Milton Friedman taught us that corporate managers should focus on profitable operations and building shareholder value, while enlightened globalists like World Economic Forum founder Klaus Schwab insist that we should all embrace “environmental, social, and governance” (ESG) theory. The latter demands that, in addition to seeking profitability, CEOs and managers should use their firm to address a long list of issues like climate change and gender equality.

Conventional analysis puts the traditionalists on the right politically and ESG advocates on the left, but a new book by Professor Alex Edmans of London Business School confounds that dichotomy. In Grow the Pie: How Great Companies Deliver Both Purpose and Profit, Edmans argues that “enterprises can create both profit for investors and value for society.” [Emphasis in original]

This takes a moment to unpack, since many of us believe that any company that is profitable and operating in a voluntary economy is, by definition, creating “value for society.” Edmans grants that basic economic understanding, but he means that companies should be creating value beyond their commercial transactions—things like donating medicines to the poor, paying higher than necessary wages, and helping people in the developing world access financial services.

He claims that companies that put this kind of social value creation first, independent of its immediate impact on profits, are more likely to be financially successful in the long term. In this counterintuitive view, only those firms that eschew profit maximization as a primary goal will make it to the top tier of success.

If this counterintuitive theory sounds oddly familiar, it may be because a version of it appears in Bernard Mandeville’s early 18^th century treatise The Fable of the Bees. Mandeville argued that the private vices of selfishness and acquisitiveness yield “publick benefits,” in the form of a productive economy. He imagined what society would look like if everyone followed the recommended morality of his age, and concluded that it would lack the industry, science, and other secular institutions we all value. Mandeville’s view was controversial, and critics questioned his seemingly paradoxical premise that habits like gambling, buying luxury goods, and avoiding thrift could, if fact, yield a more prosperous society.

Edmans may be in for a similar treatment from free-market advocates. Unapologetic capitalists in the tradition of Milton Friedman (and Adam Smith, who was influenced by Mandeville) will no doubt be skeptical of his suggestion that “pursing social value is often more profitable in the long run than pursuing profits directly.” But if license could lead to virtue in 1714, perhaps altruism can lead to profits in 2020. Edmans insists that recent peer-reviewed research backs up his ideas.

Before we get to the evidence, though, Edmans provides us with a few conventional guardrails. A company should only invest in social value creation if the project under consideration is consistent with the principles of multiplication, comparative advantage, and materiality. In other words, money spent on charitable works has to produce more value for the recipient than for the giving institution, the institution has to have a comparative advantage in the area under consideration, and the giving has to benefit at least one of the firm’s “material stakeholders.” For Edmans, material stakeholders are those that are most closely connected to the firm or impacted by its operations. He says, for example, that Apple’s employees are clearly material stakeholders. But he also parses the difference between entities that exhibit “business materiality” (like employees, suppliers, shareholders, and customers) and those that have “intrinsic materiality” (like the poor or homeless or any group that “an enterprise deeply cares for.”

These three principles go a long way toward answering many of the traditional criticisms of ESG and other “social” theories about how businesses should operate. Following these guidelines, companies won’t throw money at every issue and project they encounter, nor would they accept demands from outside activists who assert a claim on shareholder capital or policy. As Edmans illustrates anecdotally, many of the most successful and long-running instances of corporate altruism have followed the principles he lays out, even if only by intuition.

Merck’s famous development of Mectizan (ivermectin), a drug that treats river blindness, carries a lot of weight in this analysis. The people who most suffer from this condition, caused by fly-borne parasites, are among the poorest in the world, and thus not likely to be customers for U.S.-manufactured pharmaceuticals. Upon seeing promising early results, Merck’s management decided to fund development and distribution of the drug on the company’s own dime, despite the knowledge that it likely would never recoup that investment. As a result, millions of people in Africa and Latin America were saved from permanent blindness. By doing something at which the company was already expert and delivering an asymmetrical benefit to low-income people, Merck satisfied the Edmans test.

Merck, in this telling, has reaped substantial non-monetary rewards from its ongoing act of social value creation. The company acquired a positive public image. It also gained an edge in recruitment and retention among a small and highly specialized talent pool, as talented scientists who might have gone to work for other pharmaceutical companies have chosen to work for Merck instead. Some investors have chosen to invest in or continue to hold Merck stock, lowering the company’s cost of capital.

Yet, Edmans warns that we shouldn’t be swayed by charismatic anecdotes that seem to vindicate one particular side of an issue. Instead, he insists that we should examine all the available evidence and determine which anecdotes, if any, are illustrative of general principles and likely real-world outcomes. When it comes to his top recommendation to pursue social value creation in the absence of a likely profit, the evidence is mixed.

Edmans draws attention to his own research showing that companies with high employee satisfaction outperform firms with low or average scores. He also cites other research showing that high customer satisfaction correlates with higher stock market returns. That’s great, but also consistent with common sense and longstanding business expectations.

