Grow the Pie: Finding a Win-Win for Investors and Society

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  • 40 mins 40 secs
Do investors need to give up profits so companies can add societal value? Or is there a way to provide both? In Episode 4 of the All Angles podcast, Vish Hindocha and Alex Edmans explore ways to help both businesses and society, issues with comparing corporate sustainability metrics and whether ESG will end or go mainstream.
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Vish Hindocha:

Hello and welcome to another episode of the All Angles podcast. In today’s episode, I speak to Alex Edmans, a professor at the London Business School of Finance and many other things as well. I’ve been fascinated with Alex’s work ever since he first wrote the book Grow the Pie and his recent literature. In this episode, I ask him questions about how his thinking has evolved over the last two years on stakeholder and shareholder value creation, particularly in light of things such as the pandemic, the European War, and the anti-ESG rhetoric that we’re seeing in parts of the world.

We talk about what are the big opportunities for us? Are we at peak ESG? Will it go mainstream? Is this the end of ESG? And many other topics and questions that I know are at the forefront of practitioner’s minds. Alex is an incredibly clear thinker and a very fantastic writer, and we talk about some of his most recent literature and his process for identifying topics to write upon.


The views expressed are those of the speaker and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation to purchase any security or as an offer of securities or investment advice. No forecast can be guaranteed. Past performance is no guarantee of future results.

Vish Hindocha:

Today my guest is Professor Alex Edmans. Alex is a professor of Finance at the London Business School. He’s also a Non-Executive Director, author, TED Talker, and in my view he’s one of the most influential voices in the industry. Alex has an uncanny ability to somehow write really clearly, cogently and concretely about a topic that’s been floating in my mind and crystallizing it in a manner that I wish we had been able to write it. And I strongly encourage our listeners to follow his work. Alex, welcome to the podcast. Delighted to have you here!

Alex Edmans:

Delighted to be here, Vish. Thank you so much for the invitation.

Vish Hindocha:

Alex, with this podcast, we tend to just focus on you for the first sort of five, 10 minutes, and I’d love to just get a brief kind of potted history of you. How did you get to be in the seat that you are in today? You can go back in time as far as you would possibly like.

Alex Edmans:

Okay, I’ll take you off on the offer to go back as far as I want to. So let me go back to what I studied at school. So in the UK, as I’m sure the listeners will know, you do A-Levels. You have to specialize quite early on. And some of my friends did maths, physics, chemistry, some only sciences, and others would do English, history, German, so only arts. So I did an unusual mix. So I did both maths and economics, but also English and German.

And so that’s why I end up doing economics, is that you have both arts and sciences, so you do have some theories. So it’s not completely subjective, but also those theories are not set in stone. Unlike say, physics and chemistry. It could be that you and I both see the same data and I believe taxes should be higher and you believe taxes should be lower and we can have a respectful conversation, but we still could end up having different opinions on that.

So that’s why I end up studying economics at University and a mixture of arts and sciences. And then I practiced in the real world for a couple of years at Morgan Stanley, both in London and New York. But why did I go into academia? It’s because if you do a deal that might be one company’s problem at that one time, but if you write a paper that’s something with kind of a larger bandwidth, it could be something of interest to investors all around the world that could be of interest also to companies. And so that’s why I really appreciate people like you showing interest in my work as a practitioner and inviting me to share it on this podcast.

Vish Hindocha:

That’s great. Thank you Alex. In between that you also — you are a Fulbright Scholar, I believe, at MIT. So you managed to squeeze that in too. As I noted upfront — and I genuinely mean it — you have an `amazing ability to write very clearly and in sort of plain English language and commonsensically about some issues that can be really complex, already nuanced. And one of my questions for you is maybe you could talk a little bit about your process. How do you know what to identify or work on in terms of some of those areas where we can have a rich conversation around — we kind of societally can have a rich conversation around? And what is your process to write it in such a manner that can sort of translate so well across I think to so many people?

Alex Edmans:

It’s just really kind of you to say that, Vishal. And let me again sort of go back into the background as to why writing was so interesting to me too. Because normally for an academic you love doing the research, you love crunching the numbers, and writing is just like the final 5% as you just write it up. For me, I think writing might be more than 95% because the writing is what people actually read. You can do the numbers as well as you can, but nobody’s going to see the numbers that you crunch. They’re going to see the final output.

