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Alex Edmans | The Business Power of Creating Value for Society

On October 13, 2023, a professor of finance at London Business School...Alex EdamnsGuest on the 35th episodeTsinghua Wudaokou Green Finance Lecture",around"The Power of Purposeful BusinessThe lecture, themed "(The Power of Business to Create Value for Society)," was hosted by Dr. Li Jing, Senior Researcher at the Center for Green Finance Research (CGFR) of Tsinghua University's PBC School of Finance. It was conducted online and streamed bilingually across the entire network.

Enterprises should practice the business philosophy of creating value for society: on the basis of "doing no evil" such as not owing taxes and not harming the rights and interests of employees, enterprises should grow the pie and increase their profits by actively creating value for society, thereby achieving a win-win situation for business value and social responsibility.

It is achievable for businesses to generate profits by serving society, and investors and society can potentially benefit simultaneously.

Enterprises can leverage their core competitive advantages, utilize existing resources and expertise to serve society, and achieve the goal of creating value for society.

The lecture began with a professor of finance from London Business School.Alex EdamnsThe case of Vodafone, a British multinational telecommunications group, introduced the concept of "purposeful business".

He mentioned that Vodafone launched its mobile payment service, "M-Pesa," in Kenya in 2007, allowing people to deposit, withdraw, and transfer money via their mobile phones. Prior to this service, 15 million adults in Kenya did not have bank accounts. Mobile payments do not require bank accounts, so "M-Pesa" met the Kenyan people's need for convenient, low-cost money transfer services, better serving low-income populations. Seven years after its launch, nearly 200,000 Kenyan households (2% of the total population) were lifted out of poverty. This effect was even more pronounced in female-headed households, where "M-Pesa" facilitated women's career transitions from agriculture to commerce and retail, further promoting gender equality in the region.

Subsequently, Vodafone released a tax transparency report in 2012, demonstrating that it paid over £11.1 billion in taxes to governments in the countries where it operates, becoming the first company in the global telecommunications industry to publish such a report. This implies that Vodafone gained the advantage of placing intellectual property in low-tax jurisdictions for tax avoidance. In response, he posed the question: Which initiative created greater value for society—the launch of the "M-Pesa" service or the publication of the tax transparency report? If Vodafone had not taken action, which initiative would have generated resentment, lowered its ESG rating, or worsened its reputation?

He first pointed out that we can liken the social value created by a company to a cake, waiting to be distributed among investors and stakeholders. Traditional views hold that responsible companies should pay taxes as required and ensure a fair distribution of profits (the cake). However, "cake economics" argues that companies should, on the basis of "not owing taxes" and not harming employee rights ("do no evil"), practice a business philosophy of creating social value (making the cake bigger). By proactively creating social value, companies can increase their profits, thereby achieving a win-win situation for both business value and social responsibility. This signifies a shift in thinking from the traditional "distributing the cake fairly" approach to the proactive "making the cake bigger" approach. The primary goal of companies that aim to make the cake bigger is to create social value, while viewing profits as a byproduct of social value. In other words, companies should prioritize long-term social responsibility, rather than being driven by short-term profit maximization. For example, Vodafone launched its "M-Pesa" service to build a digital payment ecosystem in developing countries to drive local economic growth, rather than focusing solely on short-term profit gains—this is the essence of Vodafone's social value.

He emphasized that, in order to avoid confirmation bias, when measuring whether a company creates value for society, we should start with the results, rather than focusing on whether the company makes commitments or invests in corporate social responsibility.

He then demonstrated that it is achievable for businesses to generate profits through serving society, and that investors and society can potentially benefit simultaneously. By examining the list of "America's 100 Best Companies to Work For," he found that from 1984 to 2011, these 100 companies achieved annual returns 2.3% to 3.8% higher than their peers, accumulating to an 89% to 184% higher return. Therefore, when companies improve working conditions out of genuine concern for their employees, they inspire employee enthusiasm, increase work efficiency, and consequently boost corporate profits.

Finally, when discussing "how a company's existence creates value for society," he stated that companies can leverage their core competitive advantages and utilize existing resources and expertise to serve society. He suggested that companies can put their ideas into action in three ways: First, develop new businesses based on existing resources, that is, launch new products and services driven by the company's mission to serve society. Second, do the same thing in different ways, that is, while pursuing excellence in their core business, encourage process innovation. Third, do the same thing in the same way, that is, establish a targeted mission to serve society and assess whether the social impact of specific businesses aligns with that mission.

Alex EdamnsProfessor of Finance at London Business School. His research interests include corporate finance, corporate social responsibility, and behavioral economics. He is a contributor to the *Financial Review*.Review of FinanceThe editor-in-chief of [Journal Name], whose research is frequently published in media outlets such as the Financial Times, The Economist, Bloomberg, and Reuters. He is the author of *The Economics of the Cake: How to Achieve a Win-Win Situation for Corporate Value and Social Responsibility*, and co-authored (14th edition) *Principles of Corporate Finance* with Richard A. Brealey, Stewart C. Myers, and Franklin Allen. After graduating from Oxford University, Edmunds worked at Morgan Stanley, later earning a PhD in Finance from MIT Sloan School of Management. He joined the Wharton School of the University of Pennsylvania in 2007, received tenure in 2013, and then moved to London Business School.

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