Grow the Pie summary

Incentives play a crucial role in driving business success. In 2010, Bart Becht, CEO of Reckitt Benckiser, earned £92 million, breaking executive pay records and sparking public outrage in the UK. The backlash was so severe that he resigned in 2011, causing a £1.8 billion drop in Reckitt’s market value. This incident highlights the unintended consequences of focusing solely on high executive pay without considering the broader picture.

Becht’s leadership had been transformative. From 1995 to 2011, he led Reckitt through substantial growth, with significant annual increases in sales, operating income, and net income. His focus on continuous, incremental innovations, rather than grand new products, had earned him industry accolades. No surprise then that under Becht, Reckitt’s share price had soared, creating £22 billion in value for investors. After his departure, the picture changed drastically.

In 2014, health company Humana’s earnings per share – or EPS – dropped from $7.73 to $7.34, impacting then-CEO Bruce Broussard, whose bonus depended on an EPS of $7.50. Broussard met this target by excluding certain expenses and initiating a $500 million share repurchase, nudging EPS to $7.51 and securing his $1.68 million bonus. This highlights the controversial practice of share buybacks, and how it relates to the pie-growing mentality.

Share buybacks occur when companies use spare cash to repurchase their own shares rather than investing in growth or increasing wages. This often benefits executives and investors by artificially inflating EPS without actual performance improvements. Between 2003 and 2012, S&P 500 firms spent $2.4 trillion on buybacks, which was 91% of their net income.

Imagine living in a remote Kenyan village, where the nearest bank is hours away, and you rely on cash for all your transactions. This was the reality for Emmanuel Sironga, a goat trader in Magadi, until 2007 when M-Pesa was launched by Vodafone. This mobile money service transformed his life, allowing him to deposit, withdraw, and transfer money using his phone. No longer burdened by the risks and inconveniences of cash, Emmanuel could focus on his livelihood. This is a great example of the profound impact of purpose-driven innovation.

Purpose is the reason a company exists, serving society and answering the question of how the world is better with its presence. Profit is a by-product of fulfilling this purpose. For instance, M-Pesa lifted 196,000 Kenyan households out of poverty by 2014, demonstrating how businesses can create societal value through excellence in their core activities.

As an individual, it’s easy to feel powerless when it comes to changing major corporations. But citizens have substantial power to shape business practices. As stakeholders, policymakers, and influencers, you can help grow the pie for everyone.

As an investor, you can select companies that align with your values, prioritizing those with strong social performance. The British charity ShareAction even ranks mutual funds based on their stewardship, aiding in socially responsible investment decisions.