Shared Value: Bringing Business and Society Back Together

It began as a bold idea to "redefine capitalism and the role of the corporation in society." Now, according to one of its originators, shared value is turning into a movement

(3BL Media/Justmeans) - "The capitalist system is under siege," wrote Michael Porter, a competitive strategy expert and Harvard Business School professor, and Mark Kramer, co-founder and managing director of non-profit strategy consulting firm FSG, in a January 2011 article published in Harvard Business Review. "In recent years business increasingly has been viewed as a major cause of social, environmental, and economic problems. Companies are widely perceived to be prospering at the expense of the broader community."{1} The article introduced their concept of shared value, a new discipline of management that they broadly define as "policies and operating practices that enhance the competitiveness of a company while simultaneously advancing the economic and social conditions in the communities in which it operates."

FROM CSR TO CSV: AN EVOLUTION IN STRATEGY

If the definition of shared value sounds familiar, it’s because the idea of the private sector “advancing the economic and social conditions” is also a basic feature of such contemporary management and business ethics concepts as ESG (environmental, social and governance) and CSR (corporate social responsibility). But according to its architects, shared value—officialy known as “creating shared value” (CSV)—is similar, but different.

In his keynote speech at last month’s Shared Value Initiative Summit in New York, which gathered nearly 400 academics, business leaders and investors, Porter argued that shared value is the latest evolution of the social role of business: “The idea of shared value depends on a long history of evolution in thinking about the role of business in society. We couldn't have gotten here with shared value without going through that history.” In Porter's view, that history started with philanthropy, then corporate compliance with community standards, then finally sustainability and corporate social responsibility. He framed these various modes as fundamental preparation for what he described as the next “tectonic shift”: shared value. Without these other approaches of engagement, he said, business “would not have the trust of society to take this next step.”

“This shift from corporate social responsibility to shared value represents a discontinuity in thinking,” Porter said. “Shared value is not about balancing interests of stakeholders, which is the fundamental idea we've been working with historically: that you had to balance interests, that there were trade-offs between economic success and social outcomes.” Instead of making trade-offs, shared value aligns the traditional corporate profit motive with social interests. The main challenge, Porter said, is in identifying or creating that shared interest, "where the very thing that we do addresses a societal need that actually maximizes the economic opportunity of the business.

One of the major concepts in shared value, according to Porter, is recognizng that resources to solve society’s big problems are “heavily weighted in the private sector.” While he acknowledges that NGOs and government will “play a profound role” in enacting positive social change, “the opportunity to actually engage the private sector in these societal issues is really the opportunity to move the world. This is where most of the resources are.”

(For a video recap of the Shared Value Initiative, visit: http://sharedvalue.org/video-recap-2014-shared-value-leadership-summit)

THE ORIGINS OF SHARED VALUE

The notion that the private sector possesses a greater ability to effect positive change than government or non-profits was something that Porter and Kramer argued in a 2006 Harvard Business Review article entitled “Strategy & Society: The Link between Competitive Advantage and Corporate Social Responsibility,” in which they initially explored the idea of shared value: "When a well-run business applies its vast resources, expertise, and management talent to problems that it understands and in which it has a stake, it can have a greater impact on social good than any other institution or philanthropic organization."{2}

It was in this article that the phrase "shared value" was first mentioned, within their definition of "strategic CSR":

"Strategic CSR moves beyond good corporate citizenship and mitigating harmful value chain impacts to mount a small number of initiatives whose social and business benefits are large and distinctive. Strategic CSR involves both inside-out and outside-in dimensions working in tandem. It is here that the opportunities for shared value truly lie...Strategic CSR also unlocks shared value by investing in social aspects of context that strengthen company competitiveness. A symbiotic relationship develops: The success of a the company and the success of the community become mutually reinforcing. Typically, the more closely tied a social issue is to the company's business, the greater the opportunity to leverage the firm's resources and capabilities, and benefit society."{3}

To provide an example of shared value, Porter and Kramer pointed to Microsoft's $50 million, five-year investment initiative that addressed several related problems: the shortage of IT workers which constrained the company's growth, the challenge of community colleges in standardizing IT curricula, outdated classroom technology and lack of professional development programs to keep faculty up to date. The initiative included Microsoft employees who volunteered their time, visiting colleges to determine their exact needs while the company assisted with the development of curricula and created faculty development institutes.