So doing my Ph.D. at MIT, I was the athletics chair of my hall. So I was in charge of all the sports teams, and after games I would write match reports and humorous language, trying to make them engaging, trying to mention every player so that they would feel valued.

And when I was at Oxford, I was the sports editor of the Oxford student newspaper, so I always liked the challenge of writing for a general audience and making something as interesting and engaging as possible. So then when it goes onto why do I choose to write on particular topics, I do think what’s important is real world relevance.

Now that might seem obvious, but there are some academics who think, well, if you are working on real world stuff that’s dumbed down. If you were a true academic, you would do stuff so highbrow that nobody else would understand it. And that’s a bit like saying — an Indie musician saying, "Ah, you are too mainstream because too many people are buying your records."

Obviously, this doesn’t mean that you should always do what’s popular, but I do think that it is important to be relevant, particularly at a business school rather than just, say, an economics department or a classics department where you might be doing research for an academic audience.

Then so when I take a particular popular angle, then what specific perspective do I want to take? I do try to be a little bit contrary, and we might get into some of my more contrary in writings later on today, but why? It’s not to deliberately be controversial, but I’d like somebody to come away from — if they’re kind enough to spend half an hour or two hours reading my work or listening to my podcast — to learn something that they didn’t know before.

So one of the nicest things people think they can say is, “Oh, you said everything that I wanted to say, but you just said it better.” But that’s not a nice thing to say, actually, because if I told you everything that you wanted to know that you knew anyway, what was the point of you reading my article other than when learning the art of rhetoric, for example?

So what I hope is that maybe people don’t agree with everything that I say or if they do agree, they see there’s a different perspective. And that’s why I try to write in a little bit of contrarian where there’s so many people out here who are writing on sustainability. Many of them are very interesting to read and say, why do you want to read my stuff as well if the angle might be a little bit unique.

Vish Hindocha:

Excellent. Well, Alex, I’m going to take you up on that. I’m a big fan of Grow the Pie and two of your most recent papers, “The End of ESG” and “Applying Economics - Not Gut Feel.” So I want to take sort of each[HJ(1]  in turn if you don’t mind, and I want to talk to you about some of the things I definitely resonated very strongly with me, but some of the things that I not necessarily challenge, but I would love for you to explain or unpack or I’d just love to know how your thinking might have evolved.

And I think one of the things that comes through in your writing as an undercurrent is the need to not be too dogmatic about some of our views and to sort of update our thinking sort of through time. So I might start with “Grow the Pie,” if you don’t mind. It’s the book obviously that you wrote and was released in I think 2020. It was on the Times Best Sellers list in 2020.

And there are so many parts of it that resonated very, very strongly with me as I was sort of on this journey in upskilling and in the world of thinking about sustainable investing. And there’s just some passages here. The question here really is how, if at all, has your thinking evolved on this since you wrote “Grow the Pie”? So what of the last two years has been so much, whether it’s war in Europe or the sort of anti-ESG rhetoric or the pro-ESG rhetoric kind of continuing to grow. Has that sort of shifted any of your sort of thinking? I’m just kind of really curious.

So the first part of the extract I took from the book was — I’m going to read this quote: so, "Delivering high profits need not be shameful, failing to deliver profits and social value is." Pienomics, as I think you describe it, views profit as an outcome and not the only goal. The goal is to create value for society with profit as a byproduct. That resonated with me very strongly. Do you think that survives? Is that still viable in today’s world where we’re sort of besotted with the right perhaps in the US thinking about that sort of anti-ESG and legislating against thinking about anything other than profit as the goal or the outcome?

Alex Edmans:

So I do think it survives, and I do think it’s actually been supported by recent events. And you might think, well, he would say that, wouldn’t he? So let me just give you a little bit of substantiation behind that comment. So let me just explain to the listeners who aren’t familiar with the idea of Grow the Pie. So what is it about, what is the pie? The pie is the value that a company creates and that can be divided between profits to investors or value to society.

