Grow the Pie

Grow the Pie Plot Summary

Introduction

The relationship between purpose and profit has long been framed as a zero-sum game, where companies must choose between doing good for society or generating returns for shareholders. This false dichotomy has dominated business thinking for decades, leading to narrow approaches that ultimately limit both social impact and financial performance. What if pursuing purpose actually leads to greater profits? This question challenges conventional wisdom and offers a transformative perspective on how business can create value in the 21st century. The evidence increasingly suggests that companies focusing on creating value for all stakeholders—employees, customers, communities, and the environment—often generate superior financial returns compared to those pursuing profit maximization alone. This approach, described as "growing the pie," recognizes that business can expand the total value available rather than merely fighting over how existing value is divided. Through rigorous analysis of empirical research, case studies, and economic principles, we discover how purpose-driven strategies lead to innovation, talent attraction, customer loyalty, and ultimately sustainable competitive advantage in ways that traditional profit-focused approaches cannot match.

Chapter 1: The False Dichotomy Between Profit and Purpose

The traditional view of business pits shareholders against stakeholders in a zero-sum game where any resources allocated to employees, communities, or environmental initiatives necessarily reduce shareholder returns. This perspective assumes a fixed economic "pie" that can only be divided differently, not expanded. Corporate leaders operating under this assumption face constant pressure to maximize short-term profits, often at the expense of investments that could create greater long-term value for all parties. This dichotomy, however, fundamentally misunderstands how value creation works in modern economies. When companies invest in employee well-being, they often see higher productivity, reduced turnover, and enhanced innovation. When they develop solutions to environmental challenges, they frequently discover cost savings and new market opportunities. These initiatives don't simply redistribute existing value but actually expand the total pie available to all stakeholders, including shareholders. The evidence increasingly suggests that companies can simultaneously create value for shareholders and other stakeholders. Studies examining firms with strong environmental, social, and governance practices consistently find they outperform peers financially over the long term. This outperformance isn't despite their stakeholder focus but because of it—their stakeholder investments create capabilities and relationships that drive sustainable competitive advantage. Moving beyond the false dichotomy requires shifting from short-term thinking to long-term value creation. Many actions that appear to benefit shareholders at the expense of stakeholders in the immediate term—such as cutting employee benefits or environmental protections—often harm long-term shareholder returns. Conversely, investments in stakeholders that seem costly initially frequently generate substantial financial returns over time through enhanced reputation, innovation, and operational efficiency. The key insight is that shareholder and stakeholder interests are not inherently opposed but can be aligned through thoughtful business practices. Companies that treat their employees well, build strong relationships with suppliers, develop loyal customers, and contribute positively to communities often outperform those focused narrowly on quarterly earnings. This alignment represents a fundamental shift in how we conceptualize business purpose—from seeing profit as the sole objective to positioning profit as a byproduct of creating value for society.

Chapter 2: Evidence That Purpose-Driven Companies Outperform Financially

The link between purpose and profit isn't merely theoretical—substantial empirical evidence demonstrates that companies excelling on material environmental, social, and governance factors outperform their peers financially. A landmark study examining the "100 Best Companies to Work For in America" found these firms delivered stock returns that beat their peers by 2.3% to 3.8% per year over a 28-year period—translating to 89% to 184% cumulative outperformance. Similarly, companies ranking high on customer satisfaction metrics earned nearly double the returns of major market indices over multi-year periods. This performance advantage extends across various stakeholder dimensions. Firms with superior environmental practices—particularly those focused on resource efficiency and waste reduction—have shown returns 4-5% higher annually than environmental laggards. Companies with diverse boards and strong community relationships demonstrate greater resilience during market downturns and economic crises. The evidence consistently shows that purpose-driven companies don't sacrifice financial performance but actually enhance it over meaningful time horizons. Importantly, the relationship between purpose and profit depends on materiality—focusing on the stakeholder issues most relevant to a specific industry and business model. Research examining 2,396 companies over 21 years found that firms excelling on material sustainability issues while not wasting resources on immaterial ones outperformed the market by nearly 5% annually. This highlights that effective purpose implementation requires strategic discernment rather than undifferentiated stakeholder investments. The timing of financial returns from purpose-driven strategies often explains why markets undervalue them. Many stakeholder investments take years to fully materialize in financial outcomes, creating a temporal disconnect between when costs are incurred and when benefits appear. This time lag means that purpose-driven companies may appear to underperform in the short term while building the foundations for superior long-term results. Investors focused on quarterly earnings often miss this dynamic, creating opportunities for those with longer time horizons. The mechanisms through which purpose drives profit have become increasingly clear. Purpose-driven companies attract and retain better talent, reducing recruitment costs and enhancing human capital. They build stronger customer loyalty, reducing price sensitivity and increasing lifetime value. They develop more collaborative supplier relationships, improving quality and reducing disruptions. They maintain better community and regulatory relationships, reducing compliance costs and operational risks. These advantages compound over time, creating sustainable competitive differentiation that translates directly to financial outperformance.

