ESG and Flexibility – Interview with Prof. Alex Edmans (Full Interview)

Cali Williams Yost 

Hi everybody. It’s such a privilege today for me to be talking with one of my academic heroes, Alex Edmans. Alex is a Professor of Finance at the London Business School and the Academic Director of the Centre for Corporate Governance.

He graduated from Oxford University and then worked for Morgan Stanley in investment banking in London. He was on the fixed income sales and trading side in New York as well, and I think that’s important because one of the things that I love about Alex’s work is that it is so very grounded in reality. I think that’s why, for my work, it carries so much weight and why I appreciate Alex’s work so much. My theory is that it goes back to his experience working at Morgan Stanley.

From Morgan Stanley, Alex went back to school and received his Ph.D. in finance from MIT’s Sloan School. As a Fulbright scholar, he joined Wharton in 2007 as a professor and was tenured in 2013, shortly before moving to London Business School.

His research has been covered in The Wall Street Journal, Financial Times, The New York Times, The Economist, and The Times, and he’s been interviewed on Bloomberg, BBC, and CNBC. He’s spoken at the World Economic Forum in Davos, and he’s testified to the UK Parliament.

I think you get the picture: Alex is truly an expert on all things related to ESG—Environmental, Social, and Corporate Governance—and to employee engagement and well-being, and how those factors affect the bottom line of organizations. The world looks to Alex Edmans to really guide us in terms of how we take business to the next level—in socially responsible and profitable ways—and that’s what’s so exciting about his work.

Today, Alex is here because the paperback version of his book, Grow the Pie: How Great Companies Deliver Both Purpose and Profit, is coming out. Every author loves when you hold up a copy of their book, and the cover is ripped, text has been underlined. This is a book that I bought immediately when it came out in hardcopy, and I am so glad I did because it really takes all of his work to the next level.

So, Alex, it’s great to have you here.

Prof. Alex Edmans

Fantastic—delighted to be here. Also, Cali, thank you so much for the invitation.

Cali Williams Yost 

Oh, you are so very welcome.

In a few minutes, I am going to share specifically how Alex’s work has influenced my work in terms of executing flexibility in organizations. But let’s pull back the lens first.

I want to talk to you, Alex, about your concept of pie economics, which you call “pie growing,” versus the more traditional shareholder-profit-driven economic model. To quote something that you wrote in Grow the Pie:

“A pie-growing enterprise focuses on creating social value with the assurance that most value-creating actions will, sometimes unexpectedly, increase long-run profits—but also with the recognition that a few won’t. So even if the profit effects of every action were perfectly predictable (which, as discussed, is almost never the case) pie economics might prefer an action that grows the pie even if it doesn’t maximize profits.”

Pie growing, even if it doesn’t maximize profits, sounds like a major departure from the supposedly shareholder-focused, profit-driven model—which is the model that’s driven a lot of the decision-making in organizations.

So I want to start by asking you: How is pie economics different from that supposed shareholder-focused, profit-driven model that so many organizations have followed for decades?

Prof. Alex Edmans 

I’d say it is indeed different from the profit-driven model, but surprisingly I say it’s not too different from the shareholder-focused model. Why is that? Because I often think, well, if you’re shareholder-focused, you are profit-driven.

But what do shareholders care about? So you and I, I’m sure, are shareholders in many companies—we care about our time, and that’s why we’re investing. But what do we care about in our time? It’s not just our income in retirement, but our living standards. We don’t want to live on a planet which is two degrees warmer or is paying scant attention to things like diversity and inclusion. So I would be happy for many of the companies that I invest in to make small financial sacrifices if this indeed addresses some social goals.

The heart of my work is the idea of the pie-grow mentality—that many things that you do to benefit society also benefit profits, so there are lots of win-wins. But even when they’re not win-wins, when there are some tradeoffs, it can still be that you are acting in shareholders’ interests even if you don’t take the action that’s going to make the most amount of money. It might be you’re making 90% or 95% of the available profit opportunity, but your shareholders are willing for you to sacrifice that 5% or 10%—maybe in some cases 20%—if the social goal that you are addressing is such an important one.

Cali Williams Yost 


So, okay, here’s my question: Why don’t the players in this economic ecosystem—the analysts, the market shareholders, decision-makers and organizations, even board members—seem to understand that the pie-grow model is the better model? There does seem to be, in some cases, this very short-term, myopic focus on only things that return an immediate profit, not allowing for other things that would ultimately return a higher profit but are longer term.

Why isn’t the economic system set up to understand that and then act upon it?

Prof. Alex Edmans 

That’s a really important question, Cali. And I say there are two main reasons.

First is the prevalence of the fixed-pie mentality. What do I mean by this? What is the pie to begin with? The pie is the value that a company creates through its products and services.

