1장
The Business Revolution We Need: Growing the Pie for All
Have you ever wondered why so many businesses seem trapped in a zero-sum mentality where profits come at society's expense? Alex Edmans, a finance professor at London Business School, challenges this thinking in his groundbreaking book that's been hailed as a blueprint for responsible capitalism. "Grow the Pie" was named one of the Financial Times' Best Books of 2020 and has influenced business leaders from BlackRock's Larry Fink to Unilever's Alan Jope. What makes this book particularly powerful is its evidence-based approach-Edmans doesn't just offer feel-good platitudes but presents rigorous research showing that companies creating value for society ultimately deliver superior returns for investors. In a world increasingly skeptical of capitalism's benefits, this book offers something rare: a practical framework for business that serves both shareholders and stakeholders without sacrificing either.
2장
The Pie-Growing Mentality: Moving Beyond Zero-Sum Thinking
The fundamental problem with how we view business today stems from a "pie-splitting" mentality-the assumption that the economic pie is fixed, so any gain for stakeholders (employees, customers, communities) must come at shareholders' expense. This zero-sum thinking fuels the bitter debates between profit-maximizers and corporate social responsibility advocates.
But what if the pie isn't fixed? What if companies could grow the total value created, allowing both shareholders and stakeholders to benefit? This is the core insight of "Pieconomics"-focusing on creating value for society leads to a larger pie that benefits everyone, including shareholders.
Consider Merck's development of Mectizan, a drug that cures river blindness. When CEO Roy Vagelos discovered the drug could help millions but wouldn't be profitable, he distributed it for free. Traditional business thinking would consider this a shareholder loss. Yet by 2019, Merck's stock had outperformed peers by 54%, partly because the Mectizan decision attracted talented scientists passionate about solving important problems, enhanced the company's reputation with regulators, and built trust with communities where Merck tested other drugs.
This pie-growing approach differs fundamentally from traditional Corporate Social Responsibility. CSR often focuses on minimizing harm or giving back a portion of profits already made. Pieconomics, by contrast, is about creating value through a company's core business. It's not about charity but about excellence-developing products and services that genuinely improve people's lives.
The approach is guided by three principles. The multiplication principle asks whether the social benefit of an action exceeds its private cost. The comparative advantage principle focuses efforts where a company can create more value than others could with the same resources. The materiality principle prioritizes stakeholders most critical to a company's success. Together, these principles create a framework for decision-making that's both idealistic and practical.
3장
The Evidence: Social Value Drives Financial Returns
Does creating social value actually improve financial performance? Hundreds of studies have examined this question, with meta-analyses finding positive correlations between social and financial outcomes. But correlation doesn't prove causation-perhaps profitable companies simply have more resources to invest in stakeholders.
To address these limitations, Edmans conducted his own landmark research on employee satisfaction using the "100 Best Companies to Work For in America" list. This measure offered several advantages: it uses thorough employee surveys across various industries, provides data spanning decades, and examines a stakeholder dimension with clear logical connections to performance.
The results were striking. Over a 28-year period studying 1,682 firm-years, the 100 Best Companies delivered stock returns beating peers by 2.3-3.8% annually-an 89-184% cumulative outperformance. This magnitude is significant but plausible, similar to what's considered exceptional performance for top fund managers.
Consider Costco, which pays nearly double the retail average and provides healthcare to 90% of employees. Some analysts have criticized this approach as being "to the detriment of shareholders." Yet with turnover at just 17% compared to Walmart's 44%, and replacement costs at 1.5-2.5 times annual salary, Costco's approach actually saves money. As CEO Jim Sinegal put it, "That's not altruism, that's good business."
Similar patterns appear with other stakeholders. Companies in the top 20% of customer satisfaction earned nearly double the returns of the Dow Jones Industrial Average over a six-year period. Firms ranked highly for "eco-efficiency" outperformed lower-ranked peers by 5%.