Chapter 3: Three Principles for Creating Shared Value

Creating shared value requires moving beyond simplistic approaches to corporate responsibility. Three fundamental principles provide a framework for identifying initiatives that genuinely grow the pie rather than merely redistributing existing value. The principle of multiplication asks whether spending $1 on a stakeholder generates more than $1 of benefit to that stakeholder. This ensures that corporate resources create maximum social impact rather than being deployed inefficiently on well-intentioned but low-impact initiatives. The principle of comparative advantage recognizes that companies create the most value when focusing on activities aligned with their unique capabilities and resources. A pharmaceutical company likely creates more social value by improving drug access in developing countries than by investing in unrelated environmental projects, however worthy. Similarly, a technology company might create more impact by addressing digital privacy concerns than by focusing on supply chain issues where it has less expertise. This principle encourages companies to leverage their distinctive strengths rather than pursuing generic corporate responsibility programs. The materiality principle directs attention to stakeholder issues most relevant to a company's long-term financial performance. Not all environmental, social, or governance factors matter equally for all companies. For a mining company, environmental management and community relations directly impact its license to operate and thus its financial sustainability. For a software company, data security and talent management may be more financially material. Research consistently shows that companies outperforming on material issues generate superior financial returns, while performance on immaterial issues shows little correlation with financial outcomes. These principles help leaders navigate difficult trade-offs when genuine conflicts between stakeholder interests arise. When French electricity firm Engie closed its highly polluting Hazelwood power station in Australia, it caused job losses and higher electricity prices. However, the environment was material to Engie's business, and the plant was responsible for 3% of Australia's greenhouse gas emissions. After making the closure decision based on materiality, Engie set aside substantial funds for worker severance and transition assistance, demonstrating how companies can balance competing stakeholder needs. The principles also provide accountability without requiring precise calculation of returns on stakeholder investments. Leaders can be evaluated on whether they've applied these principles thoughtfully rather than producing exact financial projections that are often impossible for intangible investments. Boards, investors, and stakeholders can scrutinize whether investments follow the principles of multiplication, comparative advantage, and materiality, challenging leaders for errors of omission if similar firms have launched initiatives that satisfy these principles but they haven't.

Chapter 4: Responsible Pay: Aligning Incentives with Long-Term Value

Executive compensation has become one of the most controversial aspects of modern business. Critics point to the dramatic rise in CEO pay—from 42 times the average worker in 1980 to 264 times today in the US—as evidence that business has lost touch with society. Politicians across the political spectrum have called for reform, and various countries have implemented regulations to curb excessive pay. However, focusing narrowly on the level of executive compensation misses the more fundamental issue of how pay structure affects behavior and long-term value creation. The amount that could be redistributed by reducing CEO compensation is typically less than 0.06% of a company's value—a tiny fraction compared to the potential value increase from improving social performance. What matters more is how pay affects behavior, which depends on its structure rather than its level. Three dimensions of pay structure are particularly important for encouraging long-term value creation: sensitivity, simplicity, and horizon. Sensitivity leads to accountability—executives should have significant ownership stakes in their companies so they benefit when the company performs well and suffer when it performs poorly. Studies show that firms with large CEO ownership stakes outperform those with small stakes by 4-10% per year, with higher return on assets, labor productivity, and investment efficiency. This alignment creates powerful incentives for executives to make decisions that enhance long-term value rather than focusing on short-term metrics that might temporarily boost their compensation. Simplicity leads to symmetry in incentives. Complex bonus schemes with specific performance targets often encourage executives to focus narrowly on hitting those targets, potentially at the expense of other important objectives. They may cut R&D to meet profit targets or take excessive risks when close to performance thresholds. Simple restricted shares that vest over time avoid these problems by aligning executives with the long-term stock price, which reflects both shareholder and stakeholder value creation without artificial thresholds or caps. Horizon leads to sustainability by preventing short-term actions that boost immediate results at the expense of long-term value. To discourage both errors of commission (taking harmful short-term actions) and errors of omission (failing to make valuable long-term investments), equity grants should be locked up for several years—ideally extending beyond an executive's departure. Research shows that the more equity vesting in a given quarter, the more slowly investment grows, suggesting that short-term equity incentives can lead to myopic behavior that undermines long-term value creation. These principles apply not just to executives but to all employees. When both leaders and workers are given shares, leaders can't gain without workers gaining also. Evidence shows that broad-based equity ownership is associated with higher firm performance, particularly when distributed throughout the organization rather than concentrated among top executives. This alignment creates a shared commitment to long-term value creation that benefits all stakeholders.