Often people think about that pie as fixed: You can either give that pie to investors in the form of profits, or you can give it to society—that might be workers in the form of high wages, customers in the form of fair prices, maybe the government in the form of higher taxes. Often a business leader thinks: “If my goal is to maximize profits, and if the pie is fixed, I need to squeeze every last drop from everybody else. I can increase my slice only if I reduce other people’s. And so how might I do that? I might pay as low wages as possible or work my employees as hard as possible.

If you think about it, some of the greatest, most successful management innovations have been ways—unfortunately—to squeeze stuff out of your workers. When Henry Ford launched the assembly line, why was that a genius innovation? Because the assembly line forced workers to keep up with the pace of production and ensured they did not shirk.

Why is my book called Grow the Pie? What I’m trying to stress—not just based on wishful thinking, but a lot of rigorous evidence—is that the pie is not fixed. When you treat your employees well, pay them more than you might have to, or give them more flexible time and parental leave, you are not just giving away part of the pie; you’re making your workforce more motivated, more productive. And they pay you back by being more productive and more willing to stay and the like.

That’s why I really like your introduction, Cali. When I do my work, I do highlight the ethical and moral reasons for being responsible. But you also mentioned the profit and the financial reasons. I think this is really key, because obviously morals and ethics are important, but a business leader might never consider this first order unless she’s convinced that there is a business case.

I think that’s the first reason: There’s a prevalence of this fixed-pie mentality, and my work is trying to show that, no, there are win-wins.

The second reason is also prefaced in your question.

Even if a business leader agrees with everything that I say—which is that, if you invest in employees and customers and so on, you will improve profits—that only happens in the long term. While it does cost money to treat your employees well, in the long term they will repay us with greater productivity and retention. But if we are evaluating our CEOs according to quarterly earnings, if we’re paying them a pay package which highlights short-term profits, then even an enlightened leader might think: “Yes, there will be long-term benefits, but I might not be around in the long-term because I might be fired.” So there’s short-term pressure to perform, which means you can’t undertake the pie-growing activity, even if you truly believe in it.

Cali Williams Yost 

Yes! I’ve been doing this work—creating flexible operating models—for literally two decades. In those two decades, just a handful of organizations have been forward-thinking enough to say we have to do this differently because the world is changing, and wise enough to see that they needed to be transforming the way work is done.

Inevitably, it is organizations that are willing to transform the way they work that get so much more for their shareholders and their employees. When people have the flexibility to think through tasks—what, how, when, and where they can do their best—outside of the rigid, traditional model that so many other organizations seem to be married to, everyone wins. And yet companies are still not convinced.

This is why your work has been so helpful to me: Because it’s so rigorous, and it’s so grounded in data, it is very hard to dismiss. You would think everybody would be running to do this, but—as we saw with the pandemic—most organizations were caught short. They were not flexible, and they could not pivot as they needed to. Companies that had done the work already to transform their work operations could pivot on a dime, and they didn’t lose any momentum.

So now, here’s my next question: Do you see signs that the players in the economic ecosystem are adopting the pie-grow model? Because everybody is struggling. The analysts don’t understand pie-growing, so they don’t incorporate it into their reports, which then feeds into what the shareholders invest in, which then puts pressure on the leaders. Everyone’s actions reinforce the issue.

The pie-grow model is actually better for everybody—even shareholders. Do you see signs that people are beginning to understand that? Do you see signs that more players are adopting your model? If you do, why, and what are those signs? And if you don’t, what do you think will prompt the shift to pie-growing?

Prof. Alex Edmans 

Yes, I do see signs Cali. I am relatively optimistic, even though the world does face a lot of challenges.

I can’t remember when we first connected with each other; it might have been 10 years ago, or probably even more than that.

Cali Williams Yost 

It was when I first came across your study, which we’re going to talk about in a minute, this amazing study. It’s remarkable what you found, and it’s so powerful. So, yes, it was probably about a decade ago when we first connected.

Prof. Alex Edmans 

Yeah, so 10–15 years ago. That is why it was probably so easy for us to find each other: We were quite sort of outsiders in the corporate world back then; there were so few people who cared about things such as ethics and purpose and so on. Indeed, when I first presented that paper at a conference, the conference was an investor’s conference, and most of the investors who were there were not mainstream investors—not like the BlackRocks of the world, who are now trying to take this seriously. So, really, that’s why I was so happy that somebody like you valued my work, because most people back then really didn’t care. At the time, they thought, okay, responsibility, that sounds a bit fluffy.

What has changed since then is that this has moved to a CEO-level issue.

Back then we had the idea of CSR—Corporate Social Responsibility. And I don’t really like that term, because that has the connotation of being something that you can silo in a CSR department.