Importantly, these benefits materialize in the long run. The market responds sluggishly to stakeholder investments, taking over four years to fully value employee satisfaction. This creates opportunities for patient investors who recognize that stakeholder capital represents "hidden treasure" that ultimately leads to profits but isn't immediately priced in.
4장
Rethinking Executive Pay: Structure Matters More Than Amount
Executive compensation remains one of business's most controversial aspects. S&P 500 CEOs earn on average $14.8 million-264 times the average employee, up from 42 times in 1980. Politicians across the spectrum have criticized these high figures, implementing reforms worldwide.
However, focusing exclusively on pay levels reflects pie-splitting thinking. Even if a CEO worked for free, reallocating their pay would release at most 0.06% of the company's value in the S&P 500. What matters far more is pay structure-how compensation aligns leadership incentives with long-term value creation.
The solution lies in three dimensions: sensitivity, simplicity, and horizon. Sensitivity means making leaders accountable through significant shareholdings. The average Fortune 500 CEO holds $67 million in equity, meaning a 10% stock price drop costs them $6.7 million-creating powerful incentives to protect value. Studies show firms with large CEO stakes outperform those with small stakes by 4-10% annually.
Simplicity means replacing complex bonus formulas with restricted shares that executives can't sell for several years. Complex packages often produce perverse outcomes-like BP's CEO receiving a pay increase despite the company's biggest historical loss-because formulas with multiple metrics can be gamed. Restricted shares create natural alignment with all stakeholders through stock price.
Horizon refers to the lock-up period for equity. For stock-based pay to truly align with stakeholder value, shares must be held long-term-ideally extending beyond the CEO's departure. This prevents both harmful actions and the failure to make valuable long-term investments. Research confirms that long-term incentives improve profitability, sales growth, stakeholder value, and innovation-even if short-term performance temporarily decreases.
Rather than focusing on pay ratios or imposing arbitrary caps, reformers should encourage companies to adopt these principles. However, during downturns when the pie is shrinking, CEO pay level becomes important for both practical reasons (saving jobs) and symbolic ones (demonstrating solidarity with stakeholders).
5장
Investor Stewardship: The Power of Engagement
Conventional wisdom portrays activist investors as corporate raiders who extract short-term profits at stakeholders' expense. Yet empirical evidence consistently tells a different story. A comprehensive study of 2,000 activist interventions found they significantly increased long-term operating performance and innovation. Firms targeted by activists saw 31% more patent citations in the five years following intervention, with particularly strong improvements in R&D efficiency and capital allocation. These interventions often led to improved governance structures, more focused business strategies, and better alignment between management incentives and long-term value creation.
Three factors make activist hedge funds particularly effective at engagement. First, portfolio concentration gives them substantial stakes in each company - often 5-10% ownership positions - and incentives to deeply understand their investments. This concentrated approach allows them to devote significant resources to research and due diligence, unlike diversified investors holding hundreds of positions. Second, strong financial incentives through performance fees reward successful engagement, typically 20% of profits, ensuring their interests align with long-term value creation. Third, they devote substantial resources to engagement as a central part of their investment process, maintaining dedicated teams of operational experts, industry specialists, and governance professionals.
Effective stewardship takes two forms: engagement and monitoring. Engagement involves actively working to improve companies through board representation, strategic guidance, and operational expertise. Monitoring means deeply scrutinizing a company's long-term value beyond short-term profits, examining factors like capital allocation, competitive positioning, and innovation capabilities. When investors understand companies at a fundamental level-as legendary investor Peter Lynch did by visiting stores personally before investing in retail stocks-they can shield leaders from short-term pressures and safeguard companies' futures. Lynch's hands-on approach of walking store floors, talking to employees, and studying customer behavior exemplifies the depth of understanding needed for proper stewardship.
The distinction between holding period and orientation is crucial. A truly responsible investor isn't simply one who holds shares for a long time-patience without monitoring is irresponsibility. This was starkly demonstrated in several cases: Volkswagen's "patient" shareholders did nothing to stop emissions test cheating, while Kodak's investors enjoyed high profits in the 1990s without noticing the company's failure to adapt to digital photography. Similarly, long-term shareholders of Enron and WorldCom failed to detect fraudulent practices despite holding positions for years. The ideal investor is long-term-oriented rather than simply holding long-term, focusing on sustainable value creation and corporate responsibility.
