What’s the real reason businesses exist? Is it just to earn profit, or is there a deeper purpose? For decades, experts debated whether a company’s main role is to line shareholders’ pockets or to create value for employees, customers, and society. Alex Edmans, Professor of Finance at London Business School, set out to answer this question—and discovered surprising truths that challenge conventional wisdom. In his thought-provoking TEDx talk, Edmans explores whether social responsibility pays off, why company culture really matters, and how investors can be part of positive change in the business world.
Why Do Businesses Exist? Profit or Purpose?
The Conventional View: Maximizing Profit
For years, the standard answer to why businesses exist has been simple: to earn profit. This view, championed by economist Milton Friedman, argues that profit is the primary goal, and all else follows from it. As Friedman famously wrote:
“The social responsibility of business is to increase its profits.”
This statement may sound cold, but there’s logic behind it. According to this approach, pursuing profit forces companies to:
- Make quality products, or lose customers.
- Treat workers fairly, or they’ll leave.
- Avoid serious environmental harm, or risk their reputation.
It’s a cycle—if a business ignores any of these, profit suffers. In this sense, even profit-driven companies can’t completely ignore their social impact. By putting customers, employees, and the public first—even if only indirectly—a business stays profitable for the long haul.
The Limits of Pure Profit Calculation
But is everything reducible to a profit calculation? Not quite. Edmans shares the story of Marks and Spencer in the 1930s. Back then, company chairman Simon Marks required senior managers to spend time on the shop floor, seeing firsthand how both customers and employees were treated.
One day, Simon Marks witnessed a shop assistant faint. He later learned she was skipping meals to feed her unemployed family. Instead of asking, “How will feeding my staff affect my profits?” he simply acted. He introduced nutritious, affordable meals for every employee. While profit calculations couldn’t justify the move, intrinsic motivation to do the right thing mattered more.
Marks wasn’t running numbers. He cared about his people—because it was the right thing to do. Yet, the company’s reputation for taking care of staff supported its bottom line in the long run.
Corporate Social Responsibility: Profit as a Byproduct
A second, broader view is that businesses exist to make the world better for customers, employees, and communities—not just to enrich shareholders. This is known as corporate social responsibility (CSR).
CSR suggests companies should:
- Create products that change customers’ lives.
- Build healthy workplaces where employees thrive.
- Safeguard the planet for the next generation.
In this approach, profit naturally follows from serving a clear purpose.
Edmans tells the story of George Merck, the president of Merck Pharmaceuticals. In 1942, Merck became the first company to mass-produce penicillin—a move focused on saving lives, not maximizing drug profits. The changes were immediate: Anne Miller, deathly ill with an infection, became the first American treated with penicillin and recovered overnight. Merck even shared its penicillin process with competitors, saving thousands more during World War II.
Merck’s philosophy sums up CSR perfectly:
"Medicine is for the people, not for the profits—the profits follow."
Doing good wasn’t just a “nice” thing; it brought Merck respect, loyalty, and, yes, long-term profits.
Does Social Responsibility Really Boost Performance?
Putting the Theory to the Test
Edmans wondered: do socially responsible companies actually outperform their peers? To measure this, he focused on employee well-being—a key part of social responsibility that could be tracked objectively.
He tapped into the Fortune “100 Best Companies to Work For” list, published every year since 1984. This list goes beyond just pay and benefits. It also considers trust in management, pride in work, and camaraderie among colleagues, including:
- Competitive pay and benefits
- Transparent, trustworthy management
- A sense of pride and ownership
- Strong team connections
This information offered a rare window into long-term employee satisfaction across many industries.
Separating Correlation from Causation
It wasn’t enough to show companies with happy workers performed better. Edmans controlled for industry, company size, growth potential, and past returns. He put in four years of research to be sure this wasn’t just a coincidence. Was it the caring culture driving profits, or did profitable companies simply have more resources to keep workers happy?
His thorough approach strengthened the result: social responsibility wasn’t just a side effect of financial success.
Key Findings: Happier Workers, Higher Returns
What did the data show? Over a 26-year period, the Fortune 100 Best Companies to Work For outperformed their peers by 2-3% per year on average. That’s a huge result when compounded over decades.
If you visualized it, you’d see these workplace “best practice” firms pulling away from the pack, year after year. Research by Great Place to Work also confirms this: top companies to work for triple their stock market performance compared to others over 27 years. The key takeaway: putting employee well-being first isn’t just good ethics, it’s smart business.
Rethinking the Cost of Caring for Employees
The Pushback: High Cost, Low Return?
