Michael  00:46

Our podcast sponsor today is StrategyTraining.com. If you want to strengthen your strategy skills, you can get the Overall Approach Used in Well-Managed Strategy Studies. It’s a free download, and you can go to firmsconsulting.com/overallapproach. That’s firmsconsulting.com/overallapproach. And if you’re looking to advance your career and need to update your resume, you can get a McKinsey and BCG-winning resume template as a free download at http://www.firmsconsulting.com/resumePDF, that’s http://www.firmsconsulting.com/resumePDF. Hi Alex, can you hear me?

Alex Edmans  01:28

Yes I can. Hello!

Michael  01:31

Fantastic. How are you doing Alex?

Alex Edmans  01:35

Good. Thank you. Thank you very much for inviting me. It’s great to be back on the show.

Michael  01:39

Yes, we enjoyed the last discussion very much. Our audience liked it as well. And I thought your new book is very, very interesting, and I wanted to delve into it. So let’s get straight into it. Right? Let’s talk about DEI. Let’s start there.

Alex Edmans  01:53

I think there’s so much misinformation about DEI because it seems there’s only one legitimate viewpoint. So most people would like to have more diverse, more equitable and more inclusive organizations, myself included, and I’m an ethnic minority, but even if I was not, I would want organizations to be inclusive. And so when you see evidence such as McKinsey studies or Blackrock studies claim it that diverse organizations do better. You lap it up uncritically. You want to share it with with others, because you’re not trying to spread misinformation. You’re thinking you’re spreading truth. And you think this truth is enriching this truth is going to help diversity. So you think that you are doing a good thing, and even if you notice some problems with the data, you don’t want to criticize those at least, because people might say, well, you’re anti diversity. Maybe you have a hidden agenda, maybe you’re racist, or maybe you’re sexist, or maybe you’re just scared you think, Oh, well, I might not actually have my job if I was to be pit up against women or non whites, because the only way deep down I know I got my job was because I’m a member of the old boys club.

Michael  03:08

So you think that misinformation is spreading because sometimes people just want to be nice and fit in?

Alex Edmans  03:15

Yeah, I think it’s not just being nice and fitting in. I think they just genuinely believe it to be true. Why? Because of the problem of confirmation bias, is that if you have a view of the world and you see something that confirms that view, then you lap it up on uncritically. You just believe it, and you want to share it with people. So first, I think people do genuinely believe it’s true, and for those who don’t, because those who are a bit more discerning, then your comment about wanting to fit in is going to be operational, because you think to actually go against the grain and say something different will make you a social outcast, a bit like cases such as the the the the Bay of Pigs invasion, where there were many people in the US who wanted to invade the Bay of Pigs, there were views as to well, military action might actually backfire, but people did not want to express those views. People might think they’re un American or they’re not courageous enough. And indeed, the phrase group think was coined to describe the deliberations which led to that Bay of Pigs disaster. That’s a group setting where you don’t want to go against the grain, there might be some repercussions for doing so.

Michael  04:32

And the repercussions have been quite severe. I mean, there was a time not that long ago that if you spoke out against some element of DEI I know of people who’ve lost their job. So the repercussions have been severe, haven’t they?

Alex Edmans  04:45

Absolutely and they can range from something very severe, which is you lose your job for stating something which could be based on evidence, in the same way that Galileo said, well, actually, the Earth is not the center of the universe, it’s the sun. Yeah. People can lose their jobs when it’s based on data. It’s not ideology, it’s just what the data is showing. Sometimes it might be less Stark than that. It may well be that if you were to claim the evidence is unambiguous that diversity pays off, you get invited to give high price keynote speeches at pro diversity conferences, maybe McKinsey or black lot will hire you as a consultant or as an advisor. So you know, don’t only have active bad things happen to you, but there’s also missed opportunities.

Michael  05:35

So let’s stick on DEI for a second. Right? You kept saying, and I agree with you that the backlash against DEI is not just political, because there are some untruths or misinformation. Give me some example of those things.