That’s fair taxes, fair wages and fair prices. And often when people think about responsible business, they think about how to split the pie differently. So to reduce profits and to help everybody else — so this might be to regulate companies by having a high minimum wage so that workers get paid more or maybe a law to force companies to give to CSR, like there’s a 2% threshold in India.

So why the book is called Grow the Pie is I don’t want to have this fixed pie mentality where people squabble over a fixed pie, but I’m saying if a company is to invest in its stakeholders, that is just good business sense. You increase your long-term return if you treat your employees and customers well, if you are indeed reducing your environmental impact.

And then to your question, then, how do the events of the past couple of years play into that? I think there’s two types of events which are relevant. First is the politicalization and the debate about ESG that you see in the US where there are people . . . who are anti-ESG because they believe that it’s at the expense of profits. And companies need to make profits because pension funds may own shares in them.

But that is based on the fixed pie mentality where ESG is at the expense of investors. But if instead ESG is something that grows the pie and delivers high long-term value, why is it that MFS as an investment manager is so committed to sustainability? Yes, part of it is because you do care about wider society, but part of it is you care about your clients, and you believe that the way to deliver value for your clients is to make sure that you are investing in sustainable companies and to help them on the sustainability journey.

So I think this idea of finding a win-win solution that helps both business and society is something that both sides of the political spectrum should embrace, actually all ages should embrace. There’s some people who think, well, it’s more Generation Y or whatever who care more about sustainability and older generations care more about a profit.

But again, if this is a way of achieving both financial and social goals, it should be something which is unifying. And so I think the politicalization that we see should hopefully go away if we have a correct view as to what sustainability means.

Now the second thing which happened since the book was written was obviously the pandemic. And in the pandemic there were people who were concerned that companies can’t really think about serving society because they just don’t have money, right? They’re just focused on survival. And if responsibility involves a huge investment, they just can’t afford it. It’s unrealistic.

However, that does assume that sustainability involves huge amounts of financial expenditure like donating to charity or paying high wages. But the high whole idea of Grow the Pie is that you can innovate and use the resources that you already have by deploying them to a different purpose.

And this is why we saw in the pandemic you had some companies which used to make, say, alcohol or perfumes who redeployed what they did in order to make sanitizer. Lots of those types of pandemic pivots where there wasn’t a huge financial expansion. It was more the mindset shift, how can we use our existing expertise and redeploy [HJ(2] [FMR((3] this to solve a social challenge?

And so when you think about sustainability in that way, delivering the highest output rather than spending the biggest input, then this also becomes feasible. And again, this is quite different to the way in which people typically think about sustainability. If you have a press release saying, we spent 10 billion pounds or million pounds on X, people think, yeah, that’s amazing. What a nice company.

But really what matters is not how much you spend, but how much value you can create. And the whole idea of Grow the Pie is that can we find these things which cost a little but have a large output. And if so, these things will also be feasible in difficult times like a pandemic, or maybe right now under inflation pressure.

Vish Hindocha:

Brilliant. Thank you. That’s really, really clear. A linked thought that you have in Grow the Pie. You talk a little bit about integrated reporting. You have a line that I loved since I read it, which is the greatest role of integrated reporting is to spark integrated thinking. And you talk a little bit about the need to balance qualitative and quantitative measures.

In my view, it feels as though integrated reporting was kind of a hot topic maybe two years ago, but hasn’t really come on perhaps as fast as I assumed that it would sort of at the end of 2020. Is that fair in your view? Or what is your view of where integrated reporting and integrated thinking is today, and what’s the trajectory that we’re on?

Alex Edmans:

So that’s a really interesting discussion. So what is integrated reporting? Well, as I see it, it recognizes that to understand the value of the company, you need both financial and nonfinancial measures. And so this is the whole idea of integrating them together. And notice this is not something that my book introduced as being new. That’s something that we have known since at least the balanced scorecard of 1992. If you want to understand a company’s performance, we need a balance of financial and nonfinancial measures, and also both quantitative measures and qualitative measures.

So to look at human capital, yes, you would look at employee turnover. Yes, you would look at diversity statistics, but you’d also try to understand culture through some qualitative means. But instead, what I see happening is this focus on ESG metrics, ESG by numbers, trying to measure everything in as common and comparable a framework as possible.

