus on continuous, incremental innovations, rather than grand new products, had earned him industry accolades. No surprise then that under Becht, Reckitt’s share price had soared, creating £22 billion in value for investors. After his departure, the picture changed drastically.

Becht’s influence extended beyond shareholders to customers and employees. He spearheaded product innovations that simplified daily tasks, such as advancements in Finish dishwasher products. He fostered an entrepreneurial culture, encouraging employees at all levels to contribute ideas and take risks, resulting in significant growth in headcount and skills. On top of this, Reckitt’s environmental initiatives under his leadership led to substantial reductions in greenhouse gas emissions and earned recognition for corporate responsibility.

So, what went wrong? Well actually, the media’s portrayal of Becht’s pay missed key details. Most of his £92 million came from share options accumulated over a decade, reflecting his long-term commitment to the company. Becht was also reinvesting a significant portion of his earnings into society, donating £110 million to charity.

Executive pay often faces criticism for contributing to inequality, with average S&P 500 CEOs earning 264 times the average employee’s salary. But the truth is, redistributing CEO pay has minimal impact on overall company value. The real issue lies in how pay structures incentivize executives. In a nutshell, effective incentives should focus on long-term value creation rather than simply reducing pay levels.

CEO pay should be linked to long-term performance, promoting investment in the company’s future. High CEO stock ownership boosts long-term success. Simple pay structures, like restricted shares, are more effective than complex bonuses. Locking shares for several years ensures CEOs focus on sustainable value creation.

Any attempt to reform executive pay should focus on creating incentives that promote the pie-growing mentality, driving long-term value creation for both shareholders and stakeholders. Simply reducing pay levels won’t be enough. Instead, companies need structures that ensure CEO incentives are aligned with the sustainable success and health of their companies. 

The controversial practice of share buybacks

In 2014, health company Humana’s earnings per share – or EPS – dropped from $7.73 to $7.34, impacting then-CEO Bruce Broussard, whose bonus depended on an EPS of $7.50. Broussard met this target by excluding certain expenses and initiating a $500 million share repurchase, nudging EPS to $7.51 and securing his $1.68 million bonus. This highlights the controversial practice of share buybacks, and how it relates to the pie-growing mentality.

Share buybacks occur when companies use spare cash to repurchase their own shares rather than investing in growth or increasing wages. This often benefits executives and investors by artificially inflating EPS without actual performance improvements. Between 2003 and 2012, S&P 500 firms spent $2.4 trillion on buybacks, which was 91% of their net income.

But buybacks can also be strategic in a positive way, reducing future dividend obligations and signaling a CEO’s confidence in the company’s long-term prospects. When executed correctly, buybacks can grow the pie by reallocating resources to more valuable areas.

Politicians across the spectrum have called for restrictions on buybacks, reflecting concerns that these practices prioritize short-term gains over long-term investments. In 2019, Democratic Senators Chuck Schumer and Bernie Sanders proposed limiting buybacks, followed by a similar proposal from Republican Senator Marco Rubio. The UK government also launched an inquiry into buybacks, worried that they might crowd out productive investments.

Misconceptions about buybacks abound. Some view them as free gifts to investors, but really, investors can sell shares anytime, buyback or not. The notion that buybacks come at the expense of wages is also flawed, as net income used for buybacks is calculated after deducting wages and other expenses.

Research shows that buybacks can increase long-term stock returns more effectively than short-term prices. And surveys indicate companies typically engage in buybacks only after funding all desirable investments, suggesting buybacks are a response to low investment opportunities rather than their cause.

Compared to dividends, buybacks offer flexibility and targeted returns. They allow companies to adjust payouts based on opportunities and enable investors with the least buy-in to sell their shares, leaving a more committed shareholder base. Buybacks also lead to more concentrated ownership, enhancing incentives for value creation.

When properly executed, share buybacks can contribute to growing the pie by aligning company resources with value-creating investments and a long-term perspective. The key is ensuring that buybacks are part of a broader strategy focused on sustainable growth and societal benefits. And this is what we’ll look at in the next section. 

Purpose-driven excellence in enterprises

Imagine living in a remote Kenyan village, where the nearest bank is hours away, and you rely on cash for all your transactions. This was the reality for Emmanuel Sironga, a goat trader in Magadi, until 2007 when M-Pesa was launched by Vodafone. This mobile money service transformed his life, allowing him to deposit, withdraw, and transfer money using his phone. No longer burdened by the risks and inconveniences of cash, Emmanuel could focus on his livelihood. This is a great example of the profound impact of purpose-driven innovation.

Purpose is the reason a company exists, serving society and answering the question of how the world is better with its presence. Profit is a by-product of fulfilling this purpose. For instance, M-Pesa lifted 196,000 Kenyan households out of poverty by 2014, demonstrating how businesses can create societal value through excellence in their core activities.

