Alex Edmans - Lies in the boardroom: the stories, studies and statistics that mislead boards

🎙️ You can listen to the full podcast interview with Alex Edmans on Apple Podcasts, Spotify and YouTube.

Alex Edmans is Professor of Finance at London Business School, Member of the Sustainability Council of Novo Nordsik, and author of Many Contain Lies. In this conversation with Nurole CEO Oliver Cummings, Alex covers:

• Do diverse boards lead to better corporate culture and performance? (1:44)
• Where have diversity-performance studies gone wrong? (3:37)
• Does inclusion have an impact on performance? (6:05)
• Why don’t you think anyone has managed to prove the positive impact of diversity on company performance? (7:01)
• Does good corporate governance improve performance? (10:11)
• Do boards work? (12:01)
• Do financial incentives work? (13:36)
• Which truths do boards need to be more aware of? (15:43)
• What is the relevance of confirmation bias and binary thinking to decision-making? (17:37)
• Why did you focus on these two biases, over any others? (20:00)
• Can you talk through the “ladder of misinference”? (23:39)
• Have you ever been challenged that experience trumps evidence? (28:29)
• What role do you see for experience and intuition on boards? (29:55)
• What are the most important insights board members can take from May Contain Lies? (31:01)
• What have you learned about challenging in the boardroom? (34:22)
• What’s been your emotional experience of challenge? (37:22) And
• ⚡The Lightning Round (39:02) ⚡

*This is an AI-generated transcript and contains inaccuracies*

Oliver Cummings: Alex, in your new book, you unmask the lies in some of the works of some of my favorite global thought leaders, Angela Duckworth, Amy Cuddy, and Roger Martin, a recent podcast guest to name just a few, which means no more power poses for me.

But you've also [00:02:00] unmasked several lies that struck me as particularly relevant to those involved in boards, which relate to diversity, corporate governance. and incentives. Can we briefly discuss each of those? And first up, the question is, do diverse boards lead to better corporate culture and performance?

Alex Edmans: Everybody seems to think that they do. And this is based on a number of studies that claim to find a strong link between demographic diversity and company performance. And so there are studies done by McKinsey, by BlackRock, also by the UK's Financial Reporting Council. So when you think a leading consultancy, a leading investor, And also a policymaker believes that this is true, then it must be true.

But when you actually look under the hood, you find that these studies have some really basic errors. And these are much more basic than something as simple as correlation versus causation. For example, in the Financial Reporting Council study, they claim there's a strong relationship between gender [00:03:00] diversity and firm performance.

But when you look at the actual tables in the back of the document, they did 90 tests. And not a single one of them was significant. So even if you don't quibble with their methodology, with how they measure diversity or how they measure performance, their own results don't support their conclusion. And so you might think, how can people get away with this?

How can it be that a conclusion that's not supported by the data gets so widely spread? It could be due to confirmation bias. Many people, maybe including me as an ethnic minority, would love to believe that diversity improves film performance, but actually the evidence is far weaker than what people typically think.

Oliver Cummings: The McKinsey one always strikes me as amazing because they've brought that report out several times over the last few years and continue to double down on it. Why When they are such a smart group of people, do you think that is happening? 

Alex Edmans: Firstly, in what field are McKinsey smart? So McKinsey is a fantastic management consultancy.

They can go into a company and assess their company's problems and try to [00:04:00] fix those problems. But that is quite different from conducting scientific research on the link between diversity and performance. Just like a pharmaceutical chief executive will be great at motivating her company and her employees to invent some new drugs, But that is different from a scientific study on the effect those drugs compared to a placebo.

So, people will often think, oh, it's McKinsey, it's BlackRock, these are great names, but their expertise might be in quite different fields. And then you might want to think about what McKinsey's incentives are for doing research. So, you might think of your business as consultancy. Why would you give your insights away for free?

for free. This is partly for marketing and you want to have this conclusion that diversity pays off because even if the data found the opposite, you would never release a study showing that diversity harms performance. So there might be incentives to mine the data and to give the result back that other people want to hear.

And this is indeed one of the big concerns with their [00:05:00] series of now four studies on diversity and performance. Firstly, even if you agree with their measures of diversity and their measures of firm performance, that study was not replicable. So other researchers tried to replicate the study and even if you choose to have the ingredients that they had, they could not cook the same dish.

And second, it's not even clear that they have the right set of ingredients. So when they measure firm performance, they look at EBIT, earnings before interest and tax, where many boards will care about long term shareholder value. So you can have some tech companies which don't earn that much in terms of EBIT, but because they have great growth opportunities, then the long term shareholder value is doing well, and that's indeed the case with many tech companies in the US.

