The consensus among politicians, citizens, and even executives themselves, is that capitalism serves only to enrich the elites while ignoring ordinary people. Companies are making outsized profits and CEOs are raking in exorbitant salaries, while paying scant attention to – and even exacerbating – the world’s major social problems in 2020. Climate change, income inequality, population growth, resource usage, automation – the list is endless.
So it’s urgent that companies take action. If they don’t, not only may customers and workers walk away, but also politicians may pass regulations that overturn capitalism as we know it.
But many popular proposals to reform business may not actually be in the best interest of society. Many are based on the pie-splitting mentality. They assume that the value that a company creates is a fixed pie. Then, the only way to increase the slice enjoyed by society is to reduce the slice that goes to business – slash CEO pay, restrict dividends, and donate profits to Corporate Social Responsibility initiatives.
But viewing the relationship between business and society as a fight between “them” and “us” is deeply flawed. Profits don’t just go to nameless, faceless capitalists but pension funds investing on behalf of citizens – not “them”, but “us”. So while it’s critical for companies to take seriously their responsibility to society, they also have a responsibility to deliver profits.
That’s the power of a different approach to business – the pie-growing mentality, which stresses that the pie is not fixed. The implications are profound. For CEOs, the best way to increase profits is not to take from society (cutting wages or price-gouging customers) but to create value for society – higher profits then arise as a by-product. For citizens, high profits need not result from value extraction, but successfully serving a social need. A company may improve working conditions out of genuine concern for its employees, yet these employees become more motivated and productive. A company may develop a new drug to solve a public health crisis, without considering whether those affected are able to pay for it, yet end up successfully commercialising it.
Importantly, the idea that both business and society can simultaneously benefit is not wishful thinking, but backed up by rigorous evidence, which I lay out in my new book, “Grow the Pie: How Great Companies Deliver Both Purpose and Profit.” But an idea can’t just remain an idea – it must be put into practice. And the current Coronavirus crisis throws up major challenges to turning responsibility into a reality. Can companies really think about responsibility when they’re struggling to survive? Is purpose a luxury that leaders should only consider in good times? We’ve seen Unilever donate €100 million in food and sanitiser, and guarantee the jobs of all its workers. But what if you’re in an unrelated industry without relevant products to donate, can’t keep paying your workers as you’ll go under, or are a small business without €100 million lying round? I will explore these topics in my upcoming TCGI webinar, and hope to see many of you there.
Learn about this and more in our webinar on 3 June 2020 where we’ll offer guidance on what responsible business might entail in the current climate. Register your participation here.
Alex Edmans is Professor of Finance at London Business School and author of the book ‘Grow The Pie: How Great Companies Deliver Both Purpose and Profit’.