And you might think, well why is that a bad thing? Shouldn’t I as a finance professor like to have loads of data and comparability so that we can do studies? Shouldn’t an investor like MFS want to have something comparable so that you know where to allocate capital?

Well then there’s two problems with this. First is that many aspects of sustainability you cannot put into numbers. You have this problem of hitting the target but missing the point, or teaching to the test. If you know that investors will evaluate you according to demographic diversity, you might put some minorities on the board to tick the box and not actually care about cognitive diversity or inclusion and equity in addition to diversity.

And the second problem is that what it means for a company to be purposeful is often unique to that firm. So in my response to your last question, I said, companies should think about their specific expertise and resources and use what they’re good at. They’re told the social challenges that they are uniquely best placed to solve.

So one question I often ask is, what is in your hand? So by that I mean, well, what are the resources? What is the expertise that you have, and how can you deploy that to serve society? And what that means is that the metrics that are relevant for different companies will be unique. So for Unilever, they might look at the number of people they reach through their hand-washing programs. For a bank, it might be the number of loans they give to a customer who’d never received a loan from any other bank before.

So a lot of these things are unique if we just reduce it to a common set of metrics that might end up being a bit like quarterly reporting, like quarterly earnings. That’s common, and comparable across companies. But we know that the challenge is that that has led people to focus on just hitting the earnings target, irrespective of whether that involves some shorter behavior or a lower focus on what truly matters.

Vish Hindocha:

That’s great. Thank you, Alex. There’s some issues that you raised there that you cover in your paper as well on sort of that’s called “The End of ESG.” And again, I’m going to commit the cardinal sin that you told me not to commit right at the top of this of saying this was one of the papers that I read that — God, I wish we’d written it. Because it crystallized so many issues that we’d been thinking about, I’d been thinking about and writing about myself.

So again, there’s a few things here that I want to agree with, and there’s maybe one or two things that I just want to throw open for debate or discussion around. The opening line that you have in the paper, in the abstract actually is ESG is both extremely important and nothing special. Extremely important because critical to long-term value and therefore anybody should take it seriously.

But it’s nothing special since it’s no better or worse than any other intangible asset that drives long-term value and creates positive externalities for society, such as many of the things that you’ve just described: management quality, corporate culture, innovative capability. And so you talk about peak ESG, and again in the paper you say you’re not calling for the end of ESG, but the fact that it’s going mainstream.

I suppose a question I have for you is do you think that that is likely to be possible? MFS speakers have been caught saying that ESG shouldn’t really be a term. It’s just good long-term investing, but yet regulators and legislators around the world — which we’ll come to in a second in terms of the role of public policy — it feels like they are trying to bifurcate the market in terms of legislating in and crystallizing or enshrining ESG as a specific discipline within the investment management world. So can we actually get to a point where we no longer need to use the acronym ESG, but we are just talking about good long-term investing or stakeholder capital?

Alex Edmans:

Yeah, so I think maybe a good starting point is to say, well, what is my position on ESG espousing the paper? And then are regulators moving towards that position or against that position? So I think you highlighted the most important line, which is ESG is extremely important and nothing special. So the extremely important point is that everybody should embrace ESG, even if you don’t have ESG in your job title. Even if your only goal as an executive is to make as much money as possible in the long term.

You should pay attention to ESG issues, because investing in stakeholders pays off in terms of long-term value. Similarly, you might be an asset manager, and even if you are in a mainstream fund, your fund doesn’t have a sustainability label. You also would like to evaluate the state called the capital of a company because that’s linked to long-term returns.

And so this is linked to my earlier comment about it should not be polarizing between sort of Republicans and Democrats. Everybody should care about ESG. It should not be seen as niche. But the second aspect is it’s nothing special, is that often people think that ESG is a magic word, and they put it on a pedestal, compared to other things that create long-term value such as say, capital allocation and management quality and innovation.

And I think this is important because right now if you are an investor and you engage with a company by saying, “Hey, let’s reduce your plastic packaging.” You get far more good public relations than if you were to say, “Let’s find a better way of allocating capital, or let’s improve productivity.” And so there is, I think, this hierarchy where ESG is put in a pedestal compared to other things.