So they have dubious methods, measures of performance, they also, their methodology might not even deliver the results, but because of the McKinsey name, and because our biases lead us to having a halo effect, where a company's reputation in one field leads us to [00:06:00] ascribe expertise in all fields, this is why these flimsy studies have been so impactful.

Oliver Cummings: There is more evidence that you've seen for the impact of inclusion though, am I right? That is correct. 

Alex Edmans: So this is what I looked at in one of my own studies, which is called diversity, equity and inclusion. And you might think, what an uncreative title for a paper. Isn't everybody looking at DEI? But they're not.

They're looking at demographic diversity. So how is that different versus other forms of diversity than demographics? It could be that your background is in engineering and everybody else's background is in finance. be cognitive diversity. And also what matters is not just bringing in a wide mix of people, but making sure they feel included, that the corporate culture is one where people are willing to speak up even if it disagrees with the views of certain seniors.

And what I found in this paper with some co authors was that a broader measure of diversity, equity, and inclusion with the emphasis on the latter two that is correlated with future financial performance in a way in [00:07:00] which demographic diversity is not. 

Oliver Cummings: You mentioned you would like to believe that diversity is a benefit to boards.

What's your hypothesis for why nobody has yet been able to evidence that? 

Alex Edmans: It's because true diversity considers a huge range of factors. So people like to do something like demographics, gender, and ethnicity because it's easy. If you have a McKinsey report which claims that improves performance, the implications for boards are huge.

are simple. You don't need to do something complex like analyzing somebody's cognitive style or their set of experiences. You just look at their gender and ethnicity. And I've also seen some search consultants which will pitch for business by saying in our past searches, out of the short list, there were this many women and this many ethnic minorities.

And I think this is quite Maybe offensive is too strong a word, but to the people, the candidates that you have, that you reduce their complexity, you reduce their totality to something as simple as their gender and ethnicity, [00:08:00] this gives them an impression that a white male could never add diversity to a company because of his demographic characteristics.

In reality, diversity can consist of many things. So, there could be socio economic diversity, there could be cognitive diversity. In the UK, one of the biggest sources of discrimination might be your accent. Just by having a different accent from somebody else, then people will make different inferences from you.

And so, all of these factors will contribute to the totality of a person, but because it's so difficult to have a holistic measure, which considers all of these things together, that's why people have not found a relationship. I know that even if you had a broader measure of diversity, it's not necessarily true that diversity of thought will benefit you in all settings.

So one viewpoint that people have is that the more diverse your views, the greater the creativity and the more the innovation. Let's think of one of the most innovative sectors in the world, which might be beyond business, you might think [00:09:00] music. It's really innovative because people come up with new songs.

Think about some of the most famous bands. They could be back in the 1960s, the Beatles, or more recently, the Spice Girls, or maybe Boyz II Men. Now those groups, they might be all male, they might be all of one ethnic, ethnic group, so it's not necessarily the case that diversity always improves people.

performance, it could be situation specific. Here is one setting where innovation matters and yet the most successful groups with the exception of a couple like Fleetwood Mac, they typically will have one, one gender or one ethnicity. 

Oliver Cummings: There's one of the reasons why it drives me mad when I hear organizations saying we want a long list of all X and very some narrow demographic, which goes against everything we believe in an open hiring process where you get a very diverse range of people, but it's not always visible or something that you can.

You know, tick a box for on an annual report, 

Alex Edmans: but visibility sometimes will, will outweigh actual substance is that if you can demonstrate, Oh, we did this in a short list. So if you're [00:10:00] a search consultant, you can't quantify the quality of the short list as much as you can the demographic diversity. And so that is why you will sell your abilities based on that simple characteristic.

Oliver Cummings: I want to talk about corporate governance and company performance. Again, there have been some studies, Grant Thornton had done one, suggesting it does, but you've debunked that too. 

Alex Edmans: Yeah, so here the concern is that particular study rather than the body of work. So when we speak about the diversity, that topic, those studies were flimsy, but also the general body of research finds that demographic diversity is.

Does not improve performance with governance. It is somewhat different. So the grant Thornton study, which was actually very strong in terms of claiming they'd proven by the corporate governance pays off. They refer to their work as the Holy Grail there. There were a lot of concerns. Firstly, it could be reversed causality.

Does governance lead to better performance? Or does greater performance lead to better governance? Or there could be omitted factors, [00:11:00] maybe a great CEO both leads to better financial performance, and she also leads to better corporate governance. So this is the whole idea of correlation does not imply causation, which everybody knows deep down, but we forget that when we like the result being created.