For stewardship to become practice rather than just policy, investors must define it based on their comparative advantages, embed it through concentrated portfolios and dedicated resources, and communicate outcomes transparently. This requires establishing clear stewardship principles, developing in-house expertise, and maintaining regular dialogue with portfolio companies. Asset owners, proxy advisors, and equity analysts all play crucial roles in this ecosystem, with responsibilities extending throughout the investment chain. Successful stewardship programs often include regular board engagement, detailed ESG monitoring, and systematic assessment of long-term risks and opportunities. The most effective stewards also maintain transparent reporting on their engagement activities and outcomes, helping to build trust and accountability across the investment community.
6장
The Buyback Debate: Returning Capital Can Grow the Pie
Share buybacks have become increasingly controversial in corporate finance and public policy discussions, with critics arguing they divert resources from workers, research and development, and long-term investment. However, this perspective fundamentally stems from pie-splitting thinking that misunderstands how capital markets function. Extensive research, including studies from the National Bureau of Economic Research, shows buybacks typically occur when investment opportunities are low and surplus cash is available. Companies systematically make investment decisions before repurchase decisions, demonstrating that buybacks are a result of low investment opportunities rather than their cause.
The mechanics of buybacks reveal their economic function. When a firm returns cash through buybacks, that money doesn't vanish from the economy-it gets efficiently reinvested elsewhere, with shareholders rather than CEOs deciding where to allocate capital. For example, when Apple conducts buybacks, investors might reinvest those funds in emerging technology startups or growing industries like renewable energy. This creates a virtuous circle: mature firms generate profits by creating societal value, invest in all viable pie-growing projects, then return excess cash that finances tomorrow's innovative enterprises.
Market data tells a revealing story. While S&P 500 firms buy back more stock than they issue, smaller non-S&P 500 firms (typically with better investment opportunities) do the opposite. From 2010-2019, non-S&P 500 companies issued approximately $300 billion more in equity than they repurchased. This pattern demonstrates the stock market's true role-efficiently allocating scarce funds to companies that need them most for growth and innovation.
Buybacks offer several practical advantages over dividends for returning surplus cash. They're more operationally flexible, allowing companies to adjust capital return programs to changing circumstances without suffering stock price penalties that typically accompany dividend cuts. This flexibility proved crucial during the 2020 pandemic when S&P 500 firms cut buybacks by 55% but dividends by only 6%, providing companies vital financial flexibility during unprecedented uncertainty. Buybacks are also more precisely targeted-investors seeking liquidity or seeing better opportunities elsewhere can sell, while those believing in the company's long-term strategy can maintain their positions.
While critics correctly note that buybacks can sometimes be misused to hit short-term earnings per share targets or exploit temporary stock price weakness, these instances are generally symptoms of underlying short-term market pressures rather than inherent problems with buybacks themselves. More effective solutions should target these root causes through mechanisms like longer required equity holding periods for executives, reformed compensation structures, and reducing quarterly earnings pressure from Wall Street. Some companies, like Amazon and Berkshire Hathaway, demonstrate how firms can successfully balance long-term investment with occasional opportunistic buybacks when excess capital exists.
The evidence suggests that well-executed buybacks, as part of a comprehensive capital allocation strategy, can help grow the economic pie by ensuring capital flows to its most productive uses. Rather than banning or restricting buybacks, policymakers should focus on creating incentives for long-term value creation while maintaining this important capital reallocation mechanism.
7장
Purpose in Practice: Moving Beyond Mission Statements
Purpose defines why a company exists-who it serves, its reason for being, and the role it plays in the world. It represents the particular way an enterprise serves society and grows the pie. While profit cannot be the purpose itself, purpose should ultimately lead to a company's success, as demonstrated by Unilever's Sustainable Living Brands growing 69% faster than the rest of its business.