And I do feel that regulators are partly to blame. So blame, that might seem a strong word, and you might think, well, shouldn’t I be somebody who wants to promote ESG as an ESG advocate? But I’m actually not an ESG advocate. I’m an advocate of creating long-term value. ESG is a way of creating long-term value, but — so it is just being a good business.

And so if there is an attempt to legislate ESG, it may well be that people end up just teaching to the test and they focus on what is being regulated rather than what actually matters. So again, going back to diversity and inclusion. Why I mentioned — that’s something that I obviously personally care about, being an ethnic minority, but I don’t think diversity, equity, inclusion is just putting ethnic minorities on the board of directors.

It may well be that you have a white male who brings cognitive diversity or diversity in socioeconomic background. You can’t just have this “add diversity and stir” idea of just powering the diversity of people and then your profits will grow up. You’ll need to make sure that they’re included and that there are ways to encourage a breadth of thinking and so on.

What can you regulate? You can only typically regulate things that you can measure, but so much of the value of a company is intangible. So I feel that this regulator and your idea leads to ESG by numbers, where people hit the target and miss the point. I think regulators themselves might not understand ESG compared to other drivers of value.

So that’s one of the reasons I wanted to write my papers say, yes, we do want companies to maximize long-term value, but this whole idea of regulation might actually get in the way, is that people will just focus on only the regulated issues and ignore a lot of important unregulated issues.

Vish Hindocha:

Yeah, I totally agree on all of it, especially the kind of long-term value creation, which again is an undercurrent of a lot of your work “End of ESG” and “Applying Economics.” But just one of the things that maybe just to pause on was you have a section in your “End of ESG” paper called “The Other Reason for ESG.” And you touched on this before that for MFS or organizations like us. The reason that we care about sustainability is because it’s central to our fiduciary responsibility of creating value over the long term for our clients. That’s the reason to care about it.

And there is this other reason, which is the broader societal value. And I think in the paper you write that that’s the role of public policy. And I suppose I might personally agree with that, but I think there are some challenge — that as we floated that paper internally, some people challenged and said, “Hang on a second! Aren’t we learning that it can’t just be public policy?”

Almost exactly for the reason, Alex, that you just articulated, regulators may hit the target but miss the point or only try and measure this by numbers. And actually don’t we all — there’s individuals, corporates, investment, the financial world, and public policy — have a role to play in terms of what does kind of an equitable fair society by design actually look like?

So how would you respond to, actually — aren’t we agents in this system and we actually have a duty and a responsibility to more than that?

Alex Edmans:

I would agree with that entirely actually. But say that that is an issue which is again far beyond just ESG. So what is the issue to begin with? Every argument I’ve made up to now has said, well, ESG should be mainstream because if companies take it seriously, they deliver higher long-term profits. Therefore, if your only goal was profits, you would want to engage in ESG.

However, the other motive for ESG, is there might be certain ESG investments that even if they don’t create long-term profits, they’re ones that we want to do because of societal reasons. So maybe your clients at MFS, let’s say a pension fund, doesn’t just care about the income the pensioners will get in retirement, but they also care about whether the planet is two degrees warmer. And even if there is not government action to put on a carbon tax, which means that as they’re not actually financially lucrative to decarbonize, you might push companies to decarbonize anyway because that’s just good for wider society.

But I would say that there’s many things which create externalities which are just not falling under the ESG label either. For example, just to have innovative management, so a great management team. That’s something where if you have great companies, then there’s externalities in terms of providing jobs, providing consumer service and so forth, that is not captured necessarily by a company.

So if you are a bank and you are innovative by developing, let’s say, online banking that makes people’s lives really, really easy because they don’t need to go to the bank, actually a lot of these ways of making transactions cheaper. Those are things which flow through consumers. And on the flip side, if you’re a noninnovative company, let’s say Kodak, then what happens is that you could lead to 150,000 employees losing their jobs because you missed the digital revolution.

So that wasn’t something that people see as being bad at ESG, that was just bad management, but bad management also just led to a huge negative externality. So if we would argue that as an investors we need to stop activities that have negative externalities and promote activities that have positive externalities, then again, we should be promoting great management, great innovation, great productivity as well as great ESG. But right now we focus only on the latter and not the former.

