How wrong was Milton Friedman? Harvard team quantifies the ways

George Serafeim wants to revolutionize the way businesses calculate their success.

Profit and loss aren't enough, says the Harvard Business School professor. Mr. Serafeim aims to do what no one has done before: Put a dollar value on the impact of products and operations on people and the planet, then add or subtract it from companies' bottom lines.

Intel Corp. provides an example of both. Mr. Serafeim and his five-person team credited $6.9 billion to the chipmaker in 2018 for paying its employees well and for boosting local economies where it has offices. But they deducted $3.1 billion for what they said was a shortage of women employees, the difficulty of career advancement and not enough attention paid to workers' health.

"Without monetizing impacts, we're left with the illusion that businesses have no impact," Mr. Serafeim said. Companies that show big profits can have enormous negative effects on society, he said. "They're just cheating because they're operating in a context that doesn't price all those impacts."

Mr. Serafeim's research throws out the playbook of measuring business performance primarily by shareholder value, which was popularized last century by Nobel Prize-winning economist Milton Friedman. Besides providing an antidote to "good washing" — corporate happy talk without follow-up — his work comes as companies increasingly search for ways to help boost a society that, despite its wealth, suffers from woes that include racism, a widening chasm between rich and poor, and deepening damage to nature. The coronavirus pandemic has made that quest more urgent.

Mr. Serafeim, 38, plans for his work to culminate in a set of impact-weighted financial accounts. The metrics can aid in investment decision-making, help design tax incentives, be a factor in credit ratings or even assist companies in raising money.

"Not all profits are created equal," Peter Harrison, chief executive officer of London-based asset manager Schroders told the Bloomberg Sustainable Business Summit on Monday.

Mr. Serafeim is well known in the world of environmental, social and corporate governance investing — in his words, he was "doing ESG before it was cool." Growing up in Greece and observing problems in its government sparked his fascination with measuring performance.

His analysis goes beyond the established work on measuring greenhouse gases or using carbon pricing. Keeping in line with the adage, "what gets measured, gets managed," Mr. Serafeim's goal is to value intangible, non-financial factors. By tapping machine learning technology, Mr. Serafeim and his team evaluate products and services on factors that include how accessible and affordable they are, their health and safety, and the ability to recycle them.

It means charging credit card companies for the medical costs of depression connected to indebtedness, debiting airlines for the human toll of flight cancellations and making food producers accountable for health issues related to obesity. Their calculations also credit automakers for the safety of their vehicles and companies that hire in areas of high joblessness.

On employment, the team assesses issues such as the quality of wages paid, the number of Black women in high-salary positions and the impacts of sexual harassment.

"The challenge is in making sure the data reported are accurate representations, otherwise this just becomes a race to the bottom with respect to manipulative marketing of corporate policy," said Dean Karlan, an economics and finance professor at Northwestern University in Evanston, Illinois.

"It will help managers make stronger business cases," said Susanne Stormer, chief sustainability adviser at Danish pharmaceutical company Novo Nordisk. "Instead of saying, 'This is the right thing to do or we need to avoid that,' they'll have more robust data, better information, which is lacking right now."

Already, about 60 companies globally, including Dutch bank ABN Amro Bank, Kenyan telecommunications firm Safaricom and Sweden's Volvo Group, have quantified some of their impacts, Mr. Serafeim said. French food producer Danone has introduced a metric called "carbon-adjusted" earnings per share, and private equity firm TPG has worked on estimating the financial value of the social and environmental good from investments.

Impact investing, so recently viewed as fringe, has grown to $715 billion in assets at the end of 2019 from $8 billion in 2012, according to the Global Impact Investing Network. Many big companies are adopting its principles.

BlackRock Inc., the largest asset manager in the world, said this year it would make sustainability a top investment rationale. Microsoft Corp. plans to invest $1 billion to support work on carbon-reduction technologies and Citigroup Inc. vowed to spend the same amount on efforts to help close the racial wealth gap.

Keeping shareholders happy has long been the primary goal and focus of decision making for companies, and it remains to be seen whether Mr. Serafeim's work can be a part of altering that.

Mr. Friedman, the Nobel Prize-winning economist, declared that a corporation choosing social responsibility over maximizing profits was practicing socialism — a "fundamentally subversive doctrine," he called it in 1970. In a free society, Mr. Friedman said, "there is one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud."

Cracks in adherence to that philosophy are showing. Last year, the Business Roundtable, a group of the largest U.S. corporations, surprised many business leaders when members committed to broadening the beneficiaries of their firms' work from simply shareholders to customers, employees, suppliers and communities.

Mr. Serafeim's work at Harvard could ease those changes by putting number values on them.

"What we're doing is empowering capitalism to really have free and fair markets," Mr. Serafeim said. "Otherwise, it's kind of a crony version of it."