And again, this study had quite a lot of impact. But. The absence of evidence is not the same as the evidence of the absence. So just that study being weak, that doesn't necessarily mean that corporate governance doesn't matter. And indeed there are a lot of quite well regarded academic studies which show that corporate governance does make a difference.

So again, it was surprising that Grant Thornton were parading the study when this result had already been established by papers published in top scientific journals. I think one reason why they wanted to promote the study was their specific measure of corporate governance was your score on the Grant Thornton study.

thought and corporate governance index. So that was more marketing device to market their index rather than scientific objective research to look at the [00:12:00] importance of corporate governance in general. Got 

Oliver Cummings: it. So recent podcast guest Roger Martin, I think you've written about in your book, compared boards on listed companies to fire insurance, which works except when there is a fire.

It sounds like you would reject that. You'd say that boards, there is evidence that boards do 

Alex Edmans: Yeah, so I'd first ask, what is the evidence behind Mr. Martin's statement? So, he does have a history of making a lot of statements, which sound great, but they're not always being backed up with evidence. Second, I don't really know what that statement means.

So, so fire insurance does work. in a fire. So most of the time, having fire insurance doesn't help you, but when fire insurance really helps is when you have a fire, this is something which gives you a payoff. And if by this he's using inaccurate words and saying, actually, uh, boards don't work because sometimes there are still scandals despite being a board, I think you're expecting too much of a board.

Even a great board can't prevent any every possible disaster. Let's think about [00:13:00] chemotherapy. Right, chemotherapy does not always work. Unfortunately, sometimes despite having the best chemotherapy, um, you might not be able to defeat the cancer. But that is not to say that chemotherapy is not effective. It might be effective in many cases.

And so this is another challenge that some studies will not demonstrate is you can only look at the data that you see. If corporate governance avoids a lot of scandals otherwise have happened that might not be seen in the data set. But it's really easy for somebody to say, ah, hey, boards don't work because these scandals happened, not realizing there's so many other scandals that they could have prevented.

Oliver Cummings: Last myth, incentives. Do they work? You've written about CEO pay. The popular belief is that 

Alex Edmans: incentives don't work. And so why we would love to believe that. CEOs are massively overpaid, so they're getting huge amounts of money, they don't deserve it, and also why are they given pay for performance?

Everybody else seems to work because of intrinsic motivation. So at London Business [00:14:00] School, I'm not given any bonus when I publish a paper, or if I give a TED talk, or if I get high teaching rating, it's just intrinsic motivation, so why is it that CEOs deserve this pay for performance? Let's look at the data.

And so if you look at the data, what you find is that highly incented CEOs, ones which own a large stake in their company, they will outperform companies where CEOs have few incentives by 4 to 10 percentage points per year. So that is a large amount and that suggests that the structure of pay matters.

We often focus on the level of pay, the quantum, the relationship between CEO pay and worker pay, but this suggests that really what matters is your pay linked to the company's long term value. Now, despite that results, which was published in a top journal, people love to claim that financial incentives don't work.

And interestingly, there was a House of Commons select committee study into executive pay, where they asked for evidence to be submitted, and I submitted some [00:15:00] evidence because I work on this issue, and I was misquoted 180 degrees the opposite in the final report, where they said the evidence is that CEOs have no effect on company performance, quoting me when my evidence said absolutely the opposite, CEOs can have a large effect if properly incentivized.

But again, why is it so easy to misquote somebody if you play into confirmation bias, if you play into people's current beliefs on CEOs, people like to believe that CEOs are not special people. They don't really affect the company performance. It's down to the person on the shop floor, and that's why they might not have bothered to look at the footnote that they were referencing, they just took the select committee statement at face value.

Oliver Cummings: As well as debunking various myths, you've also highlighted some important truths, substantiated by a randomised controlled trial, such as the work of Bertrand and Mullainathan on how changing from an African American to a Caucasian name on a CV yields as many additional callbacks as [00:16:00] Notes eight extra years of work experience, which is just mind boggling.

Are there other truths that need greater awareness that you think are particularly relevant? 

Alex Edmans: Absolutely. So I think anything related to subtle discrimination and subtle biases, I think these things do really cloud people's judgment. So the Bertrand and Aiton paper suggested what your name is. Is it Jamal Jones or is it?

