Q&A With Professor Alex Edmans: The Purpose Of A Finance Professor

Explain the role of luck in the ability to pursue one’s passion in this space?

I chose to talk about luck for two reasons: One is because it’s so difficult to instrumentally bring about success, that you might as well go for what is fun. The nature of the research process is so random, I think that any sacrifice that you need to make in order to pursue purpose is not that high because there’s so much randomness to begin with.

The second is that hopefully it will give us a much kinder view of our colleagues in the profession. There’s this big hierarchy — when you’ve got Wharton on your nametag, people think you must be amazing, and if you’ve got a state school, then people think you’re not at the top table. But you could be at those schools, firstly, because you’ve got a geographic preference. You just love to be in Utah because you love skiing. Even if that’s not the case, you can be just as good as somebody else but just got unlucky. I think there is so much hierarchy and looking down on people from different institutions, that I wanted to say that a lot of this is not down to inability. Often, when you’re at conferences, you look at the nametag of somebody, and if the institution is not high enough for you, then people just look around and talk at somebody else. I think this is just very non collegial, and so that’s the other reason I wanted to talk about luck.

Your 2020 book, ‘Grow the Pie’ uses research, data and real-life examples to show that when companies work to serve society, they often end up more profitable than when chasing profits alone. In the keynote and article you apply this to the finance professor profession.

The whole idea of “Growing the Pie” was that when you do things to create value for wider society, even if you did it for solely altruistic reasons, you might ultimately become more profitable because it leads you to do things that end up being things you can turn into profits. Similarly, if I do something as a professor to genuinely help other people, ultimately I might benefit from it in ways I never expected. For example, when I was a peer reviewer of papers, I used to do that very, very diligently, and then completely unexpectedly, one of the top journals, The Review of Financial Studies, launched this Best Referee Awards. I was one of the winners in the very first year. I never refereed well thinking I’m going to win this award that didn’t even exist yet. But, I got the award, and then they appointed me to the editorial board the year after. I was still, I think, a fourth year assistant professor, and there were only two people who were untenured on the editorial board. I got it very early, I think, in part because of the diligent peer review I had done when there wasn’t necessarily an extrinsic reason to do so. I think there are many cases in which things that you do to just genuinely help other people do pay off.

What would you hope that your colleagues take from this keynote and this subsequent paper?

Do things for just intrinsic reasons, not strategic reasons. We are strategic about where to work and about what we research. Might I now work on big data and artificial intelligence because that’s a big topic, even though I have no considerable passion for it? I think no. Relax and chill a bit more. Meet with the people who you want to teach because you love teaching, and not so much thinking that it’s time away from research.

Do more of the things that serve society: I think that is what I wanted to say in the keynote and article. It is not about more obligations, but to free people. Because if you did not have all of the challenges of the tenure clock, so many people would be willing to chat to others and spend more time on teaching. Let’s not be naïve; I do understand people have a tenure clock, but this is not at the expense of it. I’m actually trying to free people rather than to constrain people.

What has the reception been like for the keynote and the article?

Unfortunately, I was not there physically and gave the keynote virtually, so I didn’t get the immediate feedback. But just after, people who attended wrote to me and said people were talking about it in the corridors afterwards. Particularly my suggestion that we remove the institution on the name tags at conferences. I also got lots of emails from people who weren’t at the conference but watched it afterward.

Then when the article published online, people wrote to me and it was really positive. Now, the caveat is I only got a selected sample of the feedback. There might be people who were thinking, “Why is this guy doing this thing about purpose? He should be presenting his equations.” But that person is not going to tell me that. At least from the feedback I got, because it was from a diverse set of people — seniors and juniors from top schools, people from lesser known schools– it has been positive. That was really comforting. I also had people say they sent it to their department chair, or sent it to the entire department, or discussed it at their faculty lunch, or put it in their PhD reading list. Those were really positive things to hear about.