Cali Williams Yost 

Exactly—peel it off into something over there. It sounds nice, but doesn’t really have a meaning.

Prof. Alex Edmans 

You’ve got the business, and then you’ve got CSR over there.

But business purpose is something that is central to a chief executive. Also what I have found is that investors are taking this seriously, and that’s really important because, at the end of the day, it’s the investors who vote-in the board of directors. Even if you have an enlightened CEO, she doesn’t have the freedom to pursue purpose unless investors are taking this seriously.

Just to give one example: For the last six years, I’ve served on the Responsible Investment Committee for Royal London Asset Management, which is a large UK investor. We run six sustainable funds, but who comes to our meeting? It’s not just the head of sustainable investments or the head of responsible investment; our chief investment officer comes, and he has agreed and has input on everything. Not just the sustainable funds; he realizes that, even if you’re running a standard fund right, the only way that you can invest in companies that do well in the long term is if they take these issues seriously. So I do see this positive move.

And one of the great things since the book came out is who’s resonated with it, particularly people whom you might think might be the least open to purpose—private equity firms, hedge funds, investment banks, law partnerships. And they’re saying: “No, we realize that the way that we were running business was actually not that great. In the past it might have worked, but particularly now that we want to attract millennial talent who really care about purpose, we must change.

Now we recognize that companies have a responsibility to society. Companies that have not discharged that responsibility are being walked away from. So what is causing that shift?

I do think you need vigorous evidence because, without it, it might seem wishful thinking; it might seem too good to be true. But now you have somebody like me—a hard-hearted finance professor, an ex-investment banker—and even I can say: “Well, there’s a business case.” It’s not just ethics and morals, which are important, but there’s also the business case behind it.

Now, we’re not fully there, so I’m not going to say that the world has completely changed. But I do see a real shift forward. I think you can see this shift in the C-suite within companies. And in investor behavior, you do see this—not just as a niche SLI investment model, but as something that is relevant for all funds.

Cali Williams Yost 

So, if I hear you correctly, this is giving me hope, which is great. When do you think that the shift happened? In what year did you see your chief investment officer showing up at the meetings versus just the CSR people? And what do you attribute that shift to?

Prof. Alex Edmans 

I think it’s difficult to say there was a specific event. So, certainly, some movements have precipitating events. For example, Mr. Floyd’s murder gave lots of extra weight to the really important diversity movement. I think, with responsibility, it’s just been the accumulation of effort over time.

So how did I end up on this Responsible Investment Committee? I started six years ago. There was a bill on modern slavery in the House of Commons, and I was invited to go to the debate. I raised a point from the floor: “You think that, if you are to impose this modern slavery regulation, it’s going to be costly to business, and business is going to oppose it. But I’m going to say, based on my research, it’s actually in businesses’ interest to treat their workers seriously, not just within the company, but within their entire supply chain.” An investor of Royal London Asset Management was at the debate, heard me speak, and invited me to join the Responsible Investment Committee. I do think it is a greater business case when you are able to show investors real evidence within the data.

When we first discussed my study, it hadn’t yet been published in an academic journal. Then you have to go through multiple rounds of revision to make sure that it’s absolutely robust. And I was put through even more purgatory than most authors because, back then, people were even more skeptical about ESG.

Cali Williams Yost 

Alex, I can totally relate. I always say “if there was research showing the return and benefit of flexibility in the way people can work, everybody would have been doing it.” It’s insane to me. Then to see what happened with the pandemic—that companies were able to stay in business because people could work flexibly—now it’s like “oh right.” I completely hear you. I can completely relate.

Prof. Alex Edmans 

When I first came out with the paper, it still needed to go through all the revisions to be absolutely nailed on. Once the paper finally got published in a journal, which was about four or five years after I started writing it, that triggered other people to think that maybe top journals are actually receptive to ESG work.

There was a tipping point when ESG became mainstream, but it’s really hard to identify. I think it’s just the cumulative efforts of people like you and me. Hopefully our work is now leading to ESG becoming mainstream, which is why lots of companies are having these important conversations.

Cali Williams Yost 

That is inspiring, and encouraging. So what else needs to be done? What more could we do?

As you sit around the table with mainstream players in the economic ecosystem, what more should we be doing?  I’m fascinated by this economic ecosystem because, again, everybody plays a role in it. To your point, forward-thinking CEOs can’t make a lot of change if they don’t have board members who understand the rationale and business imperative behind all of this and are being pressured by shareholders who are being supported and informed by analysts.

What more can we be doing to bring the pie economics/pie-growing mentality to bear even more broadly?

Prof. Alex Edmans 

I think there are two important things we can do. The first is to try to engender a long-term mindset. And how can we do that? I think it starts with CEO incentives.

