Episode 75

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Published on:

21st May 2024

The Power of Purpose-driven Organizations with Ashish Kothari and Alex Edmans

Here's a thought: What if the real secret to making more money was to focus less on the money itself? True success in organizations isn't just about chasing profits, but about being driven by a genuine purpose. It’s about making a meaningful impact, serving a greater cause, and adding value to the world.

In this episode of the HAPPINESS SQUAD Podcast, Ashish chats with Alex Edmans, a multi-award-winning professor of finance at London Business School with a PhD in finance from MIT Sloan. As a Fulbright scholar, he joined Wharton in 2007 before moving to London Business School. His TED talk, "The Pie Growing Mindset” and “The Social Responsibility of Business," has a combined 2.8 million views. He's written for the Wall Street Journal, Financial Times, and the Harvard Business Review.

The focus of this conversation is Alex's book, 'Grow the Pie: How Great Companies Deliver Both Purpose and Profit'. Through quantitative research, Alex introduces the concept of growing value for all stakeholders rather than merely dividing it. He presents three pivotal principles that guide organizations in defining their purpose. 

Ashish supplements this with examples from his own work, ensuring that leaders, shareholders, or stakeholders of organizations will benefit. 

Ready to redefine success and discover the power of purpose in organizations? Listen to this episode now!

Things you will also learn from this episode:

• The concept of ‘growing the pie’ and long-term greed

• The correlation and causation of employee satisfaction and stock returns

• The power of purpose in maximizing profit

Resources:

• Alex Edmans’ website: http://www.alexedmans.com/ 

• Growth the Pie website: http://www.growthepie.net/ 

• TED Talk: The Pie-Growing Mindset https://www.ted.com/talks/alex_edmans_the_pie_growing_mindset 

• TED Talk: The Social Responsibility of Business  https://www.youtube.com/watch?v=Z5KZhm19EO0 

Books:

Grow the Pie: How Great Companies Deliver Both Purpose and Profit

Transcript

Anil Ramjiani:

Hey everyone, it's great to have you with Ashish and me, as we host guests who are industry leaders helping individuals and organizations unlock inner happiness and flourishing.

The highest quality evidence reaches this conclusion. To reach the land of profit, follow the land of purpose.

scholar, he joined Wharton in:

in the FT bestseller books of:

Ashish and I delve into Alex's book, where he uses quantitative research and insights to highlight the significance of growing the pie versus splitting it. He brings to life three principles to consider when applying this approach. As a finance professor, Alex emphasizes the importance of three points for companies to consider in developing their purpose: the reason the company exists, who it serves, and its role in the world.

Ashish and I supplement this with examples from our own work, ensuring that leaders, shareholders, or stakeholders of your business will benefit. We highly recommend this book and look forward to the insights you'll gain from this episode. Join Ashish and me as we welcome Alex to the Happiness Squad.

Ashish, Alex, it's a pleasure to be with both of you. Alex, a question we often ask our guests is: What is happiness to you, and how has your definition evolved since your younger years?

Alex Edmans:

Thank you so much for inviting me. It's great to be here. Happiness to me right now is fulfilling my purpose. I define my purpose as using rigorous research to influence the practice of business. That's why I appreciate invitations like this to share my research with a wider audience. When you're a kid, happiness might be getting what you want.

Looking at my two-year-old, if he asks for something and gets it, he's happy. If he doesn't, he's not. Happiness evolves from getting to giving. Now, what makes me happy is making a positive difference to others, whether it's my family, friends, colleagues, or wider society through the dissemination of my research.

Ashish Kothari:

I love that, Alex. It's a consistent theme we hear from guests: purpose made a significant difference in their lives, transitioning from surviving to thriving. It's wonderful to hear that from you as well. We spend much of our early years pursuing things like power and promotions, believing they'll bring happiness. But when we realize that by making happiness the means, we can achieve all those things, the key is to give.

Alex Edmans:

Happiness isn't something you can pursue directly. Even if you believe the goal of life is happiness and base every decision on whether it makes you happy, you might indulge in short-term pleasures like eating a lot of chocolate cake or drinking red wine. These choices might bring immediate joy, but if you're forward-thinking, you'll recognize the long-term consequences. However, if I prioritize being a good parent, husband, colleague, or friend, I might make choices that don't immediately seem connected to happiness, but they lead to long-term contentment. Unlike a child's perspective, happiness for adults is often an indirect result of fulfilling one's purpose.

Anil Ramjiani:

Beautiful. I agree with you. We recently celebrated our one-year anniversary for Ashish's book, "Hardwired for Happiness," Alex. We had a guest, a close friend and colleague, Naomi, who's currently in Israel. She shared her experience.