Emily Smith. That has a large effect on whether you get given a callback. There's also a famous study by Claudia Golden, who won the Nobel Prize in Economics recently, and Cecilia Rouse. And what they looked at was if you're auditioning musicians, and if you had a blind audition where the, the instrumentalist was behind the curtain, then a female was much more likely.

to pass the audition than if you could see who the person is. And this is, again, because of people's biases that the best musicians may be male. So I think to be aware of those biases, this is something which will significantly improve the performance of a board. And I think that [00:17:00] is why the diversity movement, to begin with, there is some justification behind it.

Because if we are now paying attention to diversity, that's a way of undoing our biases and recognizing that we might evaluate somebody differently because of their gender, because of their ethnicity, and because of their accent, then that is something that shall improve board decisions. But, when you go too far to the other extreme where the only characteristic or the main characteristic you're going to look at are these demographic variables at the expense of their actual skills or experience, then that's something where, again, I think it goes too far on the other way.

Oliver Cummings: really emphasize two main biases at the heart of many lies, which are confirmation bias and black and white thinking. Can you just explain for those not familiar with these concepts what you mean by each of those and how they might be relevant to those involved with boards? Absolutely, 

Alex Edmans: because a lot of the mistakes that we've talked about, you might think in the cold light of day, don't we know the difference between correlation and causation?[00:18:00] 

Or shouldn't we look at the back end? Of the financial reporting council report to see whether the tables actually support the conclusion. But the reason why we don't do this is in, if we're not in the cold light of day, we are skewed by our biases. So one bias that I've alluded to is confirmation bias.

So this is the idea that we will accept a statement. uncritically because we want it to be true. So if there's a claim that diversity improves performance or that CEOs don't make a difference for firm value, we will accept it without looking at whether the evidence behind it is actually robust. But there's also a second bias, which is called black and white thinking, which is that we like to see the world in blanket terms.

So this might suggest that more is always better. So even if diversity did improve performance, up to a point, because you have different views, people think we might not have maximum diversity, when actually, after a point, it might be that the people don't, quote, speak the same language. We do [00:19:00] need some sort of commonality, and this is why culture is important.

A culture is what a company stands for. We don't want the culture to be too fragmented. Another form of black and white thinking is that we put everything within the same bucket. So I read a study which shows that employee satisfaction improves a company's long term performance if you treat workers better, the company does better, and this seems to be true.

causation, not just correlation. But people over extrapolated from this, and they said this means that every EFG issue also improves long term firm performance. But it's not necessarily true. So even if employee satisfaction is good, this doesn't mean that biodiversity or human rights or water usage affects long term financial performance.

No matter how much we want this to be true, because we want to believe that nice companies perform better, this is not actually shown, because we have what you mentioned, granularity. Granularity means that a statement might apply to only one sub dimension, or one tree, not the [00:20:00] overall forest. 

Oliver Cummings: There are lots of different biases you could have picked.

Charlie Munger used to talk about a wide range. What's the evidence that led you to focus on these two? 

Alex Edmans: It's the fact that these two are pervasive, and I think jointly they account for the vast majority of mistakes that you make. So where does confirmation bias apply? That applies to a setting in which you have a prior view.

that you want to confer. And so many people might have a prior view that a diversity improves firm performance, that climate change is a big threat to the world, you might have strong views on immigration or gun control. But there are other topics for which you don't have a strong prior view. So let's think about diet.

So most people will have a prior view about protein. You learn in school that protein builds muscles, it must be good. You also might have a prior view that fat is bad, like the name suggests, that fat makes you fat. But carbohydrates, that might be a bit more nuanced. And so how did Robert Atkins [00:21:00] become famous?

He came up with the Atkins diet, which had the black and white myth that carbs are always bad. And so why was that diet so successful despite weak scientific backing? It preyed on black and white thinking. It preyed on the fact that we like to see things as always good. I'm always bad, and it was easy to implement that diet.

You just avoid carbs. You don't need to look at whether it's complex carbs or simple carbs. Just avoid carbs. Had he come up with the other diet, which is to say maximize carbs, he might have been just as successful, because that also plays on black and white thinking. If we don't have a prior view, On whether calves are good or bad.

But we think it has to be one or the other. And in an unambiguous direction. It doesn't matter which way you go. You might well become a bestseller and go viral. Which is what happened with Robert Atkins. 

Oliver Cummings: To turn your question on you, you said that the vast majority of your mistakes will be down to black and white thinking and confirmation bias.

What's the evidence you've got for [00:22:00] that? 

Alex Edmans: There were several psychological studies that I mention in the book which try to pinpoint confirmation bias or black and white thinking. Thinking rather than the other biases that you might have. And so how do you do that? So what they give is a pre questionnaire to find out what people's beliefs are.