A lot of people focus on CEO pay, but, when they focus on it, they think about the level and the quantum of pay. Clearly those are not unimportant, as we don’t want outsized rewards. But what I think is really important is the horizon of pay. If the CEO cares about short-term profits, she might not have the latitude to make investments. But if CEOs are given shares in their company which they’re required to hold for 5, 7, 10 years, then the horizon becomes quite different. And then they are willing to make the investments that are necessary to grow the pie.

So a lot of my work is actually trying to lengthen these incentives. One of the nice things that happened in the UK recently is that there was a change in the corporate governance code, which changed the minimum horizon of incentives from 3 years to 5. Maybe even 5 years is not enough; hopefully it will move to 7. But what you saw was a change in the right direction, and that’s only the minimum. There are many companies that are voluntarily going beyond that. So I think just the change in the long-term mindset is really important.

Cali Williams Yost 

Is there a comparable governance ruling in the U.S., or is it just the Wild West here?

Prof. Alex Edmans 

There’s no similar American legislation or recommendations to my knowledge, but you do have investors who might be pushing for it anyway. The Council of Institutional Investors has recently come out and said: “Yes, we would like you to pay your executives more with long-term shares, rather than these complicated short-term bonuses.” And because the Council of Institutional Investors is quite an influential voice in America, hopefully this will be something which then encourages companies to be much more long=term in their approach.

I think, in the U.S., it’s more voluntary action by investors rather than regulation. And if indeed the likes of BlackRock are truly behind the idea of responsibility—and they’re making a lot of public statements about it—in order to truly put it into practice, they need to make sure that they engage with companies to lengthen the horizon of pay. And they have the ability to do that because they have a say on pay-votes with companies in the U.S.

The second thing actually tempers what I previously said. I said it was great that loads of people are now taking responsibility seriously, and that the concept has become mainstream. But I think sometimes people now go too far to the other extreme: They get overly excited about responsibility. They think, “Oh, let’s just do it, and let’s try to measure it as much as possible.

So what you have now is this huge plethora of metrics, asking people to report on this and that and the other dimension. Obviously, as a finance professor, I do believe in the power of data. But the problem is that there are many important dimensions of responsibility that are not strictly quantitative but are qualitative in nature. If you want responsibility to work, clearly you care about pay and turnover, and you can measure those. But things like corporate culture—the things I know that you are devoted to studying: work culture and flexibility, meaningful work and skills development—can you really measure those?

If we are forcing companies to disclose only these quantitative metrics, it can lead some companies to tick particular boxes at the expense of other dimensions such as flexibility. As my boss at Royal London says, you can’t make the artisan computational.

When many of the dimensions of responsibility are qualitative in nature, how do you assess whether a company is truly responsible? Yes, you would do some metrics. But you would also want to look at some of these other more qualitative dimensions.

Take, for example, this question: How do you choose what job to go for? To decide whether or not you’ll take a job, yes, you’re going to consider quantitative things like the pay and benefits. But you’re also going to look at other things, such as: Do you believe in the purpose of the company? or How well you might get along with the people? These are important things to consider as well.  I think, in the rush to jump on the ESG bandwagon, we must realize that there’s not always going to be a simple data approach to try to measure corporate ESG. We are going to need to apply different tools. In the haste to adopt ESG, people are trying to apply outdated models—ones that worked to model profits—to ESG without realizing that, actually, we might need a different way of assessing it. So I would say more haste, less speed is needed—just like the tortoise and the hare.

Cali Williams Yost 

Interesting. And, again, this goes back to that economic ecosystem. Profit models, these outdated models, are so much of what business leaders have relied on. Business leaders are going to have to be open to rethinking how they create the value that they’re bringing to the table in terms of how their analyses are executed, what shareholders are looking for in an organization and from their leaders. ESG requires a different model of leadership if you do look beyond quantifiable metrics. It’s fascinating how this all has to shift.

Prof. Alex Edmans 

Absolutely. And I think what is great is that people are recognizing the need to prioritize ESG issues. However, if they think, “Let’s immediately try to jump on this as soon as we can and use the old ways of analyzing ESG,” which does involve data and measurement, they are going to miss something critical. The profit-model approach needs to be modified quite significantly. Ultimately, you’re not going to be able to rely upon a box-ticking approach.

Maybe one analogy to this is the No Child Left Behind Act in the U.S., which was on education. That had a similar mentality to ESG initiatives in that, for accountability, we needed to start measuring output, but what needed to be measured—in this case, education—was nebulous. With No Child Left Behind, that resulted in standardized tests. And so what did this lead to? People started to tick boxes and teaching only to the test, only focusing on the dimensions that were being measured. I think we may observe similar issues with ESG. If there is this push towards tying the quantitative measures of ESG to decision-making—indeed, with investors saying “well, let’s allocate capital based on the metrics,” just like when education departments tied school funding to student test scores—then we will just get this overly focused approach on these metrics.

