CREATING SHARED VALUE – The Evolution of Capitalism and Corporate Behaviour

Shamal Dass – Director, JBWere Philanthropic ServicesJuly 2014

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JBWERE PHILANTHROPIC SERVICES

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SHARED VALUE

This presentation will cover:

• an introduction to Shared Value and the context of its emergence;

• the fundamental tenets of Shared Value including international and local examples;

• how Shared Value differs from Corporate Social Responsibility; and

• the implications for Governments and Civil Society

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SHARED VALUE - AN INTRODUCTION

Let us cast our minds back to 2008…

The western capitalist system was under siege

To many in society, it had become a vehicle for the 1% to get wealthier

Companies (especially banking and finance companies) behaved like ‘sociopaths’

A clear trust deficit had emerged → harsher regulation → reduced competitiveness → reduced economic growth → poor social outcomes.

This system evolved based on a neo-classical approach, a world of ‘externalities’ where Businesses maximise profits whilst Governments/NGOs solve social problems

The key cause of the problem: a narrow and outdated view of value creation. This explains:

– Environmental degradation

– Predatory lending

– Off-shoring jobs based on cost only

A new paradigm was/is needed where companies needed to move beyond trade-offs

Businesses acting as Businesses (not charitable donors) rethinking ‘value’ will deliver the outcomes in a way that only Businesses can

SHARED VALUE - AN INTRODUCTION

‘Policies and practices that enhance the competitiveness of a company while simultaneously advancing the economic and social conditions in the

communities in which it operates’

• Companies create shared value when they generate measurable business returns by addressing social and environmental challenges

Shared Value IS: - Creating economic value by creating

societal value- Using capitalism to address social

problems

Shared Value IS NOT: - Sharing the value already created - Personal values - Balancing stakeholder interests

• The Shared Value approach was first articulated in full as a feature in the 2011 Harvard Business Review article “Creating Shared Value” by Professor Michael Porter and Mark Kramer.

• The follow up article, “Innovating for Shared Value”, by Marc Pfitzer in the Sept 2013 Harvard Business Review outlined the five mutually reinforcing ingredients that companies use to deliver vast social benefits and business value.

FUNDAMENTAL TENETS OFSHARED VALUE

• By explicitly connecting corporate success with societal improvement, companies are able to serve new needs, gain efficiency, create differentiation and expand markets.

• Companies can create shared value in three ways:

1. Reconceiving Products and Markets – Identify all the social needs, benefits and harms embodied in their products– Define markets in terms of unmet needs or social ills– Develop products that will change these conditions – Innovation and growth is typically fuelled by a renewed sense of purpose– Examples:

– Intel

– IBM

– GE

FUNDAMENTAL TENETS OFSHARED VALUE

2. Reconfiguring Value Chains – A congruence between societal progress and productivity– Improve performance through considered management of natural

resources, procurement, distribution, employees and location– Examples

– Wal-Mart:

– Marks and Spencer’s

– Coca Cola

– Nestle

– NAB

– Hindustan Unilever

– Johnson & Johnson

FUNDAMENTAL TENETS OFSHARED VALUE

3. Enabling local cluster development – No man (or company) is an island– Productivity and innovation are strongly influenced by ‘clusters’– ‘Geographic concentrations of firms, related businesses, suppliers, service

providers and logistical infrastructure in a particular field’ – This includes institutions, both private (e.g. trade associations and

standards organisations) and public (e.g. universities, schools) AND broader public assets (e.g. quality standards, completion laws)

– By investing in clusters in key locations, firms amplify the connections between their success and their communities’ success.

– Examples:

– Nestle

– Yara

– NC Research Triangle

CORPORATE SOCIAL RESPONSIBILITY vsSHARED VALUE

CSR- Value: doing good

- Focus: citizenship, philanthropy, sustainability

- Discretionary, often reactionary

- Separate to profit maximisation

- Agenda: determined by external reporting and personal preferences

- Impact: limited by budget and corporate footprint

Shared Value- Value: economic and social benefit

relative to cost

- Focus: company AND community value creation

- Integral to competitiveness

- Integral to profit maximisation

- Agenda: company specific strategic and internally generated

- Impact: realignment of entire company budget

• CSR programs focus mostly on reputation md therefore have low levels of connection to the business which puts the at risk over time. In contrast, Shared Value is integral to profitability and competitiveness, and as such, over time, should supersede CSR.

SHARED VALUE – IMPLICATIONS FOR GOVERNMENT • Need to start rethinking value terms – focus on results achieved rather than funds and effort spent

• Again grounded in ‘trade-off’ thinking, where some ‘social’ aims must be pursued at any cost

• Environmental regulation is a great example: command-control-punish or set standards, measure performance, support technology and innovation and improve competitiveness?

• Quality regulation (through a shared value lens) sets goals and stimulates innovation. The characteristics of such regulation are:

1. They set clear measurable goals (e.g. energy, health, safety).

2. They set performance standards but DO NOT prescribe the methods to achieve them

3. The define phase-in periods to meet standards so companies have time to adjust and invest

4. They create universal measurement and performance reporting systems with the government investing in the infrastructure for collecting and collating reliable benchmark data

5. They require efficient and timely reporting which can be audited as necessary, rather than imposing a detailed and expensive compliance process

6. They limit the pursuit of exploitative, unfair or deceptive practices which benefit the business at the expense of society

• Poor regulation that mandates approaches and has extensive compliance requirements will stunt innovation and meet strong resistance from businesses – which ultimately undermines the creation of shared value.

SHARED VALUE – IMPLICATIONS FOR CIVIL SOCIETY (NGOs) • Traditional NGOs that get funding from corporations need to think about what a move from CSR to

shared value means for them – what is your alignment with the core business strategy?

• Example: NAB – ‘Wealth of Opportunity’ has three anchor points:

1. Healthy relationship with money

2. Building prosperous communities

3. Future focused Australia

• Only by understanding these in detail and what it means to the NAB strategy, will you be able to position yourself to partner with NAB to access resources to deliver outcomes and create value

• The NGO has also started to evolve – new NGOs are appearing with productivity and value creation as focal areas to maximise impact. These are ‘Social Enterprises’ that are run commercially in order to achieve maximum social outcomes in a long term sustainable manner.

• These enterprises understand tat it is when all three parties come together – that is, NGOs, governments and business effectively collaborate – shared value be created.

• It is these sorts of partnerships that are attracting the major philanthropists around the world – the best example being the Bill & Melinda Gates Foundation.

SHARED VALUE – CONCLUDING COMMENTS• NOT ALL PROFIT IS EQUAL!

• Profits involving a social purpose represent a higher form of capitalism – one that creates a positive cycle of prosperity

• Harnessing to true capabilities and resources of businesses will be more effective and enduring than many of their half-hearted CSR efforts to date. Remember in 2008 most US banks were ‘socially responsible’ in the CSR paradigm because of their charitable donations, at the same time they were promoting financing vehicles aimed at taking advantaged of the financially vulnerable

• Shared value is integral to corporate strategy – it will change processes and ‘best practice, it should be applied to every major company decision

• It will lead to a more accountable business which will require concrete and tailored metrics

• The key to the potential for Shared Value is that it harnesses the ‘invisible hand’ of Adam Smith top deliver wider outcomes – societal value is not created by charity or philanthropy but rather by self-interested behavior!

• It is our universities and business schools that must create the type of leaders who can deliver on the promise of shared value – leaders who understand social and environmental issues along with the entrepreneurial and innovative spirit to implement shared value models.

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