Alex Edmans  05:50

Yeah, so let’s take the famous McKinsey study. So what they do is they have a measure of diversity, and they find that that measure of diversity is positively linked to financial performance. So they say, well, diverse teams perform better. That’s great for McKinsey’s reputation, because there seemed to be pro diversity. But that also seems to be practical, useful advice companies, let’s just have more diverse diversity in the boardroom or the wider workforce. But there’s many, many problems. Let me focus on just, let’s say three. So the first is, they cherry pick their measure of performance. So there’s loads of ways that you can measure performance, but the best way is to look at the long term shareholder return. So why shareholder return? A good thing, because it measures more than just profits. A company can have its stock price go up even if it’s not that profitable, because it’s got some great future prospects. And indeed, some of the most valuable companies in the world today are tech firms, which are valued so highly because of their future potential. But what McKinsey looks at is one specific measure of profits, which is EBITDA earnings before interest, tax, depreciation and amortization. So why? Because that is only a measure of your short term profits, whereas diversity should lead to long term innovation, and even if you wanted to look at profits, there’s lots of other measures of profits out there. EBIT is another one of them return on assets, and so they cherry pick that one measure. And even if you were to look at if you were to look at other measures, the results go away. So it’s as if they mined the data, they correlated diversity with so many potential measures of performance, EBITDA was the only thing that worked, and they trumpeted that one result. So that’s number one. So it’s actually the results are not robust to begin with. Number two is, is it diversity causes performance, or is it performance causes diversity? So their latest report took financial performance from 2017 to 2021 and it took diversity in 2022 which was after performance was measured. So it’s more likely that performance led to diversity. So if you’re a company and you’re already performing really well, you don’t need to engage in short term firefighting. I can look to longer term issues such as diversifying my boardroom, whereas, if you are a company in trouble, maybe you just don’t have time to think about board diversity, because you’re just busy not going under circular performance causes diversity. Then the reverse third issue is, well, maybe neither causes each other, but a third factor causes both. So maybe industry is an explanation. So let’s say the coal mining industry has got a lot of males just the nature of the coal mining job, and coal mining has just done poorly because of the energy transition. So it’s nothing to do with the high male proportion in the coal mining industry. It’s just that you’re in coal mine. And so there’s these other factors which might be going on as well. But if there’s a prevailing narrative which people want to be true, that diversity causes high performance, you just latch onto the one explanation that you want to believe, and you ignore alternative ones. It’s a bit like a police officer who has that hunch about the suspect. Yes, they interpret all of the evidence as being consistent with that one suspect, and they don’t look at alternatives, and they end up convicting the wrong person.

Michael  09:35

And I think it should be noted here that there’s a whole ecosystem. I don’t want to use the word enable, but I’d say supports it, because you have editors of prominent publications who then look at the report and they publish the findings so that critically analyzing it. Because, you know, as you say, everyone wants to believe the story, it creates a kind of an echo chamber.

Alex Edmans  09:59

Yeah. Yes, and you’re absolutely right in terms of the ecosystem. So you might think, well, aren’t there enough checks and balances out there to make sure that these bad things don’t get published? So who does the McKinsey research? It is per particular researchers within McKinsey. Yes, McKinsey, the organization, needs to prove it, but they will do if it’s something which is pro diversity and similarly, a book, let’s say a book by Simon Sinek on starting with why is actually flimsy and not backed up by any data. Well, the publisher, Penguin might think, Okay, this is a great book. This book will sell because people like the message of this book, that purpose is going to lead to success. So let’s just publish this, or it might be sometimes a university affiliated organization, so Harvard Business Review does publish a lot of poor studies on diversity, yes, and why? Because, yes, it’s affiliated with Harvard, obviously, a brilliant university. But how do you have influence? As Harvard Business Review, you have influence if your articles are read, and your article is much more likely to be read if it’s shared, and it’s more likely to be shared if it’s something that people want to be true, and so the message that improves performance is something which people want to believe.

Michael  11:21

It reminds me of this trend I’ve noticed recently. I’m very big into healthcare and eating healthy and so on. And I noticed over the last few years, there’s a narrative that’s going around saying that we need to eat more protein. But the last time I looked as Americans, I think we eat too much meat. But if you have this discussion with anyone, they always tell you got to eat more protein. But the evidence is not there. It’s an example of how if people want to believe a narrative, they will look for whatever supports it. And of course, I went out there and told people, you shouldn’t eat so much protein as you said. I’m not going to get paid speaking gigs. I’m not going to get hired. So there’s a lot of benefits to going with the narrative.