Cali Williams Yost 

That is a great analogy and actually is a great pivot to the next thing I want to talk about, because this is what your research is all about. I’d like to pivot to this wonderful study that you did almost a decade ago: Your “best companies to work for” research and the role of employee satisfaction (which can be hard to measure) in superior returns.

I want to give everybody a little bit of background about your research. In December 2012—I believe that’s when I saw it first came out, that’s when I think it was published, so check me on the date—you published research proving that the 100 best companies to work for in America also delivered higher total shareholder returns, beating their peers by 2.3% to 3.8% per year in total shareholder returns from 1984 to 2011. Is that an accurate summary?

Prof. Alex Edmans 

Yes, absolutely.

Cali Williams Yost 

So that’s huge, just huge.

And you wrote about this study recently in an article for, explaining that the “Best Companies” list measures employee satisfaction across five dimensions: (i) credibility; (ii) fairness, which could be seen as compensation and diversity; (iii) respect, which is opportunities and benefits; (iv) pride; and (v) camaraderie, which centers around teamwork, philanthropy, and celebration. And what you found is that employee satisfaction is a critical differentiator.

What I think is even more powerful and interesting is that your study was recently independently replicated by other researchers. This is where it gets interesting, and I want to hear what you think about this. Another independent team replicated your study, which is really important because a lot of studies are very hard to replicate—especially 10 years later. So this other team of researchers replicated Alex’s research and found that it’s held over the past ten years.

I’m going to read what the researchers wrote and then I want to hear what you think. They wrote:

“Edmans showed a portfolio of companies with the highest levels of employee satisfaction earn significant and positive, abnormal returns. However, 10 years later, employee satisfaction should be priced-in . . . . So [Edmans’s] results from a decade ago should not hold out in the sample. But it does, because intangibles like employee satisfaction are inherently difficult to incorporate into stock prices.”

So here we are: It’s a decade later, and, again, still the players in that economic ecosystem haven’t caught on and priced-in or rewarded high levels of employee satisfaction. Nor is that pie-growing that you have so eloquently outlined as being powerful reflected in the stock prices.

I think it’s important for everybody to understand why your research has had such an important impact for me. Because, as we’ve helped organizations execute flexible operating models, it is clear that flexibility and the ability to fit your work and life together are drivers of employee satisfaction. Flexibility and work-life-fit were correlated with an increase in employee satisfaction pre-pandemic, but I’m going to say even now, post-COVID, employers are still are understanding that this has to be a fundamental way that their organizations do their work—even more so now that employees actually expect a level of control and flexibility over how, when, and where they work in order to be satisfied at work.

So I guess my question to you is: What is it going to take for those intangibles like employee satisfaction to be incorporated into strategic decision-making in a meaningful way? Because there is an understanding, you put it in your research, it has been replicated: the pie-growing mentality and approach that incorporates employee satisfaction does increase long-term profits. Again, how do we get that employee satisfaction built into the model? How do we build them into the execution model and the decision making?

Prof. Alex Edmans 

Lots of riches in your question, Cali, so I think I’ll first start with my original paper, and then what happened in the ten years since.

Cali Williams Yost


Prof. Alex Edmans 

So you’re right, the paper was published in 2012, but I had to start the research in 2007. It took five years to perfect the study.

Why did I even look at this to begin with? I wanted to look at whether, if companies are treating their workers better, are they just fluffy companies that are not being efficient at controlling their costs?  Because Henry Ford would say, “if your employees are happy, then you’re not working them hard enough.” And I showed that, actually, this is the opposite. Consistent with what you’re seeing and what you’re doing as a practitioner, Cali, is what we showed: If you treat your employees well, it grows the pie rather than simply splitting the pie differently.

When the paper came out in 2012, I’d hoped that people would start acting on our findings and would begin saying to themselves, “ah, if indeed companies that treat their workers well beat their peers by 2.3% to 3.8% per year, then as an investor I should start investing in these companies.” And then, if everyone started investing in it, those returns should go away because it would be priced-in. And you might think, “well, that should particularly be the case, as over the last 10 years ESG has been so popular.” If ever there would be a time for people to be paying attention to employee satisfaction, it should be the last decade.

So why has this not happened? And why did the replication find that my study’s results still held?

I think it’s going to be linked to my answer to your last question. Yes, there has been a lot of focus on ESG, but based on quantitative metrics. So, yes, people want to care about employee well-being, but they might look at things such as worker turnover, CEO-to-worker pay ratios, injury statistics, maybe pure demographic measures of diversity. And all of those things are really, really important, but they’re not the full picture.

