A narrow view about how to create profit has created a disconnect between businesses and society and this needs to change according to Harvard Business School Professor Michael Porter. In a revealing interview with Peter Day as part of the In Business series on Radio 4 last month. It is a superb programme and one that ought to be hugely useful for teachers and students looking at the limitations of corporate social responsibility as an approach to the conduct of business activity.
“A growing number of companies known for their hard-nosed approach to business—such as GE, Google, IBM, Intel, Johnson & Johnson, Nestlé, Unilever, and Wal-Mart—have already embarked on important efforts to create shared value by reconceiving the intersection between society and corporate performance.”
Creating shared value
Shared value is creating economic value by creating social value
How is the business community thinking about how to create economic and shareholder value? How can companies take their engagement with the world further?
According to Porter there is now a widespread view that driving profit has been increasingly at the expense of meeting social needs. The legitimacy of business as an institution is being challenged and the global financial crisis has intensified the belief that business values and strategy need to evolve - perhaps s nee form of capitalism less concerned with narrow conceptions of shareholder value and more in tune with “shared value”.
In recent times, creating value has tended to focus on short termist thinking - namely the urge to engage in out-sourcing and off-shoring as global supply / logistics chains are established. Businesses have been long on driving huge sales and output volumes, downsize and de-layering inefficient management and generally responding to pressure from financial markets to delver immediate results through cost-cutting, dynamic pricing and increasingly tough marketing that can often persuade people to buy things that are not good for them.
Corporate social responsibility or CSR has become a buzzword phrase - showing greater concerns for supplier base in their region, for employees, giving to charity and serving poorer communities. But according to Porter, CSR is a distraction ...... a way of ticking the relevant boxes that check the social issues of business impact .... A logical and intermediate step to better more ethical business practices but not a solution to genuinely reconnecting the values of business with the values of the community at large.
What is the purpose of a business? To scale and grow a business and make profit and generate shared value.
Porter argues that we need to widen the perspective about how to create value and profit and look towards shared value rather than shareholder value
This involves a recalibration and a rethinking about what a product really is and what needs a business is meeting, for example in the food industry, products that are nutritious and healthy rather than focus on volume, lower unit costs and higher profits. He notes to increasing prominence of genuinely social entrepreneurs with revenue generating business models. This rethinking will be the biggest driver of innovation and this will involve a move away from the comfortable CSR / ethical business mindset
Consumers looking at the world differently and expressing their preferences in strong ways - this is already having a direct effect on supermarket behaviour.
So too are the new generation of business leaders and some bell cows - in the interview Porter mentions Nestle which has incorporated creating shared value into its mission statement
Shared value and the capital markets
Will stock markets evolve to reflect a shift towards shared value as a way of valuing a business? In the medium term stock prices do tend to reconnect with the economic value of a company and the strength of growth trajectories.
Porter argues that changes to business taxation might accelerate the progress towards shared value as a business strategy. Capital gains tax might be lowered for the gains from long term investment e.g. Only allow tax breaks for 3-5 minimum investment projects
You can hear the interview using this link
Harvard Business Review (HBR) The Big Idea: Creating Shared Value
Jim’s Notes on the Programme are also provided below:
Creating Shared Value
A redefinition of the way capitalism works
A move away from CSR
Widespread view on society that business is profiting at the expense of social needs (communities and people)
Corporate profits are growing after the latest recession, but society isn’t feeling better-off
Capitalist system is being viewed with great suspicion
Business & society need each other - but is the relationship zero-sum
Business is about creating value - which is measured in creating sustained profitability
Businesses have become too fixated on short-term profit maximisation
Great pressure on companies to achieve immediate results - pressure to create demand; encourage customers to buy things they may not need
This short-termism has created a tension between business & society
Business needs to rethink about how it creates profit
Business needs to rethink what the product is - and how it contributes to society’s needs
E.g. advanced economy products don’t fit well in developing economies because they don’t fit the needs of low-income consumers there
Prahalad - Fortune at the Bottom of the Pyramid
Great opportunity for innovation and economic growth - if companies can change their mindset
The CSR mindset:
A truce between business and society
Business needs to be about more than CSR
CSR has been a logical but intermediate step - it does not solve the fundamental problem
The whole business itself needs to be reexamined
The role of regulation:
Can hinder or hurt more than it helps
Regulations can cost more than the benefit gained
Setting businesses higher standards to achieve (i.e. giving them the freedom to decide how they meet standards) can encourage innovation
What is changing:
Consumers are changing the way they think about the world (e.g. increasingly want Fairtrade or ethically-sourced products & services)
Businesses increasingly holding their suppliers accountable
Young business leaders increasingly going into social enterprises, looking for a sense of purpose
How do you measure shared value?
Economic value is still measured by profit
Social value - measuring the social impact of business activity
Businesses are doing lots of measuring of social impacts (e.g. CSR reports) - but are these being reported as part of the profit and loss account?
The financial markets (investors) are still too focused on short-term
There is an increasing blurring or “for profit” and “not-for-profit”; business models which are a hydrid of trying to earn a return which also provides a societal benefit
Business is increasingly looking for a sense of purpose
Fully worked A Grade answers to recent Edexcel GCSE Business Studies Unit 3 exam papers with detailed examiner commentary on how good technique scores top marks