ESG and Flexibility – Interview with Prof. Alex Edmans


For years, the economic ecosystem—analysts, shareholders, corporate leaders, and board members—have assumed the value a company creates through its products and services is fixed. Senior leaders have been reluctant to embrace corporate responsibility, fearful that doing so would just transfer some of the “pie” from shareholders to others.

Leading finance scholar Alex Edmans has shown that corporate responsibility related to the environment, social criteria, and governance (ESG) is not a gamble: It increases the size of the pie rather than redistributing it. Flex+Strategy Group’s, Cali Williams Yost, sat down with Alex to discuss the significance of the pie-grow model, and the role of employee satisfaction plays in delivering higher shareholder returns.

For more than a decade, Cali has cited Edmans’ research to make the connection between high performance and work flexibility as a driver of employee satisfaction, diversity and inclusion and environmental sustainability.  As these ESG considerations continue to grow in importance to investors and Boards, flexibility in how, when and where people work will become a strategic imperative. Edmans’ work helps makes a powerful economic case for that investment.

A condensed and edited version follows; the full interview is available here.

An audio file can be accessed here.

Cali Williams Yost: 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.

Alex’s published research includes a groundbreaking study showing that the 100 “Best Companies” to work for in America also deliver higher total shareholder returns, beating their peers by 2.3% to 3.8% per year. He is truly an expert on how we take business to the next level—in socially responsible and profitable ways—and that’s what’s so exciting about his book, Grow the Pie: How Great Companies Deliver Both Purpose and Profit.

So, Alex, it’s great to have you here. I want to talk to you about your concept of pie economics, which you call “pie growing.” How is pie-growing  economics different from the supposed shareholder-focused, profit-driven model that so many organizations have followed for decades?

If an organization treats employees well, it grows the pie rather than simply splitting the pie differently.

The Fixed-Pie Myth   

Prof. Edmans: 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—higher wages for workers, lower prices for customers, and so forth.

I wanted to see whether, if companies are treating their workers better, are they just not being efficient at controlling their costs? And I showed that, actually, the opposite is true: If an organization treats employees well, it grows the pie rather than simply splitting the pie differently.

The heart of my work is the idea of the pie-grow mentality: Many things that 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, you can still act in shareholders’ long-term interest by prioritizing responsibility. You might make 90% or 95% of the available profit opportunity in the short term, 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: Why isn’t the economic system set up to understand the pie-grow model and act on it?

Prof. Edmans: There are two main reasons. The first is the prevalence of the fixed-pie mentality. Some of the greatest, most successful management innovations have been ways—unfortunately—to squeeze stuff out of your workers. 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, 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 and more productive.

The second reason is that the benefits of pie-growing only happen in the long term. But if we are evaluating CEOs according to quarterly earnings, if we’re paying them a pay package that highlights short-term profits, then the immediate pressure to perform means even enlightened CEOs can’t pursue longer-term activity to grow the pie.

From Pie-Splitting to Pie-Growing

Cali Williams Yost: So the pie-grow model is actually better for everybody—including shareholders. Do you see signs that organizations are beginning to understand and adopt the model?

Prof. Edmans: About 10–15 years ago, you and I were among the few people who cared about things such as ethics, purpose, and so on. What has changed since then is that this has moved to a CEO-level issue. And investors are taking this seriously, which is important because investors elect 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.

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. You can see this shift in the C-suite within companies. And in investor behavior—not just as a niche investment model, but as something that is relevant for all funds.

Cali Williams Yost: That is inspiring and encouraging. So what else needs to be done? What more could we do?

Prof. Edmans: There are two important things we can do. The first is to engender a long-term mindset, starting with CEO incentives. What is important is the horizon of pay: If the CEO cares about short-term profits, she might not have the latitude to make the longer-term investments necessary to grow the pie.

The second thing is to realize that there’s not always going to be a simple data approach to measure corporate responsibility. There are many important dimensions of responsibility that are not strictly quantitative in nature. In the haste to adopt the pie-grow model, people are trying to apply outdated models—ones that worked to model profits—without realizing that, actually, we might need a different way of assessing it. We are going to need to apply different tools.

Leading the Pie-Grow Movement

It’s not just ethics and morals, which are important, but there’s also the business case behind it.

Cali Williams Yost: I see a lot of senior leaders holding on to the traditional profit-driven model even though it really does not apply anymore. And they’re losing people because employees know they can work differently—they’ve been doing it.

As we move into this pie-growing way of evaluating organizations, what is it going to mean for senior leaders, and how they have to lead?

Prof. Edmans: I think it’ll mean two things. The first is just to recognize the criticality of purpose. Many CEOs now get it, but some still view this a nice-to-have extra in profitable times. What I want to stress is that a focus on purpose also means a focus on profit in many cases, so this should be something central.

The second thing is that leaders must have the confidence to do things for intrinsic rather than instrumental reasons. CEOs often lack the confidence to make any investment they can’t justify with a financial calculation. What my research suggests is that, even if you adopt the intrinsic approach, later on your intrinsic decisions can become profitable in unexpected ways. And we need to use that to have the confidence to do things for intrinsic reasons.

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

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

The full conversation between the Flex+Strategy Group’s Cali Williams Yost and Alex Edmans is available here.

This conversation is the first in a new series in which Cali sits down with the leading experts on reimagining how, when and where we do our best work and live our best lives. Our next installment will be available in a few weeks. To ensure you don’t miss out, subscribe here to The Now + Next of Work: Conversations with Cali.