Clearly, diversity is something that you and I both care about lots, but that’s not just demographic diversity. Are you developing a corporate culture that is going to encourage dissent? Are you creating a psychologically safe workplace so that people are willing to express their views? And those are the things that you can’t quantify; those are the things that you can only evaluate through some “boots on the ground” approaches.

So what I have started to do recently is to work with some asset managers—they actually approached me. And they said, “Look, we are really interested in your work, and we realize that this is something that you can’t measure with a few statistics. Can you help us develop a framework, let’s say a set of questions that are probing and discerning, that we can use to ask management?

Cali Williams Yost 

These are investors—I think this is really important, Alex. There’s a struggle to do this inside of organizations, right? But it matters; it matters that investors are now trying to figure out how to measure ESG across new dimensions. Corporate boards need to understand that their investors have started asking new questions, and the answer to those questions will influence how shareholders then behave. Corporate boards need to realize that those questions are being asked within their organizations and being measured. Am I correct on that? That’s how I see it all reinforcing itself, honestly, is that true?

Prof. Alex Edmans 

That’s a great way of putting things, Cali. That virtuous circle—because investors are going to be validating boards according to blunt metrics, such as, let’s say, turnover or pay ratios, then the board just can tick that box, right?

One way to reduce employee turnover is to keep workers in the organization, but task them with non-meaningful work. So let me give an example. In Japan, you have some companies, like Toshiba and Panasonic, where employees used to make magnetic tape. You don’t need magnetic tape anymore in a digital world. To reduce employee turnover, what Toshiba and Panasonic have done is they’ve kept those employees within the company, but assigned these workers to non-essential tasks. Now, previous magnetic-tape manufacturers work in what’s known as “banishment rooms,” so they just review security footage all day. That doesn’t provide them with meaningful work or human dignity, but it ticks the boxes in terms of turnover statistics.

Companies like Toshiba and Panasonic are saying, “okay, we don’t get rid of people.” But, actually, it might be better to let redundant employees go and allow them to work without placement in order to try and find another, meaningful job.

If all you’re looking at as an investor is these blunt metrics, then people will “teach to the test”; boards will hit those metrics. But if instead corporate leaders start saying to themselves, “our investors are going to start asking me to give examples of an innovation that was prompted by a suggestion from an employee. ‘Can you tell me about the process that you undergo to ensure that employees are able to come up with their own views? What are the processes to make sure that failures are rewarded? So if somebody comes up with a great idea which ultimately fails, what happens to that person? Can you tell me what you do to try to allow people to have the freedom to try, even if it ultimately fails?’ And if indeed investors are going to be moving on that, then the board needs to make sure that management is accountable for that.” What is really great, and you’re right to highlight this Cali, is that now there are some long-term investors who are really thinking, “if we’re going to be differentiated from our competitors, one thing that we want to do is to evaluate corporate culture—that’s going to be the key driver of the performance of companies.

What this replication study found is that, even in 2021, it’s not priced into the market. So if we can evaluate the companies that truly have a great corporate culture, then this is going to be a metric where we are going to be delivering long-term superior returns.

Cali Williams Yost 

That’s great. So what are some of the questions? Can you share some of the questions that you’re asking, even if you haven’t 100% landed on them? What are some of the questions that you’re finding are important to add into that intangible-measurement structure?

Prof. Alex Edmans 

Unfortunately, I can’t share the specific questions because that’s proprietary. But what I can share is the general approach.

The general approach does recognize that the optimal culture within the company is dependent on the specific context. I think that’s really important. Because what some investors might have is their metrics for culture, and they’ll apply them across all organizations. And particularly if you’re a diversified investor, then you need something which is one-size-fits-all—then you can apply this to any portfolio. But the world is not one-size-fits-all.

And let’s just give another practical example: Netflix.

Many people think that a great corporate work culture is one which values a lot of safety, where you give your employees security that they will have jobs for life, and so on, and that does work in many organizations. However, when you look at Netflix’s website, what’s really interesting there is that they say, “Well, we have a really high performance driven culture. We will always only keep the best people, and not everybody will end up being a great fit for us.” Because Netflix is so much about innovation, they want to make sure that they have people who are truly at the top of the game in terms of being able to deliver this fantastic product to the customer base. So Netflix is a firm where their culture is going to be more performance-oriented and performance-driven than other places. That’s not for everybody, right? And that’s fine. Different employees look for different things. Emphasizing high performance is something that works well for Netflix when they go out and attract talent.

Another example is delegation. Normally, delegation and freedom benefit a work culture. But there are other organizations where—due to the margin for safety, whether the operation be mining or drilling or so on—you do want to have a “rules oriented” culture. The military is also one where you have that hierarchy. And that hierarchy can be good in certain circumstances.