And they look at how they respond to something that might confirm or contradict their beliefs. And there's tons of studies I could refer to and the interest of time. Let me just give one. What they did was they gave people two sets of statements. One of them might be non political statements like Thomas Edison invented the light bulb.

And one might be a political statement such as gun control is the best way to combat crime. And then they gave a contradictory statement which disagreed with that prior view. And so what they found was that when there was a statement which disagreed with the non political statement about Thomas Edison, nothing really happened to the person.

But, when they hooked these people up to an [00:23:00] MRI scanner, and they contradicted a political statement, like the one on gun control, the part of the brain that lit up, was the amygdala. And so that's the same part of the brain that's activated when you see a tiger, and this activates a fight or flight response.

So people respond to contradictory evidence, to counter arguments, just like they would be attacked by a tiger. And this is why you see a lot of the anger that you see on LinkedIn or other forms of social media, people just don't want to be told that they're wrong. And conversely, they will latch on to something which has not affected them because it supports their viewpoint.

Oliver Cummings: Alex, you provide a really powerful image of the ladder of misinference, which visualizes the different stages of certainty from statement to proof. Could you just talk through that for those who aren't familiar with that concept? But what I'm interested in is, what stage of the ladder do you think boards are most commonly at risk?

of getting it wrong. 

Alex Edmans: Certainly, so I'm [00:24:00] happy to talk about, um, each step of the ladder, but also to highlight that I think that boards unfortunately make all of those mistakes, and, and this is not because boards are bad people, these, they're human, and humans are prone to biases, as I am, and whenever you have biases, they will lead you to making all of the missteps up the ladder.

So let me go through each step and let me illustrate this to make it concrete in the context of the link between sustainability. So, the first step is that we accept a statement as fact, even if it's not accurate. So I have different rungs of the ladder. So if you think about the first rung of the ladder, statement, we often make a step up from statement to fact, we think that the statement is a fact, even if the statement is not true.

So what does this mean in the context of ESG studies? This might be accepting the statement that diversity improves firm performance without bothering to look up at the back of the document whether the tables actually support this. Or something much might be a [00:25:00] little bit more subtle is you don't check what is actually being measured.

For example, if you wanted to claim that sustainability improves performance, what some people will do is they will quote the book Firms of Endearment. And what that claims is that companies that were sustainable, that practiced conscious capitalism, they did better. But actually, how did they identify the firms that are conscious, that are nice to the world?

They just said, tell me about which firms you admire. And a firm that you admire is going to be likely a firm that has performed well. Right? People admire Apple because it's really successful. And so what they actually identified was not firms that really cared about people on the planet, but successful firms.

So it's not surprising that successful firms end up being successful. So we often don't understand what we are measuring when we're measuring sustainability. So what is the second So this is, we accept a fact. as data, even if [00:26:00] it's not representative. So what is a fact? A fact is a case study, and it's an anecdote.

So we might have the case study that Apple was successful because it started with Y. And this is something that Simon Sinek uses to try to argue that starting with Y leads to success. But even if we could pinpoint Apple's success as coming from starting with Y, rather than anything else. This doesn't mean that starting with Y leads to success in general.

There could be hundreds of other companies or organizations that started with Y and they failed, but they will never be in Simon Sinek's book because he will only choose the examples that will pick his argument. And this is not just a problem with Simon Sinek. A lot of case studies, a lot of stories, they will start with one particular case and over extrapolate.

So what is the solution? It's to think of it like a clinical trial. So if I wanted to show that a drug improves [00:27:00] performance, I'd like to consider tons of people. who took the drug, those who got better, and those who did worse. And also people who had a placebo, and see how many of them did better versus worse, and compare the two.

But Simon Sinek never does that comparison. He only takes the cases that fit his predictable story. So step three is that data is not evidence. It might not be conclusive. So if indeed the problem with anecdotes is you have one isolated case, can't you solve this by having tons of different cases, if you have hundreds of data points and you show a correlation between corporate governance?

And firm performance, as Grant Ford did, isn't this evidence that corporate governance improves firm performance? No, let's think about what evidence is. Evidence in a criminal trial is something that supports one culprit and does not support alternative suspects. But for the link between corporate governance and firm performance, that correlation could be because corporate governance causes [00:28:00] better performance, or the alternative suspect is performance causes corporate governance.

Or a great CO causes both. And the final one is that evidence is not proof because it's not universal. Even if my study nailed the link between employee satisfaction and firm performance, this has no implications for all of the other sustainability dimensions, because it might be confined to my setting of employee satisfaction and not extend to say environmental performance.