Vish Hindocha:

That’s a really powerful point. I want to speak a little bit to your most recent paper that I read. You’ve probably published something in the — I don’t know how you managed this, and on the timetable, but “Applying Economics and Not Gut Feel to ESG.” Again, much that resonated with me very deeply and strongly, but just so long-termism, thinking about beyond shareholder value and this idea that tradeoffs definitely exist.

This idea, you know, you kind of challenge and you’re contrarian on this point that more ESG is better or more engagement is always better. And you say, no, actually it has to be a part and parcel of the value creation. I think, again, the lens that you use is familiar to me. So actually, just to reciprocate, I did my A-Levels in maths, economics and law, so maybe following a slightly similar path in terms of some sort of hard science as well as some sort of social science and softer subjects.

And I studied economics as an undergrad at UCL, so not too far from the London Business School. So I say this with the deepest respect, but everything I learned about economics is that pure economics probably doesn’t capture the real world or the real economy and high enough resolution to kind of really be that useful a tool.

So I guess the challenge is do you think — you’ve deliberately picked on using economics, which I think you mean using sort of coherent, academically rigorous standards, rather than intuition or gut feel to drive and not shoot from the hip. But do you think economics provides too narrow a lens to judge or measure long-term value creation through — forgetting about ESG or sustainability for a moment — do you think economics is too narrow a lens to use for that?

Alex Edmans:

Yeah. I think that there’s a couple of interesting questions in what you just asked, Vish. So the first is what was the reason for writing it is linked to some of my early answers. People put ESG on a pedestal. They think it’s a magic word that defy gravity and defy just the standard laws of business. The standard laws of business is that there are diminishing returns, right? In anything, right? Even more is not always better. And that’s true even outside of business.

More exercise is not always better. You could overtrain for a marathon. Whereas people think that if you have as high ESG measures as possible, this is great. But that could be at the expense of other things such as the productivity and innovation that we mentioned earlier. And also ESG might matter in some times but not others. It might matter for some companies and not others.

It might be that in a downturn we do need to focus on survival rather than some of these ESG issues. So I said if we think about ESG just like any other long-term investment, it’s good, but we don’t want to pursue an infinite amount, then we actually lead to much more nuanced decisions than if we were to think that ESG is some sort of magic potion.

But then can we use economics to understand ESG? And I believe that we can, and I believe that economics gets much further than people think. So there was this idea that ESG is new, and economics is not fit for purpose in 2023. We can just scrap economics textbooks and develop something which is fit for purpose. And actually I might have an incentive to support that viewpoint. So some of the listeners will know this textbook, Principles of Corporate Finance by Brealey and Meyers, which I read at Oxford, I read when we were at Morgan Stanley. I joined that textbook last year and cowrote the 14th edition.

So I’d love to claim I completely scrapped that textbook and rewrote it, but in fact I didn’t because the number of the core finance and economics principles, they still apply to ESG. Why? Economics is always about the long term, right? You learn in Finance 101 the value of the company is the present value of all future cash flows until the end of time. And this is true in practice, not just theory. Why is Tesla so valuable? It’s not because of its short-term profit, but it’s long-term prospect.

And when you get to the externalities point, which is about the things that we do to society which are not captured in long-term profits, there’s a whole branch of economics called wealth of economics, which looks at externalities that a lot of the great developments of people like William Nordhaus, who won the Nobel Prize for environmental economics. They have taken externalities really seriously.


So I do think economics, when you actually consider the breadth of economics, not just the narrow things that people caricature, does get you a lot of the way, but you learn not just from economics. You learn from other disciplines as well. Which is why I was quite lucky to have my relatively broad sort of A-Level background. And then at Oxford when I was an undergrad, I did economics and management. And management involves not just finance, but accounting, marketing strategy, organizational behavior and so on.

My perhaps most cited paper in finance is one, looking at human capital and employee satisfaction, which is an organizational behavior issue I published in management journals. I’ve started a new paper on diversity, equity, inclusion. Not just demographic diversity with a strategy scholar. So I do think we learn from other business disciplines.

Alex Edmans

. . . and we might learn even from disciplines outside of business as well. So there might be issues like philosophy, which might also help. Baroness Onora O’Neill, a philosopher who was president of the British Academy, she kindly endorsed grow the pie, and it’s something that she has been thinking about quite serious as well. So I do think that we want to learn from as many diverse perspectives as possible.