Purpose unites stakeholders in a common mission more effectively than contracts, which only enforce compliance rather than commitment. In real life, contracts fail because they can't measure many valuable contributions, they only enforce compliance rather than inspiring commitment, and leaders lack knowledge to dictate every action. Purpose unleashes the human side of enterprise, creating a sense of belonging that motivates stakeholders to contribute far beyond what contracts require.
This is especially important for millennials-only 27% plan to stay with employers for five years, but 88% would stay if satisfied with the company's purpose, with millennial turnover costing the US economy over $30 billion annually.
To make purpose real rather than just a slogan, companies must embed it through five channels:
1. Strategy: Purpose should shape company activities, sometimes leading to decisions not justified by even long-term shareholder value. Patagonia's environmental purpose led them to place a "Don't Buy This Jacket" ad on Black Friday and create a marketplace for used clothing, despite potentially reducing new sales.
2. Operating Model: Core operations must align with purpose. When Tesco defined its purpose as "creating value for customers to earn their lifetime loyalty," it redesigned processes to ensure product availability and freed managers from unnecessary reporting to focus on customer service.
3. Internal Reporting: Leaders must ensure integrated reporting occurs inside the enterprise, with metrics tailored to purpose goals at all levels of the organization.
4. Culture: While purpose defines why a company exists, culture determines how it operates. Culture must align with purpose-there's no universal "right" culture. A purpose prioritizing innovation requires autonomy and risk-taking tolerance; a cost-focused purpose needs efficiency.
5. Board Ownership: The entire board must take responsibility for purpose, not just a subcommittee. Boards should require management to explain how major decisions align with purpose and monitor delivery through both reports and direct engagement with employees.
Beyond these mechanisms, purpose requires viewing stakeholders as partners rather than merely factors of production. This partnership approach transforms relationships by making stakeholders collaborators and sources of ideas rather than just providers of revenue, labor, or inputs.
8장
The Citizen's Role: Individual Agency in Growing the Pie
Despite the apparent power of global corporations, citizens wield significant influence through three key roles: as members (investors, colleagues, customers), as policymakers (voters and participants in public discourse), and as influencers (media, think-tanks, experts).
As members, citizens have monitoring power through their choices of which enterprises to join based on shared values. Workers can decline job offers from employers with poor reputations, which serves as a powerful deterrent since talent is a key asset for most companies. Customers can choose products based on more than just price, using resources like ethical consumer guides and apps that rate companies' social impact.
Citizens also have engagement power. Even small shareholders can create change, as when Abdul Durrant, an HSBC cleaner struggling to support his family, attended the bank's AGM and addressed the chairman directly about low wages, resulting in a 28% pay increase for cleaners. Customers provide feedback that can determine a business's success and support innovation through co-creation, as when Lego's Ambassador Programme helped turn around the company by engaging avid customers for product ideas.
As policymakers, citizens can support regulation that grows the pie rather than just redistributes it. Effective regulation addresses externalities that companies might ignore, provides information that enables informed decisions, promotes competition, removes unintended distortions from existing rules, and helps diffuse best practices. However, regulation must be designed carefully to avoid unintended consequences, such as discouraging innovation or creating compliance-focused box-ticking rather than genuine commitment.
As influencers, citizens should adopt a pie-growing mentality by not just "naming and shaming" companies that split or shrink the pie, but also "naming and faming" pie-growers. By highlighting positive examples, influencers encourage citizens to support purposeful companies while providing aspirational models for other firms.
The principles that guide companies in serving society can also guide individuals with limited time. The "principle of multiplication" becomes "gifts of unequal value"-taking actions that create more value for recipients than they cost you. The principles of comparative advantage and materiality suggest serving where you have unique skills and genuine passion, creating freedom to focus where you can make the greatest difference.
9장
Beyond Business: The Wider Applications of Pie-Growing
The core ideas of Pieconomics-the pie-growing mentality, avoiding errors of omission, and principles of multiplication, comparative advantage, and materiality-extend beyond business to broader contexts.