Alex Edmans  12:05

Absolutely and maybe there is some evidence that eating more protein helps, but that evidence may well be taken completely out of context. And maybe that study was in a developing country where malnutrition is an issue, and then people then apply that to to the US, which, which might suffer from too many Halloweens, not too few. Or sometimes these studies might be studies of the elderly population, where, where protein is important, and some elderly people don’t eat enough protein, and this is when muscle wastage is an issue. But then to say to maybe a 20 or 30 year old, you need to eat more protein. Well, maybe that is not what you should be doing. It might be more fruit and vegetables or more exercise. But to give this nuanced message that protein is good if you’re in a developing country or if you’re over 70 years old, that is not going to catch fire as much as protein is good for anybody, yes, of all ages, of all countries, because then, if it’s universal, then more people will listen to you. More people will buy your book. And similarly, for products they now, I saw in the supermarket protein cheese the other day. Isn’t that a bit of a tautology? Because cheese, naturally, it’s high protein and but if you’ll say, well this everybody should try to reach as much protein as possible, without any limit. It’s completely black and white. Then even something like normal cheese doesn’t have enough protein. We need to enrich the protein of even cheese.

Michael  13:38

Now you’ve touched on something very important, which I want us to elaborate on when I talk to executives and CEOs and so on. And recently, I was talking to the country leader for long term planning in a developing economy, and they were looking at what China and Korea and Japan had done by automating a lot of the production processes, and they wanted to follow the same process in their country. But one of the things I always point out to clients is that when you are looking at any piece of advice, any study, any theory, anything you have to make sure the conditions that existed in China, for example, that led to automation being so successful also exist in your country. And it sounds like when we look at research, we don’t look at the conditions that existed there as well. Is that true?

Alex Edmans  14:29

Yes. And so this is, again, another issue is like, we like to take a study from a completely different context and say, well, that study will apply here. So one issue with studies is they focus on typically weird people say, What do I mean by Weird is Western, educated, industrialized, rich and democratic. So things that work in those settings, they might not work in in other settings, and even within a weird country. It may be that you’re focusing on a particular subset of that weird country. So let’s give an example. So there’s the famous Stanford marshmallow studies. And so what they did was they took young kids and they gave them a marshmallow, and they say, Well, you can either eat this marshmallow now, or if you wait 15 minutes, I’m going to give you a second Marshmallow, and what they found was that the people who waited for the second marshmallow did better later in life. They were less likely to be addicted to alcohol or smoking or drugs, more likely to complete college and and be in a stable job. But I think they looked even further, they’re more likely to be married and in a stable relationship. And so they said, Well, this is just evidence that of delaying gratification. You need to be patient and think about the long term, and that’s why you’re so successful later in life. And that seems to make sense, yes, but his issue is, well, who were the kids who were not waiting for the second marshmallow? They might be from poorer background. Yes, why? Because, in a poorer background, even if an adult tells you, hey, trust me, don’t eat this marshmallow, I’ll give you another in 15 minutes time, they might not be able to trust them. Or maybe you’re in a home where, if you if there’s so little food that if you don’t eat what’s in front of you, you’ve got lots of siblings who might eat it or somebody else might eat it. So indeed, whether you are waiting for that second marshmallow is not so much a sign of delaying gratification as your family background. But because that study was on Stanford University students, it doesn’t necessarily apply to other settings where actually a family background might be quite different.

Michael  16:50

And now we’re getting into statistics, where we’re looking at whether the sample is representative, right?

Alex Edmans  16:56

Absolutely, because people like to use this evidence. This proves that a study proves that scientists show that research demonstrates that, but you only demonstrate it in one particular context, conditions and under certain conditions. And normally you might in some sciences. That doesn’t matter, because one carbon 14 atom is the same as another carbon 14 at them. It doesn’t matter whether you studied this in Bolivia or London, but people are different, and so how Stanford University kids will act is going to be different from how kids of a more working class family might act and how American kids might act is different to kids in a different cultural norm. So we can’t always automatically take a study and say it applies to our setting. Now clearly perfect is not going to be the enemy of the good. Yes. Why? You’re never going to have a study on exactly the same situation as you maybe a 37 year old man with two sons and one daughter who works in law. But what you want to do is you want to look at the context in which the study was conducted and ask, well, Are there reasons why it might not apply here? So if there was a study on smoking causing cancer, even if that study was was done in a different country, the effect of smoking on cancer is due to human physiology, and that could be the same as somebody in Slovakia as in the US. But if it’s something on a cultural norm, on behavior, on willingness to trust an adult who promises another marshmallow, that is something worth setting absolutely does matter. And so this is why in social sciences, which is my domain, things are quite different from the physical sciences, like carbon 14 atoms, yes, and even quite different from the Medical Sciences, which depend on human physiology, which might be more similar across people.