Oliver Cummings: A board member listening to you there might be thinking analysis versus paralysis. My experience tells me X, I don't need proof. Have you ever faced that sort of challenge in the boardroom? 

Alex Edmans: I personally haven't, but this is because maybe the types of boards which are willing to invite me are the ones who they know what they're getting, they will get somebody who will challenge them and will hold them to account for to the evidence.

But I'm sure this goes on in other boardrooms, and I would just say to that, you probably have tons of experience, but that experience [00:29:00] might be for one particular company. Or if you've moved between different companies, it might be three companies all in the same industry, or they might all be in the same country.

And so, yes, that experience is useful, but if you have data and evidence based on hundreds and hundreds of companies over different industries, that's not to supplant your evidence. but it's to complement it and then as a board can we make decisions based on the individual experience of the board members but also supplement this with the findings of large scale research.

It's just like if you're a doctor, how would you want to suggest a remedy? You're still going to do some bespoke analysis on that particular patient because evidence only finds an average effect but you will perhaps to lead to try to think about the best remedy look at the widespread evidence of whether this drug or this treatment or this operation has been successful for people with this type of ailment.

Oliver Cummings: What role do you see for experience? An intuition on boards. 

Alex Edmans: [00:30:00] I think there's still a lot of roles in and even though I think evidence is important because as I mentioned, evidence only will give you an average result. So what might be true in general might not be true for a particular, uh, So let's say, if on average, say, a passing style for a football team works better than a long ball style, that might not be true if you're Wimbledon, the Crazy Gang in the 1980s, because you have particular players who will adapt much more.

to the long ball style. So you want some tailoring, and the problem with evidence is it's not necessarily tailored. And so the expertise of a board member is to try to apply general insights to your specific situation. This is why we need to see doctors. Otherwise, we could just diagnose ourselves by sitting at home, looking at the best scientific journals and saying, well, what is the best way to deal with this condition?

No, what a doctor gives you is some tailored advice guided by the evidence not blinded by the evidence and this is [00:31:00] what I think a board should do. 

Oliver Cummings: Alex, Make Contain Lies has given me a number of pauses for reflection, thinking about tools that I can use as a board member. I think a number of my highlights included a number of great questions.

What is the evidence? What are the alternative possible explanations? What's the opposite? I want to check. I've been the full list of all your concerns so that I don't miss out anything. Also, the emphasis on statistical literacy, the importance of curiosity at being at the heart of good questions and being at the root of being able to change people's perceptions.

What for you stand out as the key tools, devices, things The board members can take away 

Alex Edmans: first is to be aware of your own biases. So as a board member, you probably have tremendous amounts of expertise, and this is why you're appointed on the board. You are being trusted by shareholders to represent their interests in really difficult situations that the company might be facing.

But I think despite that expertise, it may well be that there are blind spots. Thoughts you might [00:32:00] only view things through your lens of the world and your set of experiences, which are rich as they may be, they might not be complement, they might not contain the totality of different views that you might want to have on a company.

And so when I write this book, one of the challenges with writing a book about mistakes is that you have to, as you correctly done to me, make sure that I am not susceptible to the same biases myself. So I finished the book probably about a year before I handed the book. And in the intervening year, I just sent it to as many people as possible, and asked them to criticise it as much as possible.

And importantly, the people I sent it to were people that I trusted to be critical, because I knew them personally, I'd worked with them, I knew they wouldn't say some nice things. things just to, to, to give me a, a warm glow feeling. I think the second thing that we want to do is to always try to challenge and question.

So when I started my fledgling career as an investment banker, as a junior analyst, right at the bottom, I met a guy called Simon Robey. He's now Sir Simon Robey at [00:33:00] the time he was the global head of M& A at Morgan Stanley, and he talked about the seven C's of investment banking. Now I have to admit, I can't remember six of those seven, but the one C I remember was curiosity, and this for him was the most important characteristic that he saw in an analyst, is yeah, it's one thing to plug numbers into a standard model, but to ask why are we doing it this way, and if we want to be better than our competition in a competitive sector, whether it's Goldman Sachs, and at the time it was often Credit Suisse, and Merrill Lynch, how can Morgan Stanley be differentiating ourselves, it's to ask.

Is there a better way of doing things? And so if there are truths universally acknowledged, which is that demographic diversity always improves firm performance, might you realize there's other forms of diversity? So maybe there's a white male who would be a great board member. But is not being given a board appointment because of not taking particular boxes.

Might you see that this person [00:34:00] has a great amount of other diversity in terms of work experience or socio economic background. And hi him, and that is a way in which you will do better than your competition. So you don't beat your competition by doing everything else that everybody else is doing, but by thinking differently.

