Growth in investors’ fortunes doesn’t necessarily have to be at the expense of other stakeholders, including employees, the environment, and society at large. Instead of “splitting the pie,” responsible businesses ought to aim to expand it, according to Alex Edmans, professor of finance at the London Business School and author of Grow the Pie: How Great Companies Deliver Both Purpose and Profit. He spoke with Wharton management professor Katherine Klein about the book and its implications on Dollars and Change, a podcast produced by the Wharton Social Impact Initiative, where Klein is vice dean.

Katherine Klein: Let’s focus on the title of your book. What’s the difference between a grow-the-pie mentality and a split-the-pie mentality?

Alex Edmans: The book is about responsible business. Many CEOs historically have viewed responsibility as an optional extra or a luxury. That’s something you put in a corporate social responsibility department, but it’s not central to business. Why? Because they have a “pie-splitting mentality.” The idea is that the value a company creates is represented by a fixed pie. So anything that a company gives to stakeholders, in the form of employee wages or reducing prices to customers or stewarding the environment better, is at the expense of profits.

The book title suggests that if companies deliver value to stakeholders, in the long term, they do benefit their investors. For example, if you treat workers better and train them and invest in them, it might cost you more in the short term, but in the long term, they become more motivated and more productive, and therefore investors benefit. So when you serve society and run the business with a purpose, you’re not donating slices of the pie to society and making shareholders worse off. You’re growing the pie.

“I agree that business needs to serve society, but disagree on how to get there,” says Alex Edmans of the London Business School.

Klein: My understanding is that you’re not concerned only about CEOs or even investors who have a pie-splitting mentality. You also see this mentality among other groups. Who else is getting this wrong?

Edmans: People who advocate for the reform of business. They may be policy makers or academics who say that business needs to serve wider society. I would agree with them on that, but I disagree with them as to how to get there. They practice the pie-splitting mentality from the other angle. Their belief is that if we want to serve society better, we need to restrict what goes to investors and executives. That might be through heavy restrictions on CEO pay or profit-sharing and so forth.

That’s problematic for at least two reasons. First, if the reform on business is something that makes business worse off, the only way you can achieve that is through regulation. There is a role for regulation, but there is a limit to what you can achieve with it, because it only leads to compliance, not commitment.

The second limitation is that when we think about the pie being split between society/us and investors/them, we often think that investors are the enemy. But actually, the investors are us. So any reform of business needs to take investors seriously.

Klein: You build your argument on academic evidence and strong empirical research saying that when companies take social responsibility seriously, their long-term financial performance improves. What’s the evidence from your research?

Edmans: My own work looks at employee satisfaction. Employees are important in every firm, whereas measures like environmental impact might be relevant if you’re a mining company or an energy firm but not much if you’re a financial institution.

I wanted to link employee satisfaction to financial performance. But the big problem here is causality. Many research papers have tried to correlate social and financial performance. Some meta-analyses showed that on average, these relationships were positive. The meta-analyses looked at other dimensions as well. Is it financial performance that causes social performance, including employee satisfaction? One might think that once the company does better, it can start treating its workers well.

In finance, we look at the stock return — the change in the stock price between now and in the future. There’s evidence that the current price does take into account tangible measures of performance and not just profitability. So if we thought there was reverse causality — that employee satisfaction was the result of good performance — then good performance would already be reflected in the stock price.

I look at not just the future stock performance, but also future earnings and profitability. Equity analysts try to forecast profits, and they take into account things like management quality and past performance. They found that companies with happier employees were systematically beating analysts’ expectations, suggesting there was something about these companies that the market just wasn’t getting. That moves it closer toward causality.

Klein: Let’s talk about the evidence you’re seeing that goes beyond employee satisfaction. Turning to other stakeholders and other dimensions, what are you seeing that meets the standards and rigor of research that makes you, a finance professor, say, “We ought to take this more seriously”?

Edmans: It’s important to be skeptical and discerning about the evidence, because there is a lot of confirmation bias — we would like to believe that companies that do good do better. So we might just jump on the evidence even if it’s not fully robust.

However, there is evidence — looking at all the stakeholders, such as environmental performance — that they also improve shareholder value, which is the idea that the pie is growing, rather than being split in favor of stakeholders.

Klein: You wrote your book before the coronavirus pandemic. What are the lessons you’ve learned about great companies that are particularly relevant for us now?

Edmans: I think it’s how responsibility involves pie-growing as well as pie-splitting. There have been some great responses to the crisis that I’d call pie-splitting — i.e., companies and investors are bearing the load of the burden to help society. This might be some CEOs working for zero, or it might be companies giving away free products.

But why pie-growing is critical is, what if you can’t split the pie? You don’t have money lying around if you’re a small company. Or you’re not in a relevant industry, like food and sanitizer.

So pie-growing is about being innovative, thinking, “What can I do to create value for society?” You might be Ford — the car company that’s now making hospital masks and gowns. How can the New England Patriots help with football and merchandise? Well, they have a plane, and they used that plane to fly 1.2 million N95 masks. Or you might be a small business with no money. One example is Barry’s, a gym offering free online classes.

Donating money is really important — I can never underestimate the companies that have done that. But growing the pie means that all companies can contribute, even if you’re in an unrelated industry, just by thinking innovatively about how you can use what’s in your hand to serve wider society.


Published as “Don’t Split the Pie — Supersize It” in the Fall/Winter 2020 issue of  Wharton Magazine.