Michael  18:55

Well, I remember when I was a management consultant, I used to specialize in corporate finance and corporate strategy and the banking sector initially and early in my career, we would because the offices I was working in were a little bit smaller in the emerging markets, we would normally bring out the banking experts from the London office or the New York office to meet very senior clients in developing economies, usually the CFO or the CEO of A of a banking group, but one of the things that always annoyed the clients is when the senior partners would mention best practices that could never apply in an emerging market. For example, I remember once a presentation was done about how the leading banks in New York and Europe were using apps to engage customers, but that would never apply with this client, because they only had a 3g phone infrastructure, and that’s why they moved into SMS based banking. But it’s a very good example whereby you have to understand the context of any study or recommendation, right?

Alex Edmans  20:00

Absolutely. And this is, this is can be quite problematic, because you do have consultants or even Business School professors whose expertise is only in the US or the UK, and they go to another country, and they sort of try to tell, perhaps quite patronizingly, this country, how they can do better, whereas their remedies, they might work in their home country, but not in the local context. But again, the idea of universalism, I have my hammer. I’m going to say, well, everything looks like a nail. I’m going to just give my mantra to every single company around the world, and I’m going to treat a large company as the same as a small company, even though, for a small company, they might not have the resources to do certain things that you might be advising a large company to do, let’s say, donate loads of money to charity or come up with a flashy purpose or mission statement.

Michael  20:48

Let’s go back to the diversity example, because it’s a well-known example. How did the study define diversity?

Alex Edmans  20:56

It only looked at demographic diversity. So the McKinsey study first looked at whether you’re a man or you’re not woman, and then it later editions looked at ethnic diversity. But this is really problematic, because this reduces the totality and the complexity of a person to their gender, ethnicity. Yes, so this gives the impression that if you’re a white male, you could never add to the diversity of an organization, even if you grew up in a different country, because your parents are expats, or maybe your background is in humanities rather than in finance, maybe you tend to be a more introverted person than everybody else tends to be extrovert, and also this, this pigeon holes minorities and women, it might suggest, well, there was a woman’s way of thinking. Yes. So if we have more women, we have the woman’s way is more represented. And for some like me, there was an ethnic minority way of thinking. So I should be on the board. But Asians and Latin Americans and and Indians and African Americans may all think differently. And within the context of Asians, people like to treat Okay, Chinese and Japanese and Korean all the same, because they say, well, they all look the same, which I think is, again, quite patronizing. And for someone like me who is Asian of ethnicity, but I grew up in the UK. I spent 10 years in the US. I might have a quite different perspective than somebody who’d always lived in, say, Japan.

Michael  22:27

Yeah, so, because it’s almost a paradox whereby we say that everyone is the same. You know, people are different, but yet we define diversity by looking the differences and saying there’s a difference just because people look differently, right?

Alex Edmans  22:43

Yeah, this is absolutely a paradox. Because, like, people would say, Okay, we want people who think differently, we have different ideas, and then we go really reductive. We say, well, we quite different ideas to the color of your skin or your chromosomes. And yes, there will be differences, like men and women might act differently, so that there is evidence that women tend to be more emotionally intelligent, but to say, well, all women act the same way, and I know some emotionally intelligent men and some less emotionally intelligent men and some less emotionally intelligent women. There’s so many other things that we want to look at. But why do people retreat to something like gender and ethnicity? Is it’s easy, yes, and they think it’s very progressive. It’s more progressive to stand up for minorities who might have been historically discriminated against, but there’s lots of discrimination in another field. So today, yeah, absolutely. How many CEOs do you know who are, who are tattooed, for example? Or how many in the UK come from a with a different accent? So in the UK, despite being a small country, just to have a different accent, people will form different opinions about you to just to spit it out, though, even though it’s not a common topic, um, people’s appearance, if you’re, if you’re, if you’re seen as ugly, you’re not, you will be discriminated against somebody who’s good looking. If you think of what does a stereotypical CEO or bunker looks like, it’s somebody who, who is, who is visually attractive and looks physically and athletically fit. And I, like you, I’m all into fitness, so I would love that to be a big predictor of success, but it does lead to discrimination, who against people who might have different say, body shapes to people’s perceptions of what a leader should look like.

Michael  24:33

I want to shift the discussion just a little bit in a different direction. Here we spoke about diversity, but obviously we’re talking about bad information or misinformation or poorly used advice and so on. Let’s say that a narrative becomes the dominant discussion point, and everyone starts following the advice, even though it may be incorrect. At a certain point, the people that are taking that advice and implement. It, they’re going to see little results. They’re going to see negative results. So why isn’t it that a poor or a bad narrative dies out when it’s implemented? If it’s wrong, why is there a need to prove it’s wrong? Because if it’s not helpful, it’s going to have negative results anyway. So why doesn’t it die out in that way?