In international trade, the principle of comparative advantage shows how countries benefit from specialization and exchange even when one is more productive across all goods. While trade benefits society in aggregate, not everyone gains individually. The solution lies in policies that increase worker redeployability rather than protectionism that shrinks the overall pie.
The "lump of labour" fallacy assumes a fixed number of jobs exists, leading to fears that immigrants or technology take jobs from workers. However, immigrants often create complementary jobs, and technology frequently redefines jobs rather than eliminates them. ATMs didn't eliminate bank teller positions-teller jobs doubled since 1970 as they shifted to more complex advisory roles. This requires both companies and governments to invest in training citizens in skills that complement technology.
Carol Dweck's concept of "growth mindset" parallels the pie-growing mentality. While a "fixed mindset" views abilities as genetically determined, a growth mindset sees them as expandable through effort. This perspective provides both encouragement that improvement is possible and the responsibility to work hard.
Avoiding errors of commission often leads to more serious errors of omission that forfeit growth opportunities. True growth requires "Black Box Thinking"-painful but necessary examination of failures to learn from them-and "deliberate practice" that involves uncomfortable tasks where failure is likely.
In career selection, a pie-growing approach mirrors how purpose-driven enterprises ultimately become profitable. Rather than plotting stepping stones instrumentally, Steve Jobs advocated following what feels right at the time-trusting that the dots will connect looking backward. Someone who follows this approach doesn't see work as merely contractual but as an opportunity to apply talents to problems they're passionate about, leading to greater success.
10장
A New Vision for Capitalism
Capitalism faces a severe legitimacy crisis, increasingly viewed as a rigged system that primarily serves the interests of executives and wealthy investors while neglecting workers, customers, and environmental concerns. Public trust has eroded as wage stagnation persists alongside soaring executive compensation and environmental degradation. While some advocate for overthrowing capitalism through heavy-handed regulation or nationalization of industries, such reforms risk stifling the innovation and entrepreneurial spirit that drives economic progress and societal advancement.
The pie-growing mentality offers a compelling third way forward. When enterprises prioritize creating genuine value for society, they expand the total pool of resources and opportunities rather than simply redistributing a fixed pie. Companies focusing on societal value creation ultimately become more profitable than those pursuing narrow shareholder value maximization, as they build deeper customer loyalty, attract top talent, and develop sustainable competitive advantages. This approach is both liberating and focused - companies can make long-term investments in their people, communities, and innovation without having to calculate precise short-term profit impacts, guided instead by clear principles for ethical decision-making.
The empirical evidence supporting this approach is substantial: companies that treat employees as valued colleagues through profit sharing and development opportunities, implement genuine sustainability policies beyond mere PR exercises, and align leadership incentives with long-term value creation consistently outperform their peers. For instance, companies with high employee satisfaction scores on Glassdoor demonstrate 2.3% higher stock returns annually than their industry peers. Change is already happening across industries - from Merck's development of river blindness medicine distributed at no profit in developing nations, to Vodafone's M-PESA mobile money service that has lifted over 2% of Kenyan households out of poverty, to Patagonia's environmental activism alongside consistent profit growth.
Today's business leaders wield unprecedented influence through technological capabilities and global reach. We now have compelling evidence, inspiring examples, and practical tools to create a form of capitalism that works for all of society rather than just a select few. By embracing the pie-growing mentality across business operations, public policy, and individual decision-making, we can build an economic system that genuinely serves humanity's needs while preserving the innovation and dynamism that drives progress. This requires moving beyond quarterly earnings pressure toward metrics that capture total societal impact, reforming executive compensation to reward long-term value creation, and embedding stakeholder considerations into corporate governance structures.
The transformation to purpose-driven capitalism won't happen overnight, but the momentum is building as more organizations recognize that doing good and doing well are fundamentally aligned. The challenge now is accelerating this shift before mounting inequality and environmental crises force more radical interventions that could undermine the essential benefits of market economies.
