Editor’s note on our Business & Sustainability series:
Initiatives like the Sustainability Accounting Standards Board (SASB) have become more popular as business recognizes the importance of sustainability. But what is the business case for incorporating sustainable practices in business procedures? Do companies see real returns to taking action on the sustainability front? Further, how can consumers recognize when a company has truly incorporated sustainability into their core practices or is simply “greenwashing?” Developing a sustainable future cannot be done without the help of business but these questions will need to be answered before businesses can really engage with sustainability.
Collective impact. Social responsibility. Corporate philanthropy. One does not have to be the director of strategy at a multinational corporation to have heard these buzzwords. Interestingly, the more these words are used and the greater effort companies put into communicating their involvement with social good, the more skeptical consumers become. As companies increase their effort to communicate how they are social responsible, consumers increasingly see marketing schemes.
A couple of years ago, a new term appeared in this discussion of the role of private businesses in the public sector: shared value. In order to understand what shared value is, it is useful to identify what it is not: it is not corporate social responsibility, sustainability strategy, or corporate philanthropy. Shared value is not part of a business strategy or concerned with what corporations do for social good at the margin. Shared value is a different approach to doing business entirely.
Shared value, first coined by Michael E. Porter and Mark R. Kramer, aims to address social needs profitably, and create transformative, rather than incremental change. Businesses need to shift their focus: instead of viewing promoting social good and profit maximization as opposing forces, both should be seen as mutually enhancing. Further, the idea of shared value prompts businesses to challenge the view that civil society and the private sector are natural enemies. To achieve that aim, the Shared Value Report outlines three basic tenets of social value creation:
- Reconceiving Products and Markets
Firms can identify societal needs their products can solve and harms their products are contributing to. This can entail modifying a product to make it more affordable and accessible to undeserved communities, which can create new opportunities for revenue.
- Redefining Productivity in the Market Chain
This entails identifying social or environmental solutions that increase productivity. For example by sourcing goods for stores locally and providing training to local workers, firms can boost local income, reduce carbon emissions, and cut transportation costs.
- Enabling Local Cluster Development
The success of businesses is dependent on auxiliary institutions and in order to promote innovation and competitiveness, businesses must start to engage with stakeholders, which may include local governments, NGOs, donors, and suppliers.
The report cites examples in Chile, where businesses have started to adopt shared value creation strategies to combat the challenges the country faces. Micro, small, and medium enterprises (MSMEs) in Chile suffer from lack of competitiveness, which is problematic since MSMEs account for 85% of the country’s total employment and are more likely to employ disadvantaged groups. Many MSMEs lack access to financial services and traditional sources of credit. BCI, a firm that provided financial services to entrepreneurs with little to no business history, was founded increase MSMEs’ access to credit. Its system relies on identifying alternate forms of credit and risk assessment. With this business model BCI has provided access to financial services to those who normally would not have been able to obtain them.
An important source of income inequality that persists in Chile is the labor force’s skills gap. A significant portion of Chile’s work force does not have enough education to enter a labor market booming due to recent economic prosperity. Over 40% of the labor force between ages 15 and 65 are deemed “functionally illiterate.” Firms such as the Escondida mine, instead of waiting for reforms in the education system, proactively created training programs to supply workers with needed skills. In 2002 Escondida founded the Escondida Technical College, whose enrollment has grown to include the local population and other mining company employees. This venture has not only benefitted the labor force by providing a source of education, but also the company itself by producing skilled workers to meet their needs.
Examples reach beyond finance and education however. 25.1% of the adult population in Chile suffer from obesity. Firms are realizing that increasing obesity rates are detrimental to their businesses: increased health problems