Vish Hindocha:

That’s a great point. Thank you Alex. I have some quick-fire questions to bring us home if you don’t mind. So the first question is, if you took a step back, what would you change in the industry?

Alex Edmans:

I try to make incentives more long term. So when you have the tradeoffs between profits and purpose, they do exist, but the tradeoffs mainly bite in the short term. The more longer-term your horizon, the more stakeholder and shareholder value become aligned.

Vish Hindocha:

Great. Outside of changing incentives, what do you think is the big opportunity that we have ahead of us in the short term?

Alex Edmans:

It’s to recognize the huge amount of intangible stuff within ESG. So people focus loads on the ESG metrics, but if something was perfectly measurable, then it would be in the stock price, right? Markets are relatively efficient. People bemoan the fact that ESG is relatively intangible and qualitative, but that makes it a really exciting opportunity. Because if these things are hard to assess and the market gets it wrong, then any serious engaged investor might be able to unlock alpha by evaluating these qualitative issues seriously.

Vish Hindocha:

Great. Thank you. I mentioned before that we often share your work internally and one of the internal stakeholders wanted me to pose a question around the efficacy of SDGs in measuring progress and your perspective. Our perspective generally is that SDGs are a wonderful thing for nation states to think about kind of broad goals and the 169 kind of underpinning things to the 17 SDGs.

I believe that you’ve written about the fact that organizations should probably focus on the one or two things that I think in your language is the thing that they are uniquely well-designed to sort of solve for. And yet we see a push from asset owners and clients and institutional investors to want to map everything and attribute things back to things like the SDGs in a bid to understand broader impact.

So we are dealing with that confusion, a lot of trying to shoehorn a framework that was designed for nation states in the UN into a kind of corporate investment portfolio–type parlance. What are your thoughts on SDGs and how useful or not they can be to measure impact or progress?

Alex Edmans:

I think the way you described it, Vish, is very close to my view on the issue. These are nation level goals. These are goals for countries to achieve, but that doesn’t mean that every single company needs to tick all 17 boxes. That could be about a country comprises many companies. One company focuses on one, four and seven, another looks at two, eight and 13.

So why don’t the SDGs help? So I do think that they provide a common narrative. And so if you are, let’s say, an asset owner and you really care about particular SDGs, then you can allocate your capital to companies that focus on that. But I think if you are a company, the tail should not wag the dog. I think a company should first think about what is in my hand, what am I good at? What are the problems that I want to solve?

Then, after saying well, my purpose is to solve these problems, then you can wrap it to SDGs afterwards. But I wouldn’t sort of start with here are the SDGs which are the ones that we want to address or can we address as much as possible? Because it could be that you address a problem which might not be captured neatly in the SDGs, or maybe it’s only captured in one SDG, and there might be pressure to solve a different problem which can capture more SDGs even if it’s not as linked to your comparative advantage. So start with what is in your hand, then report according to the SDGs after the fact rather than deciding your strategy or purpose by how many SDG boxes can we tick.

Vish Hindocha:

Thank you. I think what is in your hand question is a great one for self-reflection for the audience as well. I think we should probably all be asking ourselves that question. One question I like to ask my guests is a wisdom question, wisdom standing for what I should do differently on Monday. So in terms of practical advice for any of the practitioners, what would you like to see practitioners in this field do differently on Monday having heard this podcast?

Alex Edmans:

Well, I think the very obvious question is, ask yourself what is in your hands, right? So what is the resource and expertise that your asset manager or your company has and how can you serve society if you use that a little bit differently? And also what’s not in your company’s hand but what is in your hand as a person? Can it be that you can provide opportunities for your junior staff to take them to meetings and to allow them to give part of the presentation?

Might it be something as simple as, oh, I actually have the client relationships here. I can tell my juniors who don’t actually see the clients, what is the impact of the great work that we’re doing on our clients? So let’s say you are in a bank and you lend to entrepreneurs and then you allow the entrepreneurs to then start their businesses and employ lots of people. Maybe if you were the loan officer who decide on that loan. You never see that outcome.