Vodafone’s introduction of M-Pesa shows how aligning business operations with a broader societal purpose can yield significant benefits. This is the power of purpose-driven innovation. By focusing on excellence in core business activities, companies can serve society more effectively than through additional, less central social projects.

Excellence in business isn’t limited to industries like pharmaceuticals or technology. Companies like Unilever have shown that even everyday products like soap can significantly impact global health. Unilever’s handwashing campaign, launched in 2010, aimed to improve hygiene practices worldwide, reducing pneumonia infections by 23% and diarrhea by 45%. Any company, regardless of its industry, can contribute to societal well-being through excellence in its specific role.

Purpose must be clearly defined and communicated throughout the organization. It should guide strategic decisions and be embedded in the company’s operations. Patagonia’s commitment to environmental renewal exemplifies this approach. Their “Don’t Buy This Jacket” campaign urged consumers to reconsider purchases, promoting sustainability over profit. This bold move reinforced Patagonia’s dedication to long-term environmental benefits, showing how purpose can drive business decisions that prioritize societal impact over short-term gains.

To align with a purpose-driven mentality, companies need to effectively communicate their mission and values. This is where integrated reporting comes into play. Integrated reporting involves combining financial and non-financial measures to provide a comprehensive view of performance. By enhancing transparency, this approach fosters integrated thinking, ensuring that stakeholder concerns are incorporated into all major decisions. This is a holistic method that highlights a company’s commitment to social responsibility while strengthening its long-term sustainability and success.

Purpose-driven excellence is the most effective way for companies to grow the pie, benefiting both society and shareholders. By focusing on their unique roles and serving society through their core activities, businesses can achieve sustainable success and make a lasting positive impact.

Empowering citizens to shape business practices

As an individual, it’s easy to feel powerless when it comes to changing major corporations. But citizens have substantial power to shape business practices. As stakeholders, policymakers, and influencers, you can help grow the pie for everyone.

As an investor, you can select companies that align with your values, prioritizing those with strong social performance. The British charity ShareAction even ranks mutual funds based on their stewardship, aiding in socially responsible investment decisions.

As an employee, you can hold significant sway by choosing employers with ethical practices and avoiding companies with poor social records. The Wells Fargo scandal of the 2010s, where employees felt pressured to open unauthorized accounts to meet sales targets, highlights the consequences of working for companies with poor governance and unethical practices. 

Customers, too, can assert their influence by purchasing products from responsible companies. Websites like Ethical Consumer help you make informed choices and support businesses that mirror your values. 

There are also many ways that individuals can directly engage with and be involved in a company’s decision-making processes. Investors can propose changes at company meetings, employees can suggest improvements within their organizations, and customers can provide feedback and support shareholder proposals. Take the case of Lego, which was nearing bankruptcy in 2004. By 2015, it had become the world’s largest toy company, driven by customer engagement through the Ambassador Programme, which solicited ideas for new products and helped refocus existing ones.

Now for policymakers. This group can influence regulation through voting and public consultation, addressing market failures and redistributing gains from pie growth. For instance, carbon taxes, supported by over 3,500 US economists, would reduce emissions and promote environmental responsibility nationally. But regulations need to avoid stifling innovation and should be tailored to different enterprise circumstances. “Comply-or-explain” provisions offer flexibility, allowing companies to either comply with the rules or explain why they do not, ensuring accountability without a one-size-fits-all approach.

There’s another group that has an impact on business practices: influencers. This group, which includes media and think tanks, plays a vital role in shaping public opinion. By naming, celebrating and shaming, they highlight both positive and negative corporate behaviors. Here it’s essential to present with accuracy and balance, through the use of rigorous evidence. For example, presenting the benefits of share buybacks alongside their criticisms provides a more comprehensive view, encouraging informed decision-making.

Ultimately, every individual can significantly impact business practices – and that includes you. Choose where to invest, work, and shop, and engage with companies and policymakers. In this way, you can contribute to a system where businesses strive to grow the pie for everyone, creating lasting positive impact in the world. 

Conclusion

The main takeaway of this Blink to Grow the Pie by Alex Edmans is that…

Businesses can achieve sustainable success by adopting a pie-growing mentality, where the focus is on creating value for all stakeholders rather than just maximizing profits for shareholders. This approach involves integrating social responsibility into core operations, aligning executive incentives with long-term goals, and strategically using practices like share buybacks to foster growth. Empowering citizens to engage with businesses and influence their practices is also crucial. By working together, individuals and businesses can build a fairer, more sustainable economy, demonstrating that everyone has a role in growing the pie and achieving lasting positive impact.