In essence, she said she's not happy right now, but understanding the science of happiness is what's helping her remain resilient during tough times. If happiness was solely about external sources, it would be fleeting.

However, when you delve deep within, whether as an individual or an organization, and align with your purpose, intention, and meaning, you can unlock true value and substance.

Alex Edmans:

This internal perspective is valuable. If happiness is driven by external circumstances, especially if you define happiness as getting what you want, then it's dependent on factors outside your control.

You might make excellent investment decisions, but a pandemic could cause stocks to plummet. You could put immense effort into a pitch for a client, only to see the deal go to someone else due to personal connections. Or, you might work diligently on a research paper, submit it to a journal, and face rejection because a reviewer disagrees with the message.

While external outcomes do make a difference, focusing on internal satisfaction—being proud of your work, ensuring it aligns with your purpose, and doing it the right way—can lessen the impact of external events.

Anil Ramjiani:

I absolutely agree with that.

Alex, I'd love to switch gears and introduce our listeners, many of whom are C-suite business leaders and individuals in mid-management, to the concept of your book. It revolves around the idea of growing the pie versus splitting the pie. You've had an impressive career as a professor, currently at London Business School.

Many businesses prioritize shareholder value creation. This is often influenced by Friedman's perspective, including the notion that "greed is good." What was the turning point in your career that inspired you to write "Grow the Pie"?

Alex Edmans:

This is a great question. Surprisingly, I align more with Milton Friedman than many might assume. I believe shareholder value creation is beneficial, and in a sense, greed is good. Now, this might sound counterintuitive, but let's define shareholder value. In the first finance class, you learn that shareholder value is the present value of all future cash flows indefinitely.

So, if I run a car company focused on maximizing shareholder value, would I invest in electric cars? Absolutely. A net present value calculation reveals that while electric cars might be expensive short-term, they're profitable long-term.

So, even without a concern for climate change, maximizing shareholder value would lead me to invest in electric cars. This is why greed, particularly long-term greed, can be positive. I'd prefer a CEO driven by long-term greed, willing to make tough decisions for future profitability.

Many of the world's challenges stem from not being "greedy" enough in the long-term sense. Sticking to the status quo can hinder innovation. Some groundbreaking innovations have been driven by long-term greed, which can benefit society.

So, why did I write "Grow the Pie"? Why not just emphasize Friedman's actual message over misconceptions? It ties back to our initial discussion on happiness. If the business goal is long-term shareholder value, it prompts beneficial actions like producing electric cars.

However, some actions, despite their societal value, are hard to quantify in terms of shareholder value. For instance, extending parental leave might boost employee morale and retention, but translating that into tangible cash flows for a shareholder value calculation is challenging.

Shareholder value should be a byproduct of societal value creation, not the primary focus. Just as happiness results from being a good parent, spouse, or colleague, rather than being pursued directly.

This leads to the core idea of "Grow the Pie." The "pie" represents the value a company creates, split between investors as profits and society through fair taxes, wages, and prices. Many believe that to maximize profits, you must split the pie, taking more for yourself by raising prices or cutting wages.

My perspective is that companies should focus on growing the pie. By aiming to create societal value, profits will naturally increase, much like happiness resulting from fulfilling personal roles.

Ashish Kothari:

Alex, your concept of "grow the pie" was eloquently presented in your book. As some of our listeners might recall from our initial episodes, I spent my first 10 years at McKinsey in our procurement practice. Our primary goal was to negotiate lower prices. However, I've always been drawn to the idea of growing the pie.

Even in my fourth year at the firm, as a young associate partner, I championed supplier collaboration. The aim was to collaborate differently with suppliers to expand the value our ecosystems could generate. I truly resonate with this concept.

What stood out to me in your book, Alex, was the specific set of principles you outlined based on your research. Principles like multiplication, competitive advantage, and materiality that companies should consider as they aim to grow the pie. These principles differentiate genuine value creation from mere "greenwashing." Could you elaborate on these three principles for our listeners and how they should approach them?

Alex Edmans:

Thank you for asking. Before diving into the principles, it's essential to understand their origin. Some believe that every action benefiting society will also benefit shareholders, implying there's no trade-off between purpose and profit. Writing a book with such a perspective might become a bestseller due to confirmation bias. However, that's not the reality. Even in the long run, certain societal actions might not reflect in profits. For instance, if an energy company contributes to global warming, it might not directly suffer, but an agricultural business might.

