A summary of part 4 of the IFoA’s Presidential Speaker Series on alternative economic thinking
The final event in the IFoA’s Presidential Speaker Series on alternative economic thinking was a dynamic presentation on purposeful business. It explored how businesses can define their ultimate purpose, and the positive impact this can have both for them and for society.
The speaker was Alex Edmans, Professor of Finance at London Business School and a non-executive director of the Investor Forum. His has previously been a tenured professor at Wharton and an investment banker at Morgan Stanley.
Edmans is the author of ‘Grow the Pie: How Great Companies Deliver Both Purpose and Profit’, which was a Financial Times Book of the Year for 2020. He has also spoken at the World Economic Forum in Davos, testified in the UK Parliament, and given TED and TEDx talks.
The session was chaired by IFoA President Matt Saker.
Edmans began by saying that purpose is often justified in moral terms. He said while this is certainly valid, there is a concern that pursuing purpose can distract from making long-term profits. But he made the case that purpose is good for the long-term sustainability and success of a business.
He gave the example of Immanuel, a goat herder in Lake Magadi in Kenya’s Great Rift Valley. Immanuel’s business used to depend heavily on cash. After selling a goat, he’d have to check the money wasn’t counterfeit, store it securely, and trek for up to a day to the nearest bank. He was forced to graze his goats within one day’s walk of the bank, so they did not always enjoy the greenest pasture.
In 2007 the UK telecoms firm Vodafone introduced a mobile money service called M-Pesa in Kenya. It enabled people like Immanuel to transfer money using a mobile phone, without requiring a bank account. M-Pesa helped around 200,000 households out of poverty in Kenya.
The mobile money service also improved gender equality. Lots of these households were led by women, many of whom were able to move from agriculture to retail and business. As a result, they became more financially independent.
Edmans contrasted M-Pesa with another episode involving Vodafone, when the company issued a global tax transparency report in 2012. Failing to publish this report would have led to public condemnation. By contrast, failing to invest in M-Pesa would not have upset anyone. But M-Pesa had a significant social benefit, while the tax report simply reassured markets that the company was ‘doing no harm’. It was an example of doing the minimum to manage risk, Edmans argued, whereas real purpose requires the goal of creating social value.
Edmans described how the value a company creates is divided between:
Purpose can be seen as redistributing the pie more fairly – for example, giving some profits to charity. The risk is that the company’s leaders only do this in a superficial way: their fear is that implementing it in earnest would reduce profitability. ‘Greenwashing’ is a case in point. A better approach is to ‘grow the pie’ by investing in innovative ideas like M-Pesa, which would eventually generate profits.
Edmans argued that Vodafone would have expected, based on the financial data, to make a loss on its investment in M-Pesa. It was a new technology and targeted at a poor community. So the telecoms company’s decision must have been inspired by the social value it wished to create.
In reality, though, Vodafone did make a profit. Consumers valued the service and were willing to pay a transaction fee to use it. This suggests that profit can be seen as a by-product of helping society – not something to be pursued directly.
Edmans mentioned wider evidence of this phenomenon. Between 1984 and 2011, the 100 US companies rated by Fortune as the best places to work outperformed their peers by 2.3% to 3.8% per annum.
In the concluding part of his presentation, Edmans discussed how a company can identify its unique purpose. It has to be focused and targeted. And it has to ‘use what is in its hand’ – to be aware of the physical, intellectual, and other resources at its disposal. As a result, it would be able to articulate why it existed, whom it served, and its role in the world.
Edmans highlighted 3 ways to implement purpose.
For example, NatWest promotes ‘minority entrepreneurship’, offering loans to those with no track record in business. This would not be justified in a traditional financial model, but it has a business logic as it expands the bank’s range of borrowers.
Not every situation offers an opportunity to innovate, and businesses have to make commercial decisions. But they can still choose to pursue excellence for a social purpose, even without expected financial benefit.
Edmans gave the example of Airbnb, which had to make 25% of its workers redundant during Covid to survive. But it chose to offer much more generous terms than the law required.
Edmans gave the example of 3 bricklayers who describe what they do in very different ways: laying bricks, making a living, or building a cathedral.
He used the example to conclude with a thought about the impact someone can have as an individual. We may think of ourselves as a thermometer, reflecting the culture and environment around us. But we could aspire to be like a thermostat instead, influencing our environment by ‘using what is in our hand’.
This second part of the webinar included questions from the audience about the main hurdles to becoming purposeful and the relationship with ESG.
Responding to the chair’s question about what pushback he receives to his ideas, Edmans referred to polarised views of the purpose of businesses. That is, they should either pursue profit exclusively or ignore profit altogether. Such views tend to attract more attention than the more balanced approach he advocates.
A questioner asked if we should develop more business structures such as B Corps and mutuals, which are not just financially focused. Edmans said some of these benefits could be achieved in regular public companies. For example, CEOs could be incentivised to have a long-term perspective, even beyond their tenure. It’s also helpful to have a few large shareholders with a long-term stake in the business.
The next question was about the main hurdles companies face to become purposeful. Edmans said adversarial thinking is quite ingrained, unlike a cooperative approach. This is understandable because in the short term the pie really is fixed. It takes long-term thinking to move from a ‘split the pie’ mentality to ‘growing the pie’. He gave the example of Brunel Pension Partnership, which gives a clear steer to its fund managers to focus on long-term performance.
A questioner asked how we can make governments more purposeful. Edmans said it was normal for market failures to happen, and governments’ role was to address this. He gave several examples, such as taxing negative externalities, subsidising positive ones, breaking up monopolies, and partnering with the private sector.
The last question explored the relationship between purpose and environmental, social, and governance (ESG). Edmans said ESG is about long-term value for a company, which shouldn’t be seen as niche because everyone should care about it. But he said ESG should not be put on a pedestal as an issue. It’s on a par with other factors like improving productivity, innovating, and reducing costs.
On the IFoA Virtual Learning Environment, you can watch a recording of the webinar.
Together, these 4 webinars have built up a thorough and nuanced critique of current economics.
In our first webinar, the panel discussed the shortcomings of the traditional economic assumption that markets are in equilibrium. And it explored the rich variety of alternative approaches. See An introduction to alternative economic thinking
In the second webinar, Simon Sharpe focused this debate on climate change. He highlighted that traditional economic analysis is weak at risk assessment and therefore underestimates the urgency of investing in clean technologies. Read more at: Five times faster: the invisible infrastructure of climate change
The presentation from New Capital Consensus flagged the risks of traditional ‘silo’ thinking and advocated a systems thinking approach. The New Capital Consensus applies this approach to analyse how the players involved in the investment system interact. See New Capital Consensus: the investment system and how actuaries impact it
Finally, in this webinar Alex Edmans argued that a business can thrive by thinking beyond short-term profits and by understanding its unique social purpose.