Alex Edmans  25:19

Yeah, this is, this is a great question. So, so first I could argue, well, what? Why are people then so evangelical about the need to prove that diversity improves performance, and to say all these studies, because if diversity does improve performance, then just let people do what they do, and the diverse companies will outperform. So why do we need quotas of the of the gender composition of a board just allow people to choose the very best people, and the ones who are sexist and not hiring great women will just die out. But you’re like, this could also be applied in the other way. So if indeed, studies are claiming that diversity pays off, why are people like me spending all my time and effort saying where these studies are wrong? Why don’t I just let them hire the wrong people and then underperform? Well, first, the underperformance could take a long time. And so if there are good white males, maybe from different backgrounds, who don’t get a job because they bring diversity in just other forms than gender and ethnicity, then that’s bad. That could be a lifetime or a career, which they’re never going to get back. Number two is that it’s really difficult to show that if a company did poorly, it’s definitely because it pursued diversity in the wrong way. There’s so many drivers of performance. So just like, I don’t like it when Donald Trump says, Oh, well, he was shot at that’s because the police had a DEI policy, or there’s wildfires in California. That’s definitely because the fire service spoke too much on DEI. You can’t point to that. And let’s say even it was true that you didn’t have a meritocratic hiring policy because of confirmation bias, you’re going to claim that it was due to lots of other factors. So the cause effect relationships are so unclear that you can’t just wait for the game to play out. If you’re just to look at the study and say, Well, hey, um, this study is flimsy. And notice that to highlight the flimsiness of that study need not mean that you are anti DEI. You could be pro DEI, as I am, but you highlight that DEI is more than just gender and ethnicity. So I have my own construct research where I look at cognitive diversity, but I also look at equity and inclusion, where we don’t just have a broad mix of people, but an environment where people are willing to share their viewpoints, even if they might be contrarian, that is correlated with superior performance.

Michael  28:00

And of course, if we look at the history of mankind, sometimes really bad ideas can last for hundreds of years, like slavery and so on. So you are right. Sometimes it takes a long time for a bad idea to be seen to be bad. But even though things may be counterproductive due to a number of reasons, sometimes people keep on doing it right?

Alex Edmans  28:21

That’s a really great point. Yeah, and there’s so many other examples of that slavery being a really bad one. Smoking, the first evidence that smoking leads to cancer was in 1950 here we are 75, years later, and still, the tobacco industry is, is, is earning outside profits actually going back to diversity, that the suppression of women, that women could not vote, or that women’s place should be in the home, looking after families, that is something which is problematic. So even though I recognize the huge problems, why are we not for forced diversity quotas? If instead I’m saying, well, let’s hire the best people. Don’t look at the old boys club. Don’t think, Oh, well, this job involves aggression, and men are better than women. Like let me hire the truly best people. That truly best person if I’m going to be truly meritocratic, that best person might be a woman, they might be an African American, they might be an Asian. But I would not say, Let’s hire a worse person, because I just want to have fewer white men, because I want to diversify. Let’s say in the Olympic Games, who should get the three medals? It’s the three people who are fastest in the 800 meters. Now it is fair in that all that matters is your time. It doesn’t matter the color of your skin, as long as you finish in the top three. So that is something which is meritocratic, where anybody can can get on the podium if you’re fast enough. I think that’s what it should be like in terms of hiring somebody based on merit, not skewed by factors which were there in the past. US and led to massive discrimination against women ethnic minorities. But I don’t think it should necessarily go the other way.

Michael  30:06

Yes, that’s a very good point. I remember speaking not so long ago to the CEO for fairly large company, and they were looking at putting in place quotas to bring in a certain percentage of females at certain levels and different minorities at certain levels and so on. And I remember he was asking me about the diversity program. And of course, I don’t know his country very well. I don’t know the industry. It’s different culture and so on. But the way I framed it to him is that given everything you are facing with very formidable competitors, given the changes in technology the market, and you’ve got competitors, China coming, Japan, Korea and so on. If you believe, if you are so confident that you don’t want to hire necessarily the best person to make your numbers, then you should do it. Because I think the part that is missed in the discussion you brought it up. If companies want to be successful, they should be hiring the best person, irrespective. Isn’t that so?