What the framework is trying to look at is: Are there general principles that apply in every organization? And/or: are there certain principles that might apply only in a couple of organizations when it relates to work culture? Let’s try to discern: Is the CEO aware of what’s best for her organization, rather than applying the latest Harvard Business Review article she’s just read to her company, even if the context isn’t appropriate. So that’s sort of the broad thrust of the framework that I’m able to share.

Cali Williams Yost 

That actually aligns with a flexible work culture: one size does not fit all. We’re now having this debate of back-in-the-office versus full-time-remote. And it’s like: No!

Flexible work is about what that organization does—not only at the enterprise level, but also deeper in the organization. It’s about defining the how, when, and where of work, and adapting our business practices to reflect the individual parts of the organization and what those specific employees need to achieve for the organization.

Transformation to flexible work is a consistent process that any organization can follow, but the outcome of that transformation is going to look different because one size does not fit all. Corporations will need to start recognizing that work flexibility is not going to be a cookie-cutter approach that is identical across corporate America.

I think it’s interesting how what you’re saying, Alex, aligns with how organizations need to approach moving forward—rethinking their operating model in terms of workplaces, spaces, and even time. Just adapting their policies and processes, it’s all going to be dependent on context.

Prof. Alex Edmans 

Absolutely. Any evaluation method that investors use needs to recognize the importance of context specificity. And my fear is that metrics—while they are informative, unless you interpret metrics within a particular context, then they are something that is only a very small part of the picture.

Cali Williams Yost 

This is encouraging also because, if this is the message that’s coming from the analyst community and is carrying through to shareholders, through to boards, hopefully our organizations will begin to see that they do have to take a more context driven approach. On top of that, I hope boards begin realizing profit returns are directly related to things like employee satisfaction, most broadly, and on all those different dimensions. And we will hopefully see more senior level leaders adapt the way they lead to achieve those goals.

That brings me to my final question to you before I want to hear what you are working on, and what we can help share with everybody: What do senior leaders need to do differently? How do they have to lead differently?

What I’m seeing right now is that, even as organizations are really grappling with what is fundamentally a new way of working, I see a lot of leaders holding on to the traditional model even though it really does not apply anymore. And they’re losing people because employees know they can work differently.

So there’s this tension in the system that I’m seeing: leaders struggling with knowing how they need to lead. As we move into this more employee-satisfaction, pie-growing, ESG-driven way of evaluating organizations, what is it going to mean for senior leaders, and how they have to lead?

Prof. Alex Edmans 

I think it’ll mean two things.

First is just to recognize the criticality of purpose. I think many CEOs now get it, which was one of my plans. But still, some view this a nice-to-have extra. So yes, in good times, when the company is flush with cash, we can start thinking about purpose. But maybe in a pandemic, we need to focus on profit. What I want stress is that a focus on purpose also means they focus on profit in many cases, so this should be something central.

The second thing I think leaders need to change is to have the confidence to do things for intrinsic rather than instrumental reasons. So often as a leader, you think “let me stick to the framework that perhaps finance professors like me have been teaching for the last 50 years.” And that framework is best summarized as: When you make an investment decision, you try to forecast the benefits from that investment, and if the benefits are greater than the cost, then we’re going to do it. But what that means practically is that, for any investment we can’t justify with a financial calculation, then a CEO often doesn’t have the confidence to do it.

I think you can apply this to even individual people; you don’t need to be a CEO. Why did I choose to do this interview with you? I just love doing this interview; I love having this conversation. But if I spent my one hour instead doing some consulting, I could earn income. Well, let me compare this: If I was to chat to Cali, maybe some people might hear of my work and buy my book and so on. But the small royalties I’d earn from that would never amount to how much I could have earned by consulting. But that’s not my objective. And it could be that, unexpectedly, I get some business later down the line based on who hears our conversation today. That possibility, however, is never going to go into my calculation. I am going to have the confidence to do things for intrinsic, non-instrumental reasons.

What my research suggests is that, even if you adopt the intrinsic approach, later on your intrinsic decisions can become profitable in unexpected—sometimes crazy—ways. And we need to use that to have the confidence to do things for intrinsic reasons.

Let’s take Patagonia. On Black Friday, Patagonia took out an advertisement saying “Don’t buy our jackets. We’re going to introduce this new program that allows you to repair your clothes rather than buying new clothes, because that’s good for the environment.” Crazy decision for business reasons. But, in the long run, I think it has paid off and improved their business. Now people see Patagonia as a company that is fully committed to the planet, so a lot of customers are willing to buy Patagonia products. I think to have that confidence to have this purpose-driven approach is something that I would encourage leaders to try to implement.