Chapter 5: Engaged Investors as Partners in Growing the Pie

Investor activism is often portrayed as predatory behavior that extracts value at the expense of stakeholders. Popular narratives depict activist investors as corporate raiders who fire workers, slash R&D, and squeeze suppliers to generate quick profits before moving on. This perception has led to defensive measures like dual-class share structures and anti-takeover provisions that insulate management from investor pressure. However, comprehensive research challenges this negative portrayal, suggesting that engaged investors often serve as valuable partners in growing the pie. Studies of hedge fund activism show that when investors take large stakes and engage with management, target companies experience significant improvements in long-term stock returns, profitability, and productivity. Rather than simply extracting value, these investors often help companies allocate resources more efficiently and improve operations. When ValueAct helped transform Adobe, it encouraged the company to embrace new technologies, transition to subscription-based revenue models, and develop better mobile applications. As a result, Adobe's revenue nearly doubled, its stock price more than tripled, its workforce increased by 80%, and its tax payments more than doubled—creating value for multiple stakeholders simultaneously. Effective investor engagement involves two key mechanisms: monitoring and influence. Monitoring means deeply scrutinizing a company's long-term value—looking beyond quarterly earnings to understand its strategy, culture, and competitive position. Influence involves actively shaping how companies are run through voting, private meetings with management, and sometimes public campaigns. Both mechanisms help shield companies from short-term pressures and encourage long-term value creation when investors have the right characteristics. Three investor characteristics particularly enable effective engagement: portfolio concentration, financial incentives, and expertise. Investors with concentrated portfolios have substantial stakes in each company, giving them incentives to engage meaningfully rather than simply trading shares. Those with strong financial incentives tied to long-term performance are motivated to improve sustainable value creation rather than pursuing short-term gains. And those with relevant expertise in the company's industry or operations can provide valuable perspectives that enhance strategy and execution. The distinction between an investor's holding period and orientation is crucial. What matters isn't simply how long an investor holds shares, but whether they trade based on long-term or short-term information. "Patient capital" that holds shares regardless of performance can entrench poor management, while investors who sell based on deteriorating long-term prospects provide valuable discipline. The ideal investor is long-term oriented rather than merely long-term, focusing on sustainable value creation while maintaining accountability for performance.

Chapter 6: Implementing Purpose in Corporate Strategy and Operations

Putting purpose into practice requires more than inspirational statements—it demands systematic integration into strategy, operations, and culture. This begins with defining a clear purpose that answers the question: "How is the world a better place by your company being here?" A well-crafted purpose statement should be specific enough to guide decisions but broad enough to inspire innovation. It should focus on the value the company creates for society rather than what it sells. Merck's purpose to "discover, develop and provide innovative products and services that save and improve lives" guided its decision to donate a drug that cured river blindness, even when the financial return was uncertain. Purpose must be embedded throughout the organization, not just proclaimed in mission statements or annual reports. This requires leadership commitment, appropriate incentives, and cultural reinforcement. When Southwest Airlines faced the 2008 financial crisis, its purpose of democratizing air travel guided its decision not to charge for checked bags, even though competitors were generating billions in baggage fees. This decision aligned with its purpose of making air travel accessible and ultimately strengthened customer loyalty, demonstrating how purpose can provide strategic clarity during challenging times. Measuring impact is essential to ensure purpose isn't just rhetoric. Companies should track both their contributions to society (such as reduced carbon emissions or improved employee well-being) and the business benefits that result (such as enhanced reputation or talent attraction). These metrics should be integrated into strategic planning and performance reviews, not treated as separate "CSR" initiatives. Effective measurement focuses on outcomes rather than inputs or activities, tracking how the company's actions actually change conditions for stakeholders rather than simply counting dollars spent or programs launched. Implementing purpose also requires engaging stakeholders as partners rather than merely managing them as external constraints. This means empowering stakeholders through meaningful participation in decision-making, investing in their capabilities and well-being, and recognizing their intrinsic value beyond their instrumental contribution to corporate objectives. Companies that master these stakeholder partnerships develop stronger relationships, greater operational flexibility, enhanced innovation capabilities, and more sustainable business models—all of which contribute to superior long-term performance. Purpose implementation isn't without challenges. Leaders must navigate trade-offs between competing stakeholder interests, balance short-term pressures with long-term value creation, and maintain purpose through leadership transitions and market changes. However, companies that successfully embed purpose throughout their organizations demonstrate that these challenges can be overcome through consistent leadership commitment, appropriate governance structures, and cultures that reinforce purpose-driven decision-making at all levels.

Summary

The growing body of evidence demonstrates that purpose and profit are not opposing forces but complementary drivers of sustainable business success. Companies that focus on creating value for all stakeholders—employees, customers, communities, and the environment—often generate superior financial returns compared to those pursuing profit maximization alone. This outperformance stems from multiple sources: stronger stakeholder relationships that enhance operational effectiveness, greater innovation that creates new market opportunities, improved risk management that reduces downside exposure, and enhanced reputation that attracts talent, customers, and investors. The path forward requires moving beyond simplistic metrics and short-term thinking toward a more sophisticated understanding of how businesses create value in the 21st century. By applying the principles of multiplication, comparative advantage, and materiality, companies can identify initiatives that genuinely grow the pie rather than merely redistributing existing value. By aligning executive incentives with long-term value creation through sensitivity, simplicity, and horizon in compensation design, they can ensure leadership decisions support sustainable performance. And by engaging with investors as partners rather than adversaries, they can secure the patient capital needed for transformative innovation and stakeholder investment. This approach represents not just a more equitable form of capitalism but a more effective one—creating prosperity that benefits shareholders and society alike.

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Alex Edmans

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