And the idea of questioning is something that the book hopes to promote, because that will then lead to thinking differently and then having an edge. 

Oliver Cummings: Alex, you're obviously very good at thinking critically, but challenging when you have time to reflect on it and write a paper is one thing. Challenging in real time in the boardroom is quite another.

You sit in various boards. I'm curious to hear what you've learned from your experiences about providing effective challenge in the boardroom in real time. 

Alex Edmans: Thank you. So, you're absolutely right, Oliver, that there is a difference between challenging on paper and challenging in the boardroom. Sometimes the latter is in real time.

There's so many meetings I go into when I think afterwards, Oh, I wish I'd said this at the time or I came up, this would have been a better way to [00:35:00] express the argument. But I also don't think that they're too distinct from each other. I think it was Gandhi who says you cannot do good in one part of your life and bad in another part of your life.

Life is one homogenous whole. And I think it's easier to challenge if this is something you do in whole, on your whole life because then it becomes a habit. It becomes something which is ingrained. And so what is the way that I try to challenge both in the boardroom and also, um, in, um, my writing. I think number one to try to challenge as respectfully.

as possible. So when I challenge in the boardroom, I'm not saying that person is wrong, their experiences could indeed be entirely valid. But what evidence will provide is a different perspective, which will not be as deep as one person's experience working from a company for 20 years, but might be broad and that it brings a range of perspectives from different types of industries.

And then suddenly when I challenge something which you must think is difficult to challenge, such as diversity. [00:36:00] I am saying these particular diversity studies might be weak, but this is not because I'm anti diversity. Maybe diversity still improves firm performance, but to measure diversity, we need to go beyond gender and ethnicity.

It could be other things like sexual orientation and disability status and neurodiversity. And even if you found that diversity had no impact on financial performance, you could instead justify diversity initiatives On other goals, such as the social reasons, we don't always do something because we think it's going to be improving our profitability.

So I think when to challenge to try to make sure that this is respectful is a way of challenging even the most tricky things to challenge and not getting too much of a pushback. And I think the second thing to bear in mind when challenging is also to recognize just the limitations of the challenges that you are providing.

So I am challenging based on data, but data is something which only [00:37:00] finds an average relationship. And even if on average, there is no link between these two factors, maybe in this company, there could be a link or vice versa. Maybe on average, I think. Employee satisfaction improves firm performance, but it might not do so in every situation.

Maybe in certain situations, focusing purely on the bottom line might be important for that company at that particular time. 

Oliver Cummings: One of the things that struck me from the mastermind groups that we host as part of our neural board community. Is a recurring theme is the link between challenge and emotion, psychological safety.

Sometimes people will duck a challenge because they're afraid to stand out from the group or to cause offense. What's been your experience of the emotional side of that challenge? And how do you ensure that you're not ducking the challenge? 

Alex Edmans: So I was very lucky when I started my career at Morgan Stanley as an analyst right at the bottom.

Why? [00:38:00] Because when I started, I was told that the best analyst is one that toes the line. You just do everything that your boss tells you to do. You don't complain, even if you have to work the entire weekend, you do it. And then six months in, you get your first evaluation. And these evaluations, you have your three strengths and three weaknesses in the left column.

The right column was nearly always blank. unless there was something unusual. And during all my time there, I only ever received one comment in the right column, and it came in my first six months, and it said, unusually for a first year analyst, Alex has the confidence to express his views and ask questions which is to be encouraged.

And this told me that, For an industry in which challenge was seen as bad, where you were always seen to toe the line, this was actually just a myth that had been perpetrated. What Morgan Stanley appreciated was somebody who would challenge, and this I think says far more about the company than it does about me, the people that they wanted to build up were ones that were willing to express different [00:39:00] viewpoints and offer their own opinions.

Oliver Cummings: Alex, time has flown by which means it's time for the lightning round, where I'm going to say a short statement and ask you for a quick response if you're ready. 

Alex Edmans: Sure, yeah, let's go ahead Oliver. 

Oliver Cummings: So first up, the boredom behaviour that irritates you most. 

Alex Edmans: When people make strong definitive statements and imply that's the only way of viewing things, particularly when that statement is not backed up by evidence.

Oliver Cummings: Most valuable 

Alex Edmans: board ritual. I think it's difficult for me to think about rituals because rituals seem to give the impression that the board is a mystique, a a special form of club, um, which acts in a different way. I just say board is just a group of, of, of people and, and I think just like any group of people, you act respectfully.

