Friday 27 March 2020 12:05 am

Pursuing purpose, not profit, could help businesses grow a bigger pie for all of us

Alex Edmans is Professor of Finance at London Business School and author of Grow the Pie: How Great Companies Deliver Both Purpose and Profit.

The coronavirus crisis is highlighting one of the most fundamental tensions that business leaders face: do they pursue purpose or profit?

Sainsbury’s chose purpose. They’ve reserved the first hour on every Monday, Wednesday, and Friday for elderly and vulnerable customers, and are giving them priority access for online delivery slots.

Read more: Coronavirus: US stocks shake off dire unemployment data

The supermarket is also limiting the number of high-demand items that each customer can buy, to prevent the panic buying and empty shelves that have been a defining picture of the crisis.  Doing so is fully in line with Sainsbury’s vision, which involves “putting our customers at the heart of everything we do”.

But such a strategy is fully out of line with maximising short-term profit.  A profit-focused company would encourage consumer rushes and empty shelves – a sign that everything has been sold.  It would never prioritise the elderly and vulnerable over bigger spenders such as families and young professionals. 

Yet it needn’t actually be an either-or choice. While Sainsbury’s motive is genuinely altruistic, it may end up unexpectedly benefiting as a by-product. Its employees may be more motivated, knowing that their efforts are helping those most in need. Suppliers may be more willing to forge long-term relationships with a retailer that channels their products to the best social use. And customers may be attracted to a store which truly puts them “at the heart of everything we do”.  

It might seem too good to be true that serving society might ultimately boost profits. So we need large-scale, rigorous evidence. That’s what I gather in a new book, which presents the results of multiple studies – spanning industries, countries, and decades – on the long-term performance of companies that deliver value to society. 

The studies find that such companies typically outperform – and it is purpose that leads to profit, rather than profit allowing a company to pursue purpose.

The implications for business are profound. Many leaders run their businesses with the “pie-splitting mentality”. This views the value that a company creates as a fixed pie. Any slice that goes to society reduces the slice taken by shareholders. So they maximise profits by exploiting society – cutting wages or price-gouging customers. 

But the evidence supports a new approach to business: the “pie-growing mentality”. By having its main objective as creating social value, a company isn’t sacrificing investors’ slice, but grows the pie, ultimately benefiting shareholders. Profits remain important, but are generated as a by-product of serving society, rather than the end goal in itself.  

Read more: Sainsbury’s ramps up rationing on more items as demand rises

And being driven by social value inspires companies to innovate and think about novel ways they can serve society. After all, it’s not just supermarkets and healthcare companies that can help in the crisis. 1Rebel gym is offering space to the NHS to be used for beds or facilities, while Chelsea Football Club is allowing health workers to stay at their hotel for free, to reduce commuting time.  

If there is any silver lining to the crisis, it’s that it may permanently inspire leaders to think creatively about how they can use the vast resources they’re entrusted with to serve society.

Alex Edmans is author of Grow the Pie: How Great Companies Deliver Both Purpose and Profit, published by Cambridge University Press. He is also a professor of finance at London Business School.

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.

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