But if you, as the senior, must say, “Well hey, that loan we gave, that’s created all of these jobs and created that product” That’s something which is really powerful, and it doesn’t cost you much. So this whole idea of what is in your hand, one of the powers of that is that these are seemingly small actions that don’t cost a lot, and therefore I think they’re realistic and feasible.

Vish Hindocha:

Alex, we have a tradition on this podcast where I ask a prior guest to write a secret question to a future guest on the show. So you’ll have the same opportunity to retaliate, but I have a secret question from you from a prior guest, which I’m going to open. So if we were in-person, I’d do your dramatic opening of the envelope. So just picture that in your mind.

So the question is how would you measure stakeholder capital over a longer time frame instead of the current model of 1-, 3-, 5-year alpha? So I feel like that’s actually a perfect question for you, even though the person who wrote that could have no idea that I’d be talking to you. But I think the question here is about time frame. So if we currently measure value creation in our world, we are measured against a relative return of 1-, 3-, 5-year alpha, and yet we know that’s probably a poor way to think about stakeholder value creation or stakeholder capital of a longer time frame. How would you think about that differently, or how would you measure that differently?

Alex Edmans:

Yeah, I don’t think you can measure stakeholder capital, because as I mentioned earlier, it can comprise many different dimensions, many of which would be qualitative as well as quantitative. It’s just like asking, well, how do you measure the quality of a teacher? You can look at the test scores, but that’s not going to capture many of the things that you’re going to look at. You’re going to value. How do you measure the quality of a parent? How do you measure the quality of a boss or mentor at work?

I think there’s a lot of obsession with, I think, measurement, but why there’s so many things in life that we care about which we don’t measure. How did you choose who to marry? You don’t measure a particular attribute of your spouse. Earning power, whatever. There’s many qualitative factors in that. So I would say rather than measuring stakeholder capital, what is the output of stakeholder capital that should be long-term shareholder returns?

And so I don’t have any better silver bullet than just measure share returns over a longer time horizon than five years. And is that possible, you might think? Well, CEOs, they might only be in the job for four or five years, but one development is to require CEOs to continue to hold shares in their company even after they’ve retired. How do you measure whether you have a good spouse? Well, you measure an outcome. If you’ve been married for 25 years or something like that, that might indeed be a good outcome.

How do you measure whether a teacher is good? Well, can you still remember the values that they taught you 10 or 15 years later? So I think I would try to measure the outcome of stakeholder capital rather than stakeholder capital as an input because it considers contains so many different dimensions, some of which are just qualitative.

Vish Hindocha:

Alex, thank you so much. You’ve been extremely generous with your time and your insights, and I’m deeply grateful. And actually I’ve recommended to people at the top of the call that they should be following your work. What’s the best way for people to follow your work and keep up with what you’re thinking about?

Alex Edmans:

Well, that’s really kind of you to suggest that. So two ways I’d say. So, one is Twitter, @aedmans, A-E-D-M-A-N-S, and my LinkedIn is Alex Edmans. And so what I try to share in that is not just my own work, but I often try to show work by other people. So I think there’s a lot of great academics and also not- academics, producing not just research papers but also opinion pieces and articles.

And I try to share even things that I disagree with because even if I disagree with the stance, maybe 90% of the stance, there might still be 10% in which I agree with. So one thing I do try to do with both of those social media platforms is share other people’s work, not just my own.

Vish Hindocha:

That’s great. Alex, again, thank you so much. Really, really appreciate your time today!

Alex Edmans:

Really enjoyed the interview. Thanks so much for inviting me!

Vish Hindocha:

So that was Alex Edmans. It was really interesting for me to hear his thinking on how his thinking has evolved, firstly, over the last few years, thinking about the pandemic, the war, the anti-ESG rhetoric that has been growing in parts of the world, and to hear how he thinks so clearly about the grow the pie mentality or in broader shareholder value creation across the industry. And it’s a question: What is in your hand? It’s an interesting one to reflect on. What is in our hand collectively as we as agents of change can affect the kind of broader real economy in the capital markets as well.

So I hope you enjoyed the conversation. I hope you took something from it. And again, I would strongly encourage you to follow Alex’s thoughts and literature either online or on his publications. If you have any questions for us and the team here, please email [email protected]. We would love to hear from you. Thanks again!



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