Still, he insists that his point is relevant when it comes to debates over firms like high-wage Costco, which has better pay and benefits than rival Walmart. Costco has been criticized by market analysts for not cutting labor costs, but Edmans argues that those policies contribute to long-term success, as validated by his research. Perhaps, but if his research finding is as strong as he claims, shouldn’t Costco’s superior worker satisfaction be driving Walmart (and perhaps Target as well) out of business? If paying higher wages is good for business across the board, shouldn’t low-wage firms be failing?

The truth is that there is room in the economy for both low-wage models and high-wage employment models. Costco gets more sales per employee, and can afford to pay them more. Walmart employs more people per unit of sales, but at lower rates. If Walmart were forced to increase pay, we’d end up with a Walmart that operated more like Costco, employing fewer people and charging higher prices. But that tradeoff wouldn’t show up in Edmans’s research, because people who have been laid off aren’t around to fill out job satisfaction surveys.

The evidence cited on employee and customer satisfaction is, if anything, a refutation of much recent ESG advocacy. Such critics position employees and customers as simply two bullet points on an ever-expanding list of stakeholders with little material connection to any particular company. That is why the book’s rules of engagement—multiplication comparative advantage, and materiality—are so important. Edmans observes that “The principle of multiplication asks the following: If I spend $1 on a stakeholder, does it generate more than $1 of benefit to the stakeholder? In other words, does the activity multiply the money I spend on it? If not, the social benefit of the activity is less than the private cost and so the activity doesn’t deliver value.” Thinking like this presumably helps a manager focus on what kind of social value project might make sense for a particular firm. Firms that internalize this logic will be better positioned to resist the more politically motivated versions of ESG theory, which veer away from well-accepted goals like employee and customer satisfaction to an illiberal embrace of identity politics and attempts at monitoring things like a company’s tertiary down-stream carbon emissions.

Despite the book’s message to downplay worries about profitability, the data are much stronger when it comes to justifying some of the traditional, non-ESG compliant practices that are increasingly under political fire. Edmans demolishes opposition to private equity ownership, high CEO compensation, and share buybacks as somehow being antisocial, problematic, or symptoms of short-termism. These policies can be consistent with shared value creation and Edmans’ metaphorical growing pie, delivering rewards to shareholders, workers, and other stakeholders without anyone being worse off. Attacks on them, coming from everyone from Elizabeth Warren to Donald Trump, are fundamentally off-base. 

However, his dedication to hard evidence—and the complex statistical analysis that makes it possible— falls short in one odd way. Early on he argues that companies should take on social value projects even if managers cannot show that they will be profitable. But then he insists that companies shouldn’t even attempt to gauge future profitability related to social value expenditures, and that it’s a mistake to try. He hedges in a couple of places, saying that such calculations and estimates are “almost” impossible, but eventually says of the value of a hypothetical time-off-for-volunteering program that “It’s impossible to calculate.”

Impossible? Calculating the value of X number of volunteer hours worked for a charity organization and then estimating the value placed on that experience by an employee doesn’t seem like an especially difficult calculation. It’s especially strange given Edmans’s own sophisticated data analysis. At one point he suggests that a responsible executive need only “discern” rather than calculate a firm’s comparative advantage, but it’s unclear how such a discernment process bereft of any numerical signifiers is better than a guess.

One can imagine that Edmans might worry that executives with a skeptical, traditionalist mindset will game social value calculations to make programs they’re uncomfortable with look as unpromising as possible. But that doesn’t explain his insistence that expectations of social value are somehow impossible to generate. Edmans is right, certainly, that predicting future returns is harder than finding correlations in the data after the fact, but we all—humble individuals and global finance titans alike—have to make decisions every day that are based on expected returns, including qualitative, non-financial utility. Just because the answers are based partly on subjective criteria doesn’t make a calculation futile.

Despite his insistence that we not try to calculate social value, Grow the Pie has some excellent messages for managers. Unlike ESG advocates who insist that corporations must appeal to every possible constituency and address every environmental and social issue under the sun, Edmans urges firms to focus on what is closest and most important to them. He presents evidence that counterintuitive business strategies, consistent with increased worker welfare, can deliver market-beating returns for innovative firms. He also presents compelling arguments from the other side of the debate, justifying some of the most maligned business strategies in the corporate world, such as high CEO salaries and stock buybacks, as potentially legitimate and beneficial.

From the perspective of political economy, however, the question is not “how should corporations be managed?” but “who decides?” Edmans acknowledges that government regulation, intended to correct ostensible market failures, “often has unintended consequences,” and that shareholders, employees, and consumers are “the ultimate regulator of enterprises” by walking away from companies they don’t want to be associated with.  

He still supports an array of regulatory fixes, however, including prohibiting business practices that produce negative social externalities and mandating those that produce positive ones. But deciding which is which (and hopefully there will be at least some future activities that are neither prohibited nor mandated) would seem to require exactly the kind of social value calculation that Edmans himself insists is impossible. If an individual project manager can’t perform such a numerical calculation in the context of a single firm, how can we expect parliaments, executive departments, and “society at large” to come to such decisions?

He may have to leave it up to those highly paid CEOs he’s been defending to come up with the necessary synthesis.