You listen to somebody while they're out interrupting you respect people's different viewpoints. So I'd say any common sense thing that you do in any group situation that applies just as much to a board. Favorite quote and why this is probably not directly related to board, but hopefully it will be still useful for people's career thoughts.

There was an interview in the Financial Times by Laurie Hodrick, a professor at [00:40:00] Columbia, who is now a board member of several boards, and she was asked, What is your greatest lesson learned? She says you can do everything you want to and be everything you want to be. But not all at once. So I think the career implications is that we live long lives here.

And it might have been that when I started out in my career, I would have loved to write a book. But no, I had to focus on my academic research so that when I write a book later, it is based on substance and research rather than shooting from here. And so that's why my career changed from just. being an academic researcher to now being more practitioner facing.

And I think this could be the same for people's careers, like you typically have multi stage careers rather than the age in which you started at one company and always stayed at that company for the, until the end of time. 

Oliver Cummings: Your 

Alex Edmans: most significant professional insight. It's how different things are intertwined with each other.

So when started as a professor. I was told only focus on research. Don't bother caring about teaching. It's the research which is going to get you tenure. But I thought research and teach were really intertwined because [00:41:00] teaching involves explaining something complex and simple language. And similarly, if you want your research to be impactful, it doesn't need to just be technically accurate.

It needs to be something where people can see why it's important. And so many people like to silo research and practice. This is what academics do, and this is what practitioners do. But I get a lot of insights for my research from practice, and vice versa. I like to apply the insights from academia to practice, and that's what I've done in my books.

Oliver Cummings: Worst professional advice you've ever received? 

Alex Edmans: I think it's back to the one of toe the line. And toe the line, don't ask questions, just do everything that people ask you to, and be, and that's what a great employee is. 

Oliver Cummings: What have you changed your mind on about boards over time? 

Alex Edmans: This is the idea that boards are not one size fits all, that there's different types of board effectiveness.

I know this one size fits all phrase is often hackneyed and people hear it a lot, it's a cliche, but this certainly was the case in terms of academic research and boards. So the early studies showed that [00:42:00] smaller boards are always better. And also independent boards are always better. This generally is good formal governance, but then there was a later paper finding that in certain settings, if you have a complex company, after you want a larger board, because you might want to have a board of a range of expertise and experiences.

And also when there's a company, For which um, you're doing a lot of R and D and there's a lot of important internal information actually board independence is not that useful because it's really hard for an outside director who doesn't really get involved in the day to day running of the company to provide some useful independent perspectives.

Oliver Cummings: Best book every board member should read and why. 

Alex Edmans: My favorite book of all time is called The Seven Habits of Highly Effective People by Stephen Covey. I think this just gives great insights into business, but also life. Just a couple, one of them is to be clearly focused on a mission. So to begin with the end in mind, to know what the goal is for your career and your life, and also know what's not part of that goal, so that we can [00:43:00] turn those things down and make sure we're not spread too thinly.

And then knowing your goal, then this affects the destination, the journey towards the destination. And Stephen Covey provides some great insights on time management. Now, I know there's a lot of Me Too books on productivity and time management right now, but I think these are all just different variations on seven habits.

And I think going back to the original source, I think this is way more powerful than some of the derivatives I've seen since. 

Oliver Cummings: And finally, three things our listeners should take away from this podcast if they take nothing else. 

Alex Edmans: So I'm going to cheat a little and repeat the two that I had earlier for starting with and those two were number one, be aware of your own biases.

And second, to challenge everything and to question in a respectful way. But the third to add, because you did ask me to three, will be just to recognize the value of scientific and academic research. Now I recognize I'm talking my own book a little here as an academic, but we often think we have the real world.

And we have academia and they're different, but one of the things I've learned, one of my great professional [00:44:00] insights that I've learned from others was how these things are intertwined. And it's not that academia goes after different questions than practitioners, we go after the same questions. What makes a board effective?

What creates long term value within companies? But because academics don't. Have the pressure of the quarterly earnings cycle because we have the time and space to spend three or five years nailing down a result, addressing those alternate explanations, we can answer the questions that companies are really interested in themselves, but with greater rigor just because we have the luxury of time and space.

So I would not dismiss academic research as being academic, I would see this as being complementary to. It doesn't replace expertise and intuition, but it's complementary to the intuition that you already have as practitioners. 

Oliver Cummings: Alex, thank you so much for taking the time. That's been hugely stimulating and I've really enjoyed it.

Really enjoyed the conversation. Thanks so much Oliver.

🎙️ You can listen to the full podcast interview with Alex Edmans on Apple Podcasts, Spotify and YouTube.