by Alex Edmans
What does it mean to be a responsible business in a time of crisis?
We’ve seen some incredible responses to COVID-19. Unilever is donating €100 million of food and sanitizer, and providing €500 million in liquidity by paying suppliers early and extending credit to customers. Wynn Resorts is continuing to remunerate its employees, including the average tips they earned, even though their hotels are shut. Some CEOs are taking a personal hit, with the bosses of United and Qantas forgoing their salaries.
But what if you’re in an industry that’s not directly related to the crisis, such as food manufacturing? What if you’re a small enterprise that doesn’t have millions lying around? Or if you’re a big business whose revenues have plummeted, such as an airline? You know that keeping all workers on full pay would be the “right thing to do” – but you’d go bankrupt and they’d permanently lose their jobs.
To understand “what does it mean to be a responsible business at a time of crisis?”, we must start by understanding what it means to be a responsible business. Conventional wisdom is that it’s one that splits the pie fairly. The pie is the value that a company creates for society. Under this view, a responsible business is one that ensures that enough of the pie goes to employees, customers, and the environment, rather than just executives and shareholders.
The division of the pie is clearly important. Everyone who contributes to a company’s success should benefit, not just the CEO – employees should be rewarded by being given shares. Profits must not be earned through price-gouging customers or polluting the environment.
But splitting the pie fairly is not enough. In my new book, Grow the Pie: How Great Companies Deliver Both Purpose and Profit, I stress how a responsible business must go further by growing the pie – actively creating value for both stakeholders and shareholders through innovation.
In 2007, Vodafone launched what seemed a crazy idea – M-Pesa, a mobile money service in Kenya that allowed citizens to transfer cash without a bank account. By 2014, M-Pesa had lifted 200,000 households out of poverty, most of which were headed by women. Had Vodafone not launched this innovation, there would have been none of the media backlash typically reserved for unfair splits of the pie, such as high CEO pay – but 200,000 households would have been worse off. At the other extreme, Kodak is rarely seen as irresponsible, since executives and investors didn’t line their pockets at the expense of others. But the fact that they also lost out is of no consolation to the 145,000 workers who were made redundant due to management’s complacency and inaction.
The importance of pie-growing is highly pertinent in a time of crisis. There’s no doubt that responsibility involves executives and investors bearing their share of a shrinking pie, to reduce the burden on others. The tremendous actions mentioned at the start – CEOs working for free, firms paying their workers during shut-downs, and companies donating their products – are highly laudable and should never be underplayed.
But the value of thinking about responsibility as pie-growing is that it unlocks the potential for all companies to play their part – including those in unrelated industries and without funds to donate. A responsible leader asks herself: “What’s in my hand?” In other words, “what resources does my company have that I can use to serve society?”
Such a mindset can inspire some great ideas – just like Vodafone contributing to financial inclusion even though its core business is telecoms. Chelsea Football Club might not obviously have anything relevant in a crisis. Football tickets and replica merchandise are of little value. But what’s in its hand is its hotel, where it’s allowing the UK’s National Health Service staff to stay for free, saving them a long commute after a day of fighting on the front line. LVMH’s luxury perfumes are indeed a luxury right now, but what’s in their hand are production facilities that it’s using to make hand sanitiser.
Sometimes, what’s in a company’s hand is its relationships with other firms. Qantas Airways can’t afford to keep paying its staff, since its business has been badly hit. But it has a relationship with Woolworths grocery store, whereby customers can earn Qantas miles for shopping in Worthworths. It’s leveraging this relationship to redeploy its staff to Woolworths – not only safeguarding their incomes, but also serving wider society given the spike in demand for groceries.
And thinking of responsibility as growing the pie is particularly relevant for small businesses, who don’t have the resources to donate slices of the pie. In financial markets, two assets of equal value trade – an investor pays £100 for £100 of shares. But society is not a financial market. The key to creating social value is to give gifts of unequal value, that are worth far more than the recipient than it costs you.
Take Barry’s Bootcamp, the boutique fitness studio. What’s in its hand is fitness expertise, which it’s using to offer free livestreamed workouts – particularly valuable when citizens are staying at home. It also has many staff trained in mental first aid, available to call on those who are finding self-isolation particularly tough. And they’re also reading stories to kids over Zoom, to take the load off working parents.
Hopefully the crisis will be over soon, and the sun will rise again. But the idea of thinking about what’s in our hand – what gifts of unequal value we can give – applies in good times as well as bad. Responsibility certainly involves paying fair wages to employees. But it also entails mentoring them, viewing them as partners in the organisation, and giving them opportunities to step up. Responsibility may not mean giving bells and whistles to customers, but stepping into their shoes, taking feedback seriously, and forming personal relationships. Indeed, the book provides rigorous evidence that creating value for society ultimately benefits investors – so the idea that the pie can be grown and both can benefit is realistic rather than wishful thinking. Responsibility is not just “worthy”, or something that should be pursued in crisis times. It’s good business sense, and is fundamental to the success of a business at all times. If there is any silver lining to this crisis, it’s that it will permanently inspire business leaders to think innovatively about how they can use what’s in their hand to serve society.
Alex Edmans is Professor of Finance at London Business School and a leading authority on reforming business to serve the common good. Alex is the author of Grow the Pie: How Great Companies Deliver Both Purpose and Profit.