Alex Edmans  31:07

Yeah, so let’s take the field of sport. So this was one where there was huge racism. If you had a black player, they would be greeted with monkey chance as soon as they got into the pitch, maybe bananas would be thrown at them. Very few black fans in the terraces, and if you were, you might get, get beaten up. And I sort of know this and that I was an ethnic minority myself in the mid 90s, uh, having a season thing, I wasn’t beaten up or anything, but you just could help everybody else there was was white, and so the first teams to sign black players, they weren’t doing this to make any social statement in order to diversify their team, or to say, Oh, we want a team to reflect the diversity of our community. They’re doing it, which there were some great black players, and they were great players who are not being signed because of discrimination, because of this monkey chanting and this ridiculous behavior. And there were teams saying, No, we’re going to sign this player because he is good. But what drove this was merit and simply, then later, the first Premier League clubs to sign Asian players, let’s say Park Ji Sung in a world in which maybe you think, well, Asians because of the stereotype, they should be doing computer science. They should not be playing football. No, again, they did that for pure meritocracy, and I think that’s what it should be. We should be color blind. We should be gender blind. We should be blind to other things like appearance or sexuality. Focus on ability. Notice that meritocracy is not just your individual merit, but what you can bring to the team. So maybe you are less good in isolation than an alternative candidate, but you bring complimentary skills. That is all part of general merit, but that should be the decision criterion. It shouldn’t necessarily be okay. I want to have more Asians on my senior management team, because I think I have a social responsibility to increase Asian representation.

Michael  33:06

That’s a good example, because I remember talking to a couple of executives in the auto industry about three decades ago, and they were convinced that if they moved their centers of excellence in engineering and research, and they move some of their best production assets into places like China and so on. They were of the belief that the Chinese would never be able to master the engineering skills, the design skills to be a threat to them in the automotive sector. But of course, they turned out to be wrong, right? So these stereotypes hurt, but I think the point I want to make here is that now we’ve been talking about diversity, we’ve talked about ESG and so on, but ultimately, what you’re trying to do here is help companies and people make good decisions so they can outperform their competitors, right?

Alex Edmans  33:58

Absolutely, so that if the goal is indeed outperformance, what you should look at is the link between diversity and performance, and look at if rigorously and if the data is not there, don’t make up the data, then think, well, how can I learn from the data? Maybe there is still a case for diversity, but I need to define diversity more broadly than just gender and ethnicity. Now notice, this is not the approach sometimes people take. So sometimes you’ll say, okay, diverse boards do better period, where period suggests it’s not up for debate, which is iconic, given diversity is about being open to different viewpoints, but diverse boards do better period. All these McKinsey studies and these Blackrock studies show this. And then when you argue against this and you say, look, look, these studies are actually weak, they say, Ah, well, the science doesn’t actually matter. Diversity is a human rights issue. Why are you focused on the link between diversity and performance when it’s just the right thing to do? Well, you you first said. Is that it’s linked to performance. So you’re now playing chameleon and saying, Well, let’s now that there has been some pushback on it. Let’s completely change our cue and say it’s a human rights issue. And even if you think it’s a human rights issue, is that actually clear? Why does an ethnic minority like me, who was lucky enough to go to, say, Oxford University. Why should I get a leg up compared to a white male from, say, the north of England who never went to university, maybe his parents were in prison or something like that.

Michael  35:32

But that’s a good point, because the way most of these arguments are constructed is one of two things, and you’ve said it very well, either it’s a social good or it actually leads to an improvement in performance. But what often happens is, when the data is not there, people say it’s the right thing to do, then all of the analysis, all of the research, gets thrown out, and so on. But I want to come back to another point here. Let’s look at sports teams. You gave a good example of sports teams, and that Korean player, I think he played for Manchester United.

Alex Edmans  36:04

Yes, partly. So yes, he actually lives in Wimbledon London, which is my neighborhood as well, fantastic.

Michael  36:10

So maybe you run into him sometimes. So let’s look at the sports league, right? If you do not hire the best players, and you do not hire the best coach and all the things that goes into creating a successful franchise, you are either going to not win enough games to the point of relegation, so every year, it’s clear that you have failed, and therefore you need to make changes. Now in business, we have the same thing, like we have share prices, we have the performance of companies and so on. But it seems that in the sports world, when someone does not perform and the strategy they’ve rolled out is not working, owners of sports team are quicker to respond. If companies are putting in place policies, and it will, DEI is one of them, but there could be any number of policies that they’re following that is not working. Why isn’t the market or the owners reacting fast enough?