Cali Williams Yost 

Very interesting, Alex, and I have to tell you, I am so glad that we have had this conversation. It has meant so much to me to be able to talk to you one-on-one and hear you explain more deeply what it is that you have been trying to do, and are now doing, and seeing real meaningful movement in this area.

It makes me very hopeful. And I think we will all benefit as a result, so thank you so very much. Is there anything else you’d like to share or add? Obviously buy your book; it is fantastic.

To your point, I think there are a lot of people jumping on the ESG bandwagon right now, and get Alex’s book if you really want to understand how to do this right, and what this means. It really does give you a roadmap in terms of how to execute it within your own organization and to think it through even just as an individual. I highly, highly recommend it.

Anything else?

Prof. Alex Edmans 

Sure. Most of my answers have been two parts, so let me end with a two-part answer. So there’s two things that I’m working on right at the moment.

The first is to make this even more mainstream. I really appreciate your kind comments on the book, but you have to be somebody who would choose to buy a book about ESG. So what I’m now doing is I’m changing the core finance textbook. For 40 years, the main finance textbook is called Principles of Corporate Finance—that’s what I was taught at Oxford, it’s what we taught at MIT, I was given it at Morgan Stanley—and I’ve now become a co-author of that book for the 40th edition. So, from chapter one, I’ve put in the importance of responsible business. So, hopefully, the next generation of business-school students going and doing MBAs will read, in chapter one, the importance of caring about wider society.  So I feel that’s really important.

Cali Williams Yost 

Okay, can I stop you for one second?

As a Columbia Business School grad who worked off that book, I’m going to tell you—maybe people don’t understand—that is huge. That is huge. Because this then is the mentality: You send all of these future business leaders out into the world with an understanding of the importance of caring about our wider society. And they become the analysts, you know, they become the hedge fund people, they become the senior leaders. Principles of Corporate Finance is their bread-and-butter way of approaching how to look at the finances of their organization.

So Alex, this is huge! And I’m very happy to hear this news.

I’m sorry, please, go on into your second point.

Prof. Alex Edmans 

Thanks so much. We probably studied it when it was Brealey and Myers or Brealey, Myers, Allen. And it’s now going to be really Myers Allen and Edmans—April next year.

Cali Williams Yost 

I need to go buy a copy just to see how it’s different. Right?

Prof. Alex Edmans 

Thank you.

And then number two is I’m trying to improve financial literacy. I think financial literacy is one of the most important skills one can have, particularly for people to know how to save and how to invest.

We talk about income inequality, and that is important. But wealth inequality is not just based on income inequality; it’s also how can you invest and save the money? And the issue is that—yeah, you do get these courses at Columbia, and at Wharton, and the London Business School. But it costs so much to do these courses; the people most in need of it are the people who are least able to afford it.

I have another position in an institution called Gresham College in the UK, which is weird: You can’t do a degree at this college; all it does is it gives free lectures to the public just like Michael Faraday used to give on science. And I’m really happy to be the Gresham Professor of Business.

So my current lecture series is called The Principles of Finance. We go through basics like compound interest, saving, investing, what is the mutual fund, what happens when you buy and sell shares. And we’ve made it intentionally accessible to a very wide audience. We’ve had people who are finance professionals who’ve said, “my 14 year old son or daughter is watching, and it’s understandable.” There are retirees watching. So for anybody who wants a resource for financial literacy that is easily accessible and simple, hopefully my course can be a resource for people.

Cali Williams Yost 

I’ll be posting the link to your course right here for people.

And it’s free to watch?

Prof. Alex Edmans 

Yes, it’s completely free. You can watch the video; there’s an audio podcast’ there’s the Cliff’s Notes version. So whichever one you want. My passion is to make these things accessible to all, and I’m really grateful to Gresham for giving me that platform.

Cali Williams Yost 

Oh, that’s great. We will put a link to the course in the transcript of this fantastic conversation.  And I do encourage people to go to and read Alex’s article about the business case for diversity. What I think makes your piece so important is you make the case for why it should be diversity and inclusion, and that goes back to many of the findings from your original research around employee satisfaction—that inclusion is the key because it allows people to bring their unique ways of thinking to the table during the day-to-day operations of an organization.

Did I say that correctly? Because I thought that was really important what you were saying.

Prof. Alex Edmans 

Absolutely, yes.

Cali Williams Yost 

So again, please check that article out. We’re all talking about diversity, but really there is this element of inclusion that truly is going to be the differentiator.

So, Alex, thank you. This has been a thrill for me truly, and I look forward to continuing to follow your work

And again, I thank you for how you have supported mine over all these years.

Prof. Alex Edmans 

Really enjoyed, Cali, thank you so much for the invitation.

Cali Williams Yost 

Thank you.