Companies need to use their comparative advantage to serve society

• Businesses are responsible if their core route to profits also serve society, rather than responsibility being channelled through an ancillary activity;
• Responsibility is not about donating to charity, since shareholders can make such donations themselves. Instead, it is about using a company’s comparative advantage to address social problems;
• The Coronavirus pandemic has shown the role companies can play supporting its employees and society, in times of crisis companies have a responsibility to see what they can do to help;

Being responsible should be at the core of a company’s purpose, not an ancillary activity

Traditionally, Corporate Social Responsibility (CSR) has been seen as actions a firm can take to serve society, typically through an ancillary department that might donate profits to charity to mask the fact the core business has negative externalities. Instead, Edmans thinks responsible businesses are those whose core route to profits also serves society.

According to Edmans, being a responsible business is linked to a company’s comparative advantage. Thus, it should not involve making charitable donations, since it has no comparative advantage in doing so.  Companies could instead return profits to shareholders, who can then decide which causes they want to support, rather than executives making those decisions on shareholders’ behalf

Companies should use their comparative advantage to benefit society

Edmans cites the example of Coca Cola’s ‘Project Last Mile’ initiative, which delivers vaccines to hard-to-reach parts of Africa. This uses the company’s comparative advantage and strength in logistics – particularly refrigerated transportation – especially considering the vaccines have to be kept cool.

COVID-19 has shown that companies can have a massive effect on society

The COVID-19 pandemic has made it even more important that firms use their expertise to serve the society they exist in. Before the crisis, some companies were focussed on serving shareholders at the expense of society. This led to widespread resentment towards big business, as seen by movements such as Extinction Rebellion and calls for heavy regulation. Similarly, there has been research that shows companies can become more profitable and sustainable by serving society.

There have been some great responses during the crisis from companies seeing what they can do to help wider society. Edmans cites companies that have used their comparative advantage to manufacture new products, such as personal protective equipment and hand sanitizer. Similarly, some companies, such as Sports Direct, have been seen to continue to extract value from society by asking workers to keep coming to warehouses in unsafe conditions. There has been a broad public acknowledgement how companies can impact society, not just through wages and being responsible for protecting the environment, but during the pandemic, actively supporting or endangering lives.

Companies need to think about the gifts of unequal value they can give to society

Edmans uses a lesson from finance; instead of looking at assets of equal value, such as £100 in cash for £100 in stocks, Edmans uses assets of unequal value to illustrate how companies can think about what they can give society that provides a much greater impact than it costs. In some cases, this might mean donating food and hand sanitizer where the cost of production is lower than that of the market, but this can also extend to how companies treat their workers. Some companies have had to downsize as a result of the crisis, but some have done this in a more humane way than others. Airbnb had to let go of some employees, because the travel industry has taken a permanent hit. However, they have taken great strides to minimise the losses suffered by employees, by committing to paying healthcare expenses of displaced employees for a year, letting them keep their laptops and redeploying their recruitment function to support with outplacement to help them find alternative jobs. By doing this, they are using their comparative advantage, knowing the strengths of their employees better than anyone, in order to help them find new employment.

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Elias Papaioannou’s conversation with Alex Edmans is part of the Wheeler Institute’s COVID-19 series – bringing together the expertise and experience of our extended community to understand, illuminate and offer solutions to the challenges created by COVID-19. Our differentiating factor is the role of business in addressing these challenges, with a focus on the implications and actions for those in developing countries.   

This is ‘part one’ of two conversations with Professor Edmans; for ‘part two’, focussing on how companies can grow their pie, even during a crisis, click here. If you’re interested in following the Wheeler Institute COVID-19 series, check out our previous episode below.

Elias Papaioannou is academic director of the Wheeler Institute for Business and Development and professor of economics at London Business School, focusing on international finance, political economy, applied econometrics and growth and development. 

Alex Edmans is Professor of Finance at London Business School and Academic Director of the Centre for Corporate Governance.  He has published in the American Economic Review, Journal of Finance, Journal of Financial Economics, Review of Financial Studies, and Journal of Economic Literature. He is Managing Editor of the Review of Finance, Associate Editor of the Journal of Financial Economics, a Research Fellow of the Centre for Economic Policy Research, and a Fellow of the European Corporate Governance Institute.