WHEN THE GOING GETS TOUGH, THE TOUGH GET GOING

The timing Porter and Kramer’s “Creating Shared Value” article was not all that auspicious: Nine months after it was published in Harvard Business Review in January 2011, Occupy Wall Street took New York by storm. The grassroots movement led the news headlines, advancing the issues of income inequality, wealth distribution and corporate malfeasance with the slogan, "We are the 99%." Anti-capitalism was the zeitgeist. Fueled by global public outrage with corporate greed that was sharpened by the 2008 financial crisis, the OWS movement erupted in cities around the world.

And while angry protesters took to the streets, a host of companies and business executives took major hits. Deloitte was sued for $7.6 billion for failing to detect fraud. A former Citigroup vice president was arrested for embezzling $19 million. Bank of America settled a lending discrimination suit for $335 million.{4} It was against this backdrop of intense anti-corporate popular sentiment that Porter and Kramer launched the Shared Value Initiative at the Clinton Global Initiative (CGI) annual meeting in New York in September 2012, a year after Occupy Wall Street took over Zucotti Park in downtown Manhattan.

But considering the corporate world’s damaged reputation in recent years, perhaps the central premise of shared value arrived at the perfect time. Since the private sector isn’t going anywhere, it’s far more productive to work with the vast majority of companies than tear them down. For though the Occupy movement finds fault with corporate greed, there are countless companies on the other side of the equation—engaging in fair trade, advancing worker’s rights, caring about the environment, championing transparency, helping to solve societal problems. Unfortunately, corrupt executives make far better headlines than companies doing good. Porter recognizes the challenges of moving the concept of shared value into the mainstream. In his keynote address, he said, "Is everybody nervous about it? Yes. Are governments a little nervous? Oh yes. 'We're not quite sure about these private sector folks and why they're doing this and what their real motives are'…the citizens are not that sure."

SIZING UP THE SHARED VALUE CHALLENGE

Porter noted the importance for the private sector in building trust with both the government and the public. That's a tall order. According to Gallup's 2013 annual "Mood of the Nation" survey, "Americans continue to be worried about the effects of big companies," with over 60% expressing dissatisfaction with "the size and power or influence of major corporations."{5} A 2013 survey by public relations agency Edelman found that just 15 percent of American consumers trust the words spoken by a corporate executive.{6} Echoing the tenets of shared value, Edleman's president and CEO Richard Edelman wrote in the report's executive summary, "Business must embrace a new mantra: move beyond earning the License to Operate—the minimum required standard—toward earning a License to Lead—in which business serves the needs of shareholders and broader stakeholders by being profitable and acting as a positive force in society."

But corporate distrust isn't the only challenge. One of the roadblocks to popularizing shared value is the simple fact that long-held views are hard to change. Porter asserts that many businesses still believe that it's profitable to pollute, "when what we've learned over the last 20 years is actually that it's profitable for businesses not to pollute." Another obstacle on the path of shared value, he says, is that "most companies are still very reluctant to talk about profit [because]…profit is seen as taking away from society, and somehow if we make a profit, that's somehow illegitimate. What we know from shared value thinking is that actually profit is what enables us to solve the problems of society. Because if we can make a profit, we can create a business model…it enables us to scale to serve millions and billions of people."

He also admits that shared value proponents are not necessary comfortable during this period of shifting ideologies. "All of you in this room...are in the vanguard of that shift. In this process, we're feeling uneasy, we're feeling a little awkward. And not everybody agrees. And we have critics who don't trust us."{6}

DIGGING FOR OPPORTUNITIES: EXTRACTIVES

Porter singled out one industry that could benefit greatly from a shared value solution: extractives. Noting that "the next major body of work that FSG will release is on shared value in the extractive sector," Porter described the extractive industry as "an area with enormous resources…5% of global GDP…taking place in most cases in very poor countries in very rural areas where there's every possible societal problem and need.”

“Extractives is a very striking case of shared value opportunity but not shared value history," Porter said, "where there's been massive strife between the industry and the community, despite the fact that most extractive companies have been spending hundreds of millions of dollars per year on every single kind of community engagement you can imagine. What we see in extractives in terms of shared value, is the opportunity to change the nature of the relationship…that will allow for enormous benefits not only for the companies but also for the communities in which they operate.”{7}

In 2012, a Gallup poll on the image of business and industry sectors found that just 22% of Americans have a positive image of the oil and gas industry—the very bottom of the list.{8} Considering that the extractive industries are Public Enemy No. 1, FSG’s choice to show how shared value can turn things around in these fields is a bold one. But if it works, the tectonic shift will have been made: If shared value gets a foothold in these businesses, then it should work in any industry.

THE SHARED VALUE INITIATIVE SUMMIT: CHANGING MINDS...AND MISSIONS

Extractives was the theme at one of the summit's breakout workshops. Other workshops covered the health industry, financial services and education. The two-day summit featured academics like Porter, as well as executives from some of the world's biggest companies across a multitude of sectors. Jin-Yong Cai, EVP and CEO of the International Finance Corporation, was on hand to discuss the future of public and private shared value investment. Brian Smith, President of Coca-Cola's Latin America Group, discussed how his company successfully scaled shared value from a country to a regional level. Stephen Kehoe, Head of Global Financial Inclusion at Visa, and Stanley Litow, President of IBM, talked about the impacts of shared value on brand value, corporate reputation and consumer loyalty—and how firms are measuring the connection between shared value and brand value.

Even a cursory look at the summit's attendees reveals that shared value has made significant inroads with some of the most respected and successful companies and brands. One of those inroads has been an impact on corporate mission statements: A compelling aspect of the shared value concept is the changing view of a company's own view of its identity. "So many of us in business have tended to historically define ourselves by what we do in the sense of what our product is," Porter said. "Somebody asks us what we do, and we say, 'We're a food company.' Or at IBM: We make computers and software. At Pearson, we publish textbooks...But what the shared value idea is starting to do—and it's starting to accelerate—is to get companies to question what they really do, and to move from a product-based definition of the company to a definition that reflects the social needs and the social purpose that the company is actually meeting."

"There's a fascinating change of mission statement going on in business," Porter says. "Many companies are changing their mission statements in this way: To define the mission in terms of what their capabilities and what they do allow  to do in society that's valuable, rather than being locked in that more traditional mode of competition and how they competed historically. This is an exciting and powerful shift that we see going on."

From changing minds to changing mission statements, shared value is making footholds in a variety of ways. The next big frontier, Porter says, is the investment community: Will significant investments in the market be made based on the principles of shared value? It remains to be seen. But based on the success of the summit—and the participation of big investors like IFC, Heirs Holdings and the Abraaj Group as panelists—signs look good. "I've never been more optimistic," Porter said, "which is nice because for the last couple of decades it's been easy to be pessimistic." Now that's a sentiment worth sharing.

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NOTES

1. Michael E. Porter and Mark R. Kramer. "Creating Shared Value." Harvard Business Review. January 2011. http://hbr.org/2011/01/the-big-idea-creating-shared-value

2. Michael E. Porter and Mark R. Kramer. "Strategy and Society: The Link Between Competitive Advantage and Corporate Social Responsibility." Harvard Business Review, p. 13. http://hbr.org/2006/12/strategy-and-society-the-link-between-competitive-advantage-and-corporate-social-responsibility/ar/1

3. Ibid., p. 10.

4. For more corporate misdeeds from 2011, see my article, "Top 10 Scandals, Arrests, Lawsuits and Settlements that Rocked the Financial World in 2011." Justmeans.com. December 23, 2011. http://www.justmeans.com/blogs/top-10-scandals-arrests-lawsuits-and-settlements-that-rocked-the-financial-world-in-2011

5. Gallup. Americans Similarly Dissatisfied With Corporations, Gov't. Mood of the Nation Survey. January 17, 2013. http://www.gallup.com/poll/159875/americans-similarly-dissatisfied-corporations-gov.aspx

6. See Thomas Beschorner's critique of shared value in Business Ethics Journal Review. 1(17): 106–112. http://doi.org/10.12747/bejr2013.01.17

7. The ongoing legal battle between energy giant Chevron and residents of Nueva Loja, Ecuador, is one of the most publicized cases. See http://en.wikipedia.org/wiki/Lago_Agrio_oil_field.

8. Gallup. "Americans Rate Computer Industry Best, Oil and Gas Worst." August 16, 2012. http://www.gallup.com/poll/156713/Americans-Rate-Computer-Industry-Best-Oil-Gas-Worst.aspx