The goal of these principles is to distinguish actions that benefit society and lead to long-term profits from those that might cost the company. You mentioned three principles, but for brevity, I'll discuss two.

The first is the principle of comparative advantage, which gauges a company's societal impact. Activities using a company's comparative advantage create significant societal value with minimal profit cost. During the pandemic, many companies pivoted using their expertise to address the crisis. For instance, alcohol or perfume companies, with their alcohol-based manufacturing expertise, shifted to producing sanitizers.

This approach contrasts with companies making charitable donations. After George Floyd's tragic death, many companies donated to Black Lives Matter. While racial equality is crucial, for a perfume company, it's not their expertise to determine if Black Lives Matter is a more deserving charity than others. Donating 1 million dollars costs exactly that, which is pie-splitting, not pie-growing. However, if an alcohol company produces sanitizer worth 1 million dollars, it could save lives many times over due to their comparative advantage.

That's one principle: comparative advantage, which measures an action's impact on society.

Ashish Kothari:

Alex, before you delve into the second point, I want to emphasize the first. It's not just about doing something beneficial for society; it's about doing what you excel at, leveraging your expertise. Is that a correct interpretation?

Alex Edmans:

Yes, that's a valid point. Given the numerous challenges we face today, including the 17 sustainable development goals, companies might feel compelled to address every issue and solve all the world's problems. However, that's neither realistic nor necessarily beneficial for society. For instance, while homelessness is a pressing issue, should I personally assist at a homeless shelter or soup kitchen? Perhaps my time is better spent offering free public lectures on financial literacy, leveraging my expertise, even though I recognize the severity of homelessness.

Ashish Kothari:

Beautiful. So talk to us about the second principle that businesses should keep in mind.

Alex Edmans:

Absolutely. This leads us to the principle of materiality. While comparative advantage measures the impact you have on stakeholders, materiality gauges the significance of stakeholders to you. Actions taken with comparative advantage may have minimal profit costs but can create significant societal value. Conversely, investing in something material ensures that societal benefits eventually enhance profits.

For many companies, employees are vital due to their direct influence on productivity and retention. However, the importance of suppliers can vary. For Apple, suppliers are crucial, producing essential components like the touch screen glass for iPhones. This is why Apple invests in an advanced manufacturing fund to support suppliers such as Corning, their iPhone glass provider. On the other hand, for a plastics company using petrochemicals as raw materials, suppliers might be less significant due to the commodity nature of the inputs.

Materiality can be a challenging concept for some companies, as it requires prioritizing certain stakeholders over others. However, given a company's limited resources and the potential trade-offs between stakeholders, it's essential to determine which stakeholders are most crucial. By focusing on the most material stakeholders, a company can ensure that the value created reciprocates, benefiting long-term profits.

Ashish Kothari:

It was these principles, dear friends, that really spoke to me about six months ago when I picked up Alex's book. I reached out because oftentimes in this world of ESG, the world of trying to do good, we forget the mind. We just go with the heart, and the heart goes and bleeds for everything out there.

And in his book, Alex really highlights that in the end, we do have fiduciary responsibilities, not just to stakeholders, but to all stakeholders as every individual. If we focus on doing what makes the most difference, we are rightly placed to do so. Power of competitive advantage and materiality. We can be more thoughtful and bring the science, research, and our minds, the analytics part of us, in addition to the heart.

Now, Alex. Stakeholder value, social performance, as you call it, increases shareholder value. Financial performance, as the results of your research clearly show. And I loved how you actually took employee satisfaction as one of the ways to measure social performance because in almost all companies, employees are material to the long-term growth and value creation potential for companies.

That is at the heart of our mission at Happiness Squad, how do we enable leaders to create environments where people can flourish and be at their best, enjoy the work, connect to their personal whys, and work in ways that help them create value versus burnout.

So talk to us, Alex, about the correlation versus causation effects of what you found from employee satisfaction. I also loved that nuance because so many people don't talk about the difference there. So talk to us about what you found in terms of the relation between employee satisfaction and stock returns.

Alex Edmans:

-year period, from:

So what does that mean? That means that companies that treat their workers well are not just being fluffy and nice tree-huggy people. They are being commercially sensible. They're not just giving their pie to the employees, they're growing the pie because employees become more motivated, more productive, and more likely to stay.

But as you say, quite rightly, is this only a correlation? The question is, is it causation? So I'm suggesting that employees who are happy improve their financial performance. But you might think, is it the opposite? If the company's already performing well, then it can start investing in its employees.