Not everyone agrees that happy workers mean higher profits. Take Costco as an example. The company pays about $20 per hour—nearly double the U.S. national average of $11—and gives 90% of its employees health care coverage.
Many analysts are skeptical. As one from Business Week put it:
“Costco management is focused on employees to the detriment of shareholders. Why would I want to buy a stock like that?”
Under conventional thinking, every dollar paid to an employee is a dollar less for shareholders. Managers are expected to minimize wage costs and squeeze employees for every ounce of productivity—just like a football coach driving players to their limit.
Edmans experienced this firsthand early in his career as an analyst. Laughter in the office was met with lectures about how “looking too happy” could be a sign of not working hard enough.
Costco’s Example: Investing in Employees Pays Off
But Costco’s results tell a very different story. Their management philosophy, as explained by CFO Richard Galante, is that if you pay people well and offer strong benefits, you attract and keep the best people. These employees are more efficient and stay longer—a win for everyone.
Costco’s values show in other ways too: the company closes on Thanksgiving and major holidays, so staff can spend time with their families. This sacrifices some short-term profits, but supports a culture of respect and trust.
And what about the numbers? Costco’s profits topped $2 billion in each of the last two years, showing that a people-first approach can boost—not hinder—financial performance.
More Evidence: It’s Not Just About Employees
Edmans notes his research is just one piece of the puzzle. Other studies reveal that environmental responsibility and customer satisfaction also drive stronger performance. For those interested in the broader research on this topic, a study on the long-term financial impact of corporate social responsibility offers global insights.
Firms with strong social responsibility practices—toward the planet, customers, or workers—all see the benefits reflected in long-term stock growth.
What This Means for Managers and Investors
Responsible Actions Without the Math
Managers don’t need to justify every ethical decision with a spreadsheet. Doing the right thing for its own sake nearly always pays off in the end. As Edmans puts it:
Do things for intrinsic, not instrumental value.
When companies act out of genuine care—rather than for a quick public relations win—profits follow naturally.
Investors: Earning Better Returns by Supporting Good Companies
Investors have real power to vote with their money. The old belief is that ethical investing means lower returns. Edmans’ research turns this idea on its head—investors who back responsible companies can do well and do good.
A good example is the Parnassus Endeavor Fund, which focuses on employee well-being. Over its first decade, the fund outperformed broader market averages by 4% per year. Other sources, like this Investopedia overview on social responsibility, detail further benefits of supporting responsible business.
Beyond the Hard Numbers: Measuring What Matters
Most investors check numbers like price-to-earnings ratios, dividends, and past profits. But these figures are available to everyone, so they rarely offer an edge.
Some of a company’s most valuable attributes—culture, customer loyalty, innovation—aren’t captured in standard financial reports. Today, investors can use advanced measurement tools, such as True Cost, Sustainalytics, Asset 4, and Calvert, to track things like sustainability and ethical practice. Few people know about these tools, which means using them can provide a unique advantage.
Recent studies highlight how employee satisfaction correlates with stronger revenue and share price growth.
Long-Term Success Requires Patience
The Market Is Slow to Catch Up
One of Edmans’ most interesting findings is that the market takes four to five years to fully price in the benefits of a great workplace. That means you don’t have to be first to reap the rewards; careful, patient investors can still profit even if they buy in “late” to great companies.
Dumping stocks after a missed quarterly earnings target pressures companies to chase short-term performance. The real value shows up years down the road.
Supporting Long-Term Vision
Leaders like Unilever CEO Paul Polman took bold steps, like ending quarterly earnings reports, to focus on sustainability goals and longer-term results. Unilever, for example, designs products like water-saving shampoos as part of a bigger sustainability mission.
Alliance Trust, a 127-year-old investment firm, highlights what long-term perspective can achieve. Families that bought Alliance Trust shares in 1888 and reinvested their dividends would have seen that investment swell to £1,885 million by 2015, with dividends increasing every year since 1967.
If this were a graph, the growth would shoot through the roof of any building.
The Takeaway: Profit and Purpose Are Partners
So, why do businesses exist? The answer isn’t profit or purpose—it’s both.
Businesses that put purpose first, by serving employees, customers, and society, will thrive financially. You don’t need to sacrifice profit to do the right thing; in fact, serving a greater purpose is the best way to secure profits for the long term.
If you’re a manager, invest in your people. If you’re an investor, seek out companies with an authentic commitment to social responsibility. Backing purpose-driven businesses isn’t just about feeling good—it’s about achieving real, lasting returns.
In the end, the road to financial success is the road of purpose. Make choices that serve a bigger goal, and the profits will come.
To reach the land of profit, follow the road of purpose.
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