Alex Edmans  37:09

Yeah, this is an interesting question. I think it’s the link between performance and outcomes is clear in sport. So if you have a better team, on average, they will score more goals and win more games. Now, obviously there’s luck in it, there’s poor referring decisions, or maybe you hit the bar, but the quality of the team is quite closely related to the quality of the results and the outcome. Whereas in the corporate world that you can do a lot of things to mask poor performance, yeah. So if you’ve got a worse product, you could brand it really well. Whereas if a guy can’t score goals, it doesn’t matter what color boots you give him, he’s not going to score goals. So that there’s not the same way of of green washing or dressing up poor ability, whereas you could have some great marketing about a poor product, it may well be that you you enjoy market power, so you are in a place where people are are just unable to switch from this. It may well be that there are multiple other drivers which could be leading to you doing really well. It could be another a competitor has something bad happened to that. So given that there’s so many other factors, you might call them intervening variables between input and output, if a if a strategy is really failing, you don’t know that it’s failing, and even if you have poor outcomes, again, back to confirmation bias, you’re not going to say, oh, it’s because of my mis informed DEI policy. It could be, well, unlucky. It could be due to lots of other things.

Michael  38:51

Yeah, that’s a good point. I want to talk a little bit about incentives and how it shapes and influences behavior. I’ll give you an example of this right later in my career, I switched to focusing on mining companies and oil and gas companies, and I was working with the board of a well-known mining company. I’m not going to mention their name, and it was very obvious. And they knew it. Everyone knew it, that their entire business model could only work if they paid very, very, very little in salaries to the labor force. And the entire model was to hire people who were basically illiterate, couldn’t read, couldn’t write, and they would get them to work the mines. And clearly they were incentivized, and they set up things whereby they worked with the government to make sure that a large parts of the labor force almost lived in the servitude kind of environment. Now, if they ever educated the labor force, they would want more money, and their business model becomes. And economical, but the market rewarded them, the more they were able to pay their labor less money. But eventually this business model was going to fall apart, so I want to talk about incentives here. Clearly, bad information should be punished in some way. Whether it’s going to be investigated by the SEC or the share price is going to lead to punishment. What role do incentives play here in allowing these false narratives to propagate?

Alex Edmans  40:31

I think incentives play a really important role. And one of the issues is that some bad actions can lead to bad consequences, but only in the very long run. And if you have short term incentives, then you might not care about the long term consequences. So there are some CEOs whose pay is linked to DEI, where DEI is is driven purely on demographic criteria. So this might mean, let’s say I, if I just hire a lot of ethnic minorities. I’m going to hit my DEI statistics, even if they were lower quality and my company underperforms. Five years from now, I might not be around. I could be just retired by then, and even if I’m going to increase the ethnic minority of my senior management team by hiring people from the outside, and that’s actually bad, because it might prevent me from promoting people from within. But again, I’m not going to suffer the consequence of of poor motivation of junior staff for many, many years time. So this is again, if you take it into a sporting context, there you might see the results the time lag between input and output as being shorter. So if I am to be racist to not sign a great black player, and my my my rival does, then that play has caused against me. That’s something that happens right right now. Now, there’s certainly certain things in a football context which are more long term, maybe the development of the youth academy, but in terms of diversity of the first team, that is something where you might see a pretty immediate impact on results.

Michael  42:09

Yeah. I mean, you raise a very good point whereby in sports, there’s a rapidly compressed timeline to see the results of your action, and also the scorecard is very, very clear, because if you look at businesses today as the example you gave, one company uses EBITDA to measure performance, but I’ve been in situations whereby I’ve worked for state owned companies and they’re falling apart. It’s a disaster. They’re not making money. But when you read their annual report, they will cherry pick some metric that tells the world what a wonderful company they are, and you have to be really confident, I think, to be willing to read between the lines and see what is happening, which is where I want to go with the conversation now, because it seems that if you have to challenge a narrative, you need to have the confidence to stand behind what you’re saying. And I don’t think most people are like that. They may have a viewpoint that’s different, but they may not have the confidence to debate something they disagree with.