When you first started researching and publishing about these topics, you were one of the few working in the space. How do you feel about it today now that ESG, sustainability, DEI and other purpose topics are, perhaps, en vogue?

I think it’s becoming just much, much more mainstream. Fifteen years ago, this was not even a field.  Even when I wrote my paper on employee well being, I never mentioned the term ESG. Now, when you go to finance conferences, the ESG sessions are the most popular. If you look at the Financial Times, they have a special Moral Money newsletter for it. It’s just become really mainstream, and I think that’s a positive thing.

How do you hope the business school of the future engages in this space?

I think, actually, one of the most important things for a business school to do to be purposeful is not so much to publish research on purpose, but to think about the purpose of a finance professor and to make sure to emphasize teaching and external impact. The first thing, I think, is to make sure that teaching plays a weight in tenure promotion, hiring decisions, and external relevance.

The next point, and I hope it doesn’t come across in a catty way, but there are professors now who sort of put themselves as champions of purpose and saying companies need to care about wider society. But if you look at their own actions, they are not delivering that. They’ll be quite happy to hobnob with the World Economic Forum and some big CEO who wants to talk about purpose. But if you’re doing this because you really care about creating purpose in wider society, you need to have deep respect for your students.

The ideas that I have, I don’t think are difficult to implement. It’s not like I’m saying that in order to do this, you need to fly to Mars. There already was a major conference last month which removed all the name tags, and replaced that with research interests. When I say to send each other your papers and be willing to provide feedback for others, or put some weight on teaching in tenure decisions, I don’t think this is difficult. I wanted to not just be an idealist, but I wanted to be realistic.

Switching gears a bit, I understand that you also incorporated some of these topics on purpose, how business should serve wider society, Growing the Pie, etc., into the “Principles of Corporate Finance” textbook. Tell us a bit about the history of that text, and why you thought it was important to add these themes.

So this book is a huge place to be involved. It was known as the Bible of Finance for, like, a decade. When I started Oxford, this was the main textbook that we all got, then when I went to Morgan Stanley, every analyst had it, and when you looked at the shelves of senior bankers, they all had it. I myself have taught this book for nearly 20 years.

How did I get involved? So, again, this could well be luck. Look at the authors: Stewart Myers was my thesis advisor at MIT. Franklin Allen was my colleague and mentor at Wharton. And Richard Brealey was at London Business School, although retired a long time before, but because I’m at LBS, he’s heard of me. If I’m going to be a little bit immodest, it’s not purely due to luck in that I fortunately have all these big teaching awards, and I also work in the areas like responsible business in which it wants to modernize. But again, this goes to the idea like when I decided to put so much effort into teaching as an untenured professor, did I think that 15 years down the line, I’d be asked to work on this book. No, I did not.

What are some of the most important changes, in your opinion?

I think one important change was to recognize that business needs to serve wider society. So rather than just making sure to profit, we need to make sure that we’re doing so in the right way: Making products that transform customers’ lives for the better rather than causing addiction, providing employees with a healthy and fulfilling workplace, and so on.

The first thing, recognizing that the goals of business are wider than just shareholder value. But, on the other hand, recognizing that many of the tools of finance are still applicable. So, it would be great for me to say I completely scrapped this textbook, that I, Alex Edmans, rewrote 40 years of finance. But that would not be true. For example, what do you learn in the first week in finance? Net present value, the value of all future cash flows from now until the end of time. This is inherently forward looking. Finance has always taken the long term into account. This is important because when people think about trying to encompass responsible business, they think, “Oh, this is scary. We don’t have any principles or frameworks. I’m stepping into the unknown.” But I’m saying no, actually, many of the principles of classic finance still work.

Now there are other things which do need to improve. There are genuine additions and enhancements in the book. But I want to say, for many things, we can go with what’s tried and tested and proven. Even though the goals of business in society seem to be radically different from the past — nobody thought about things like diversity or climate change previously — actually the tools to get there, there’s not as great an amount of scrapping and starting from scratch as some people might think.

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