Purpose and profit are not enemies: how great companies grow the total pie
In short: Conventional wisdom suggests businesses must choose between serving society and maximizing shareholder returns. Alex Edmans argues this is a false trade-off. By focusing on growing the overall pie through innovation and responsible action, companies can create long-term value for both shareholders and stakeholders, proving that purpose is fundamentally good business.
Alex Edmans, a professor of finance at London Business School, challenges the binary view that firms must sacrifice profits to serve a purpose. In his book, Grow the Pie, he argues that the traditional focus on dividing a fixed pie between shareholders and stakeholders is flawed. Instead, he advocates for growing the pie, where companies create value that benefits society while simultaneously driving strong financial performance. This approach is not about charity but about integrating purpose into the core of business operations.
A primary mechanism for this is innovation. For instance, Vodafone utilized its telecommunications expertise to develop M-Pesa, a mobile money service in Kenya. This solution addressed a critical barrier to economic development, lifting 200,000 households out of poverty in less than a decade while generating a return for the company. Similarly, Merck’s commitment to its mission led to the Mectizan Donation Program. By providing a drug to treat river blindness at zero cost, Merck built a reputation that attracted top talent and contributed to an average annual shareholder return of 13% since 1978—significantly outperforming the S&P 500.
Edmans notes that while government regulation is essential for setting standards like minimum wages, it cannot capture every dimension of corporate behavior. Some aspects of purpose, such as fostering an inclusive corporate culture, are difficult to measure and regulate. Therefore, shareholders and individual citizens play a vital role in encouraging purpose by supporting companies that align with their values. Ultimately, purposeful business requires holistic reform rather than piecemeal changes, ensuring that profit is viewed as a byproduct of creating genuine value for the wider society.
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Sources
- Summary by Intellect · source: Purposeful Business - Alex Edmans
- Also: The power of purposeful business - WheelerBlog
- Also: kenaninstitute.unc.edu — LBS Professor Alex Edmans Q&A: Power, Profits and Purposeful Business - Kenan Institute of Private Enterprise
- Also: www.gresham.ac.uk — Purposeful Business: The Evidence and the Implementation
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