Alex Edmans  43:13

Yes, absolutely. And so this is why, another reason why diversity is not enough, you need inclusion, and often when people who have inclusion. It’s, I’m going to include somebody who might be, say, physically disabled or have a a different way of thinking, but it’s actually improvement in terms of different viewpoints, not just neurodiversity, but in terms of having a contrary view. So if you were somebody who was working in the run up to the financial crisis, and they said, Well, hey, actually you should not be taking such risky positions. Then you might not be in trouble. And like more recently, if you were to say to target or Bud Light, hey, you might be alienating some of your more conservative customers. You might be canceled or kicked out for that, because people might say, No, this is you are just not with it. You are based on an old world nowadays, we need to be much more inclusive of these social issues. But actually, some of these companies lacked political diversity like it all along it, 52% of Americans voted for Donald Trump. Now I would have never voted for Donald Trump were an American. I don’t know anybody who did vote for Donald Trump, but it’s a big problem in academia that if we all live in our bubble and we don’t have people who might share the same viewpoints as Trump and might have said, well, actually, I don’t care what your economic theories say. I just don’t like free trade. And if, if people have done things to moderate some of the effects of free trade, we might not have had to have the very radical and I think very destructive tariffs, which which Trump is passing right now,

Michael  44:55

You raise a very good point. Jeff, when I work with clients, they always tell me things like, Michael. How do we come up with some brilliant insight in our business? And I always point out to them that an insight is a contrarian idea that eventually turns out to be true. And if you present a contrarian idea to your fellow colleagues, whether it’s a board and so on, you must have the confidence to defend it. So it’s not enough to have the idea, you have to have the confidence to push it through. And I think most people miss that side, and I think that’s one of the things we see, whereby there are people want to challenge bad narratives, but sometimes they’re not just drowned out, but they don’t have the confidence to see through.

Alex Edmans  45:36

Yeah, and sometimes it could be that just institutional features actually, actually make dissent really difficult. So I am lucky to be a fellow of the British Academy, which is a an organization of elite academics, a bit like the American Academy of Arts and Sciences. So I’m really grateful to be elected, and then every year, then there’s nominations for future fellows, and you say whether you approve or do not approve them. And there were a couple of suggestions I thought were below the bar, and so I thought, well, let me select just does not meet the criteria. And I was pressured into not doing this. I was told I had to say undecided. Yes, but I wasn’t undecided. It was clear to me that they did not satisfy the criteria to be bestowed on them the honor of fellow British Academy. And then I said, Well, if you want to do that, you kick off a process. Is that you if you want to say that you disagree, you have to write a memo. Your name needs to be attached to that memo, and that name needs to be decided by the rest of your section, which for me is management. For others, it might be history, yes. And so you don’t need to, if you were to just rubber stamp something, there is no trouble involved. You don’t need to justify why you think this person should be bestowed of this honor, of being elected, of the fellowship. Yet if you are to go against something, you need to put your name to this, and then you’re going to be unpopular with the people who made the proposal and and you were told to falsify the vote to begin with. Now, if you think this is an academic institution which which tries to promote academic freedom and different ideas, then, why are you making it really difficult to express a different viewpoint the status quo should the default decision should be not to be elected to the fellowship, because it’s honor. And so why is it that people who propose somebody to be elected don’t have to say anything. Where do I want to say, well, actually, this person might not meet the bar right now that I need my name to be attached to this. I am known as being the dissenter, and I have, I have to prepare a written statement, which is at least 500 words to be read out across the whole of the section. I think this is really, really problematic.

Michael  47:55

Yeah, that’s interesting, because we spoke about echo chambers. But there’s also institutional practices, culture, routine that makes it difficult to be the one standing on it almost sounds as if you disagree with someone, there’s almost like a trial that you’re having. You’ve got to defend your viewpoint, right?

Alex Edmans  48:13

Yes, absolutely. And these things, they might say, Okay, we’ve always done it that way. But that is not that is not a good reason. The whole point of diversity is to think, Well, are there better ways that we can have done things and and if you were to start with a system right now which is going to lead to the best outcomes, I would like it to be just as easy to disagree as it is to agree. I might not want to make it easier, but I would like to treat it symmetrically. It may well be that you can dissent and then you can write a memo, but that should be anonymous. Or maybe, if you are to approve somebody, you need to say, well, out of this really select group of people, why is it that this fellowship should be bestowed on this particular person?

Michael  48:59

Yes, now one of the things we haven’t touched on, but no, I think you mentioned earlier, is that sometimes and often, an industry builds around a narrative where people get paid. That’s where they get their salary from their consulting contracts. They build lucrative careers by peddling a false narrative. And when you think about it, always comes back to Money and incentives that encourage or drive bad behavior. Alex, thank you so much. That was a wonderful discussion.

Alex Edmans  49:28

Really enjoyed it. Michael, thank you so much for having me.

Michael  49:31

Excellent. We’ll see you soon, and good luck with all the other interviews.

Alex Edmans  49:34

Okay, thanks very much. Take care. We’ll speak soon. Bye.

Michael  49:38

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