And maybe there are third factors that affect both. If you're in the tech sector, employees are happy because the job is more fun than in, say, coal mining, and also the tech sector has performed better than the coal mining sector. So the skepticism that you show should be really important, and we should show this with any study on purpose or happiness or satisfaction or ESG.

Why? Because of confirmation bias. We always want to believe that these things have a causal effect on performance, but it could be that the effect is the other way. So how do I address them? Well, first, let me go to the concern of third factors affecting both, like the industry or maybe bigger companies can afford high satisfaction and bigger companies perform better.

I have a very long list of controls that I strip out. So, for the industry, I will compare, let's say Google, which is on the best companies list, not to the broader market, but to other tech companies that did not make the top 100 to try to isolate the effect of employee satisfaction and not just an industry effect.

And I can do other comparisons beyond the industry. I can compare the company to other companies with similar size, similar recent performance, similar valuation ratios, dividend yield, and so on. But the second issue of reverse causality is potentially harder to deal with. How do I know that it's not the company's already performing well, and therefore that causes employees to be happy?

So this is why what I look at is future stock returns. If I look to other measures, like profitability, which is what many studies look at, you could have causality in either direction. But the nice thing about the future stock return is that it's the change in the stock price between now and five years time, let's say.

Now the stock market is already quite good at incorporating current profitability. So if the reason that employees are happy is that the company is already profitable and therefore able to spend on free gyms and so on, the current stock price would already be high because the current stock price already takes profitability into account.

So if I find that companies with high employee satisfaction deliver superior stock returns in the future, it can't be that the starting point was already high, and therefore it's unlikely to be that the company was already profitable. That's it in a nutshell.

It's actually much more nuanced than that, and I go into more details in the paper, but in a nutshell, by looking at future stock returns, the change compared to the current stock price, I address the issue that maybe it was already had a good starting point, and that's why employees were happy.

Ashish Kothari:

I love that. I had not seen that extensive research and the strong quantitative underpinning, Alex. By the way, friends, this research, at least showing the correlation between the two is not new. Most recently, if you look around, three months ago, Professor Yavne Anuel at Oxford studied 2 million data sets partnering with Indeed and showed high returns, return on assets.

If you think about it, he was studying well-being, work well-being, and it was linked to higher return on assets, higher shareholder returns, higher profitability. If we look at the work over the last 15, 20 years done by Gallup and so many others, we have seen similar results. What was beautiful about Alex's work was he said, yes, I don't want to stop at correlation. I want to look at causation. So it was one of those final pieces that really helps me when I'm conversing with many CFOs to say, look, it is not correlation. We can put our head in the sand and believe what we want to believe, or we can actually look at the data that is clearly showing how this drives it.

I love that, Alex. Thank you for fitting in that piece of the puzzle.

Alex Edmans:

s something that I started in:

There's a famous paper by John Abowd in the American Economic Review showing that it was a zero-sum game. So because it was new at the time, the Journal of Financial Economics made me go through so many more hurdles than other papers had to. And that's good in the end because given I had to go through purgatory, it now means that the results are robust, and it's easier to publish papers on this topic now because it's not seen as so controversial that back then it was new.

The studies that you mentioned sometimes go beyond me because Emmanuel has some really nice micro granular level data, which I don't have, but because my paper actually came before. Some of this research, that's what made it more difficult to publish because of its novelty at the time.

Anil Ramjiani:

I'm going to look at the book and see which companies were included in the research because I work for Nike, I've worked for Adidas, before that IBM before that. So I can tell you qualitatively a sentiment that I've sensed around the business over the last couple of years, especially after reorganizations have typically been.

Well, my contribution may not do much because the till will continue to ring, products will continue to sell, but we know that's not the case. That’s at the end of the value chain, but up the value chain where products are being created, brand ideas, campaigns are being designed, that creativity, that employee engagement and employee satisfaction is absolutely critical. If you don't have that, long term, the business will ultimately suffer.

So short term gain, check, long term gain, at risk. And just on the back of that, this is maybe an opportunity, Alex, where could you maybe share examples of companies that you believe from your work, from what you've seen, are actually leading the way and maybe how their stories truly prove that companies can do both good and do well.

I know in your book, you refer to Barry Cares, you refer to MPS, Vodafone, Unilever. I'm not sure if you have an example from Nike, but I would love to hear some examples from your side just so that skeptics that may be our listeners would actually be like, there is merit beyond and there are case studies and examples they can see in the market that truly can change their perspective.

Alex Edmans:

Certainly, let me start with Google because I just mentioned them in terms of employee satisfaction. They have been number one on the best companies to work for list for many years. What they introduced was 20 percent time where one day a week, a Google employee could work on whatever they wanted to do. They didn't need to report back to management.

And so you might think, well, this could just lead to abuse. Would they be playing Minesweeper or whatever the equivalent of that today is and just wasting time? The answer is no. Why? Because they all buy into Google's purpose of organizing information and making it useful. This led to the discovery of Google Maps, Gmail. Where would we be without Google Maps? I would not be able to get to most places I need to without this navigation.

So here, the trust in their employees that Google had to give them the 20 percent time led to this huge innovation. And then for Google themselves to launch it, maybe it's not clear how easily monetizable something like Google Maps is. So if you were a regular company basing decisions on financial outcomes, maybe you would not have done that.

But instead, they first said, let's launch Google Maps because we think it's going to create value, and then find a way to monetize it. Can it be that we can get some advertising revenue from some restaurants or other companies that want to be displayed more prominently on the maps?

Anil Ramjiani:

No, I agree with you. I mean, there are things that I know companies work on. Within Nike ourselves, there are areas that we want to work on. We want to be Mavericks. We actually want to try things differently, but there always is that question.

First, is this a priority? Second, is this something that's going to add to the top line in a bigger way, or is this a risk that we're undertaking, hoping that, to your point, you might be able to find a way to maximize it or, maximize its return on that investment in different ways that maybe you've not thought about in the present, but you'll have to give it time in the longer run in order to see what you can convert that opportunity into.

It's a risk that companies take. And I think this also leads back to conversations we've had previously with other guests, which is how do you create that environment? That psychological safety, that openness, that communication within your business, in order for an organization to enable employees to feel comfortable to come to the table with ideas, to come to the table with possibilities and forge new ways of thinking.

Otherwise, again, short term, you may profit, but long term, you not only may lose that talent, but you'll lose that opportunity that your competition may jump on or may take an opportunity that you've lost sight of.

So that truly resonates for me in the industry that I'm in and that the industry that we're trying to pursue and support others in, Alex. Thank you for sharing that.

Alex Edmans:

I think you raised a really important point because if you want to be a company that has a competitive edge over your rivals, you need to be bold and do things that your rivals are not doing. So if every other company is making decisions based on financial analyses, then to do something different, you might be the company to have the confidence to do something, even if it's not backed up by a rigorous spreadsheet showing how it's going to be profitable in the long term. This leads to creating a culture where employees are willing to share bold ideas, even if they might fail.

Companies like Tata and Intuit give rewards for failures. So this is an idea that ultimately failed, but it was something where the learning process was good, and the idea at the time was worth pursuing. And why is that important? It reinforces that the culture is one in which they want employees to take risks and not necessarily be scared of these risks failing. This gets to a broader point on diversity, equity, and inclusion.

Every company right now claims to care about DEI, but many of them only care about demographic diversity in a box-ticking way. They think that if they hire enough women or minorities, then this will improve performance. But it's far more than hiring a diverse set of people. We want to ensure they create and contribute their diverse viewpoints, and a psychologically safe corporate culture where people are willing to express ideas, launch innovations without fear of failure is absolutely critical to get the best out of your employees.

Anil Ramjiani:

I absolutely agree with that. And I think this is also an opportunity, Alex, to shift gears into purpose. Speaking as an individual in a team within an amazing business that has a very clear purpose. I'm sure there are folks out there who work for companies, small, medium, and large, that may not have a clear purpose or the purpose within their team is actually different from the broader purpose that the business is driving.

In reading one of your essays, Alex, I chuckled. You said, as a finance professor, when you were in a room and you mentioned to folks the importance of purpose, people were a bit taken aback. They wouldn't expect a finance individual or the finance department, let alone that part of the business, to truly appreciate the role and the importance of purpose.

What I'd love to shift and ask you, Alex, now is, could you please share with our listeners the power of purpose and making it real as a powerful way to grow the pie?

Alex Edmans:

So what is ‘purpose’? It's why a company exists. It's its reason for being, and the role that it plays in the world. And why is that useful? Because that's something which then inspires and excites the company to make bold decisions, even if they cannot see the bottom line impact of doing so.

That might be something like launching Google Maps and Gmail. Why? Because it's consistent with their purpose to organize the world's information and make it useful. So this means that we're not just basing a decision on a financial calculation, but ultimately, if you are driven by purpose, you will become more financially successful. Why? Because if purpose drives you to grow the pie, as a byproduct of growing the pie, the slice that goes to shareholders, which is profits, will rise as a result.

So this is why I think it's sometimes bizarre that people say, if you're a finance person, you shouldn't really care about purpose. If you're a true Republican, you should care about big business, and big business should not think about purpose.

What I'm arguing, and this is not just me arguing based on words, but based on data, is that if you're a company which is purposeful, then it is actually good for big business. This leads to the company being long-term successful. So purpose is not just about being woke or being tree huggy. It's about being commercially successful and creating long-term social value that manifests in financial value.

Ashish Kothari:

Alex, your points on purpose are so resonant and coherent with the work I'm incredibly passionate about, doing and helping companies do. And I'll add a little bit to what you just highlighted.

and we just did this with a:

The importance of purpose when we do that work is a really powerful way to engage everyone who's involved, all stakeholders, not just employees, but customers and suppliers, to truly articulate our "why" and how we actually focus on growing the pie, right?

So it does not just focus on one stakeholder at the expense of another; it truly allows us to look further back at our reason for being. But the other big reason why purpose for us is so powerful is even if you have the most noble purpose in the world, if it is not connected to the individual "why" of employees who are working there, you don't get the best out of the people. You just don't get there; they're then just there to check the box and earn a paycheck versus really living into meaning.

The work we did at McKinsey, the research we looked at when I was there, everybody wants purpose through work. Yet, while 85 percent of executives say they find meaning at work, only 15 percent of frontline do so. There is real power in purpose, both defining it and activating it. Alex, in his book, highlights three really powerful points to consider as companies develop their purpose.

And Alex, I want to invite you to share that because purpose can be just a creative exercise. You know, let's give it to the creative; let's come up with a big, exciting purpose statement. But that's not what you're recommending. You recommend very specific things, just like you defined upfront around how to grow the pie. You have some guidelines for companies. So can I invite you to speak around those three points that companies should consider?

Alex Edmans:

So the first principle is that purpose needs to be focused and selective. Sometimes companies have purposes like, "Our purpose is to serve customers, suppliers, communities, the environment, and generate returns to shareholders." And that sounds great; we serve everybody, but it's unrealistic. Why? Because there are trade-offs, as I've highlighted earlier.

If you're an energy company and you shut down a polluting plant, that's good for the environment, but it's bad for workers. So that's why I go back to defining purpose as why you exist, who you serve, your reason for being, and the role that you play in the world. It can't be to solve all of the world's problems but to focus on a few.

For example, as I mentioned at the start, my personal purpose is to use rigorous research to influence the practice of business. So there might be other professors whose purpose is to use rigorous research to get published in the top academic journals, but for me, what gets me really excited is to influence practitioners, which is why it's a pleasure for me to be on this podcast and have this conversation.

This is why purpose can be so useless. If purpose is focused, then it tells the company where to devote its limited time and resources, just like for me, it means that I will accept an invitation like this but might decline a keynote speech at another university.

The second principle is, well, how do we decide what to focus on? Yes, I've decided that purpose should be focused, but this is where the two other principles we mentioned earlier, materiality and comparative advantage, should come into play. Why you exist, that should be based on comparative advantage; who you serve, that should be based on materiality.

So again, why I choose my personal purpose being to use rigorous research to influence the practice of business is that I have quite a lot of interactions with the real world. I started off in investment banking with Morgan Stanley. That's why I feel particularly comfortable speaking to a practitioner audience and enjoy it. Whereas some of my colleagues, who might be lifetime academics, their comparative advantage might be publishing in an academic journal.

The third set of principles is that purpose should be both deliberate and emergent. This echoes the points that you've just raised. So often people think that purpose is only deliberate. It's decided by the top managers when they go on an offsite for one weekend with some flip charts and marker pens. Then, after they've decided the purpose, they tell everybody, "This is our purpose, and you need to obey this." Well, how would that then be received within the company? Probably with a lot of resistance.

Who are you, top executive, to tell me what our purpose is? Not only will that be met with resistance, but the purpose you come up with is probably going to be short-sighted and not capture many elements of the company. So a lot of companies that I know who've taken purpose seriously will have focus groups at all levels of the organization to allow people to contribute and say what they think the company's purpose should be.

I noticed that you don't just have one company with one purpose that applies to all the 10,000 people in the company. Nobody runs an entire company with a single sentence. You might have a micro-purpose, which is the purpose of the company at the overall level, but how the procurement department implements that purpose might be different from how the R&D department implements its purpose. So I think London Business School's purpose is to have a profound effect on the way the world does business.

For me, I choose to have that effect by interacting with practitioners and conveying to them not only my research but the research of other people, whereas other people might contribute to that purpose by exclusively focusing on just producing academic research and not disseminating it. And that's fine. We can have different types of people within the organization. Not everybody needs to do the same thing to fulfill the organization's purpose as a whole.

Ashish Kothari:

You know, Alex, and to those who are listening who say, "Wow, is this actually practical? How much effort is it going to take to engage the whole organization?"

Let me give you a very practical example. There is a way to do this. So we engaged about 5,000 people, and the way we did this required little more than three hours of investment from almost all people leaders. What do I mean by that? And how did we achieve it? How did we touch 5,000 people with only a two to three-hour investment per people leader? We used a process called cascading.

So imagine you start at the top of the house, and you engage your team with four questions:

What drives you?

What is your proudest moment in this company?

What should we stand for as a company beyond just earning shareholder profits?

How can you connect what drives you into what we do here?

Four questions. You start at the top, CEO and their team of eight, you have those eight individuals then do the same with their team of eight. So individually, it might be an hour and a half to two-hour exercise, collectively of time that you're investing. But you're truly sensing and having real conversations about it.

And it doesn't need a lot of time in terms of actual time investment. You do have to take time in terms of how long it would take for you to go do it. But if you do it, the purpose statement that you create will have more resonance because everybody had a hand in shaping it and will have an element of living it because the last question is about how you as an individual can live into it.

Really, really important. And so I want to switch with that example, Alex, to the second element of purpose, which is so important. So many companies create a purpose statement or have a purpose statement. It's on the wall, but it's never activated. They don't live it. They don't integrate it into the strategy, into the operating models.

I want you to share an example of one of the interventions, which was in the context of balanced scorecards. And bring that to life for us to say, how can companies, if they really want to live it, they have to measure it. So bring that example of the balanced scorecard for us.

Alex Edmans:

mething that was developed in:

So they might be certain things such as Customer Net Promoter Score, employee satisfaction. And so now we would say, well, these things have to be not just consistent with the company's business, but the company's purpose. But we can certainly come up with key performance indicators that are relevant for a company's business model.

For example, if you're Unilever and you want to make sustainable living commonplace, they will measure the number of people they reach with their hand washing campaigns to highlight the importance of handwashing in order to prevent the spread of illnesses. Now, that is something which ultimately does lead to profit.

Why? Because if people recognize the importance of handwashing, they will buy Unilever soap. So it's something which is still business-relevant, but I genuinely believe it is driven by the desire to stop the spread of illnesses, rather than just a clever way of selling soap. But why I highlight this is, this is something tailored to Unilever's business.

This is very different from the ESG metrics you see out there, which try to be as generic as possible. Why? If you are a standard setter and you come up with a set of ESG metrics, you claim victory by saying, "I've got 10,000 companies to adopt my standards, and you've only got 1,000." And so they will be generic things such as water usage, carbon emissions, gender pay gap.

Now, those are not irrelevant, but do they really capture what a business is about and what gets people excited? I don't think so. Those are measures of "do no harm." Yes, we don't want to emit a lot of carbon or use a lot of water, but purpose is more about doing good, growing the pie, reaching people with handwashing programs, or if you are a bank, some banks will measure the number of business loans they give to entrepreneurs who had never received any loan from any other bank before to highlight their commitment to financial inclusion.

These might be minority entrepreneurs who might be turned down by other types of banks out there. So come up with some measures, some key performance indicators that are relevant for your specific purpose. And therefore, they are highly informative about the extent to which you are succeeding in putting it into practice.

Ashish Kothari:

I was going to say that it is so powerful what you've shared, Alex. And this notion of using the balanced scorecard is also how we can keep ourselves honest. You know, I have companies talk about ESG being really important, or I really care about employee well-being and employee health.

Well, then why, when we do weekly, bi-weekly, monthly, quarterly reviews internally or what we communicate externally, why are we not holding leaders at all levels accountable for both revenue and profit metrics and the health metrics? Or, in this case, elements that we are prioritizing based on the measures around whether they give us a competitive advantage and whether they are material.

Also, a multiplication effect we didn't get into in this, but if you define the areas and integrate them into purpose in your way to grow the pie, then let's really make sure that we embed them in every performance dialogue, in every review of the business at all levels, so that we can keep purpose front and center.

Alex, this was incredibly helpful, and I recommend everybody to get a copy of the book because it truly marries the heart of what we all want to do with the science in mind, a real practical guide to implement this research and this work. So we truly can actively do good versus do less harm.

Anil Ramjiani:

I agree. I mean, working for Nike, I have to be honest. So I wanted to make sure folks know, the purpose for Nike is to move the world forward through the power of sport. What I'm actually thinking about is going into work on Monday. I actually want to kind of look at how we are on a micro and macro level tracking that? Because I know we talk about what we do with athletes, what we do with shoes, t-shirts, various clubs, teams, licensed programs, and whatnot.

I'm actually quite curious to see how we do it. So my invitation as well is, until you pick up the book, maybe even ask the question within your own organization: How do you track this? How are people aware of how this can come to life? And if there's something lacking, raise the question, raise your hand, say, "Hey, there is an opportunity to do something different around this space," and not treat this as just a qualitative exercise. That's a nice high-five exercise, but actually something that you can measure, track, and discuss at the right intervals, day to day, week to week, month to month.

Alex, as we wrap up, I would love to just have a little bit of fun. It's something that we'd love to do with our guests, and it's just a little bit of a quick round of a few questions, just to kind of pick your brain on things you love, things that make you happy. So, I just want to ask you three questions. The first is, could you please share with us when you're feeling down, what is the comfort food you love to eat that makes you feel great?

Alex Edmans:

I don't really have a comfort food. I think if I was feeling down, I would probably do something physical, like some exercise. So that's something which gives me a pickup through endorphins.

Anil Ramjiani:

As a guy then, from Nike, I have to ask, my second question, what's your favorite sport or what would you then do to pick yourself up?

Alex Edmans:

I really like Barry's bootcamp. So this is a brutal gym that I go to in London. There's various outposts and it's really good because I think it's group exercise. So you are lifted up by a lot of other people out there in the same room going through the same class as you.

Anil Ramjiani:

Third question is, do you have a particular song that you love to listen to that fires you up, gets you moving, gets you going, when you're doing either your research, your work, or just to fire yourself up first thing in the morning?

Alex Edmans:

I like Born to Run by Bruce Springsteen.

Anil Ramjiani:

Cool. We're actually going to build a playlist of these songs, Alex, and share it with our listeners at some stage. So if you don't mind, we're going to add that to that playlist.

Alex, as we wrap up again, just truly as a former London Business School MBA student, reached out to you, and you were gracious to welcome the invitation to have this conversation, to share your insights, share your research, your practices. I'm taking this away both at a personal as well as an organizational level.

And my invitation to our guests is to do the same, as Ashish already mentioned. Encourage all of you to pick up a copy of "Growing the Pie." Genuinely, the insights, the research that you raise, Alex, are things that we need to be thinking about and talking about. And again, it's quant-based.

There are clear examples, clear opportunities, and as Ashish even mentioned from his experience prior with McKinsey, it's not like every company has the purpose set out. It can change. It can evolve. But how do you truly embrace it? Not only at the global, at the macro level, but as individuals.

One thing we didn't get to, Alex, I personally also took away from our conversation is just how as citizens, we also can make a difference in embracing change that we can make and growing the pie and not just wait for leadership or an organization to drive that for us. So pick up the book, folks, you'll know more when you read it.

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About the Podcast

The Happiness Squad
Welcome to Happiness Squad.

This is the podcast dedicated to helping you unlock your full potential by mastering the art and science of happiness.

We bring on the best leading experts on these topics to help you unlock your true potential and live with more joy, health, love, and meaning in your life.

Your host is no other than Ashish Kothari who is on a mission to provide you with an unfair advantage to be the masters of your experience and leaders in your industry.

Get ready to be moved, challenged, and enlightened on this podcast. It may change your life.

Thanks for being here and joining the squad!
Learn more: https://happinesssquad.com/

About your hosts

Ashish Kothari

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Ashish Kothari is the founder and CEO of Happiness Squad, a company focused on democratizing happiness and touching a billion+ lives over the next 20 years and helping them live with more joy, health, love, and meaning.

Prior to founding Happiness Squad and writing his best-selling book “Hardwired for happiness”, Ashish spent 25 years in consulting, including the last 17 at McKinsey and Co, a premier management consulting firm, helping thousands of clients and their organizations achieve breakthrough performance by building new mindsets and capabilities.

Ashish is a trained ontological coach and a lifelong student of human thriving.

Anil Ramjiani

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Anil Ramjiani is an experienced senior leader at Nike, Inc., most recently as the Commercial Director managing key athlete partnerships and business with Cristiano Ronaldo, Kylian Mbappe, and Marcus Rashford.

Anil's passion is grounded in empowering people, unlocking potential, and driving performance. He has worked in consulting and corporate across the US, Europe, the Middle East, and Asia acquiring over 20 years of experience in strategy, brand, and general management at IBM, Adidas, and Nike.

He created the podcast and platform Live. Breathe. Believe., to enable reflection, motivation, and inspiration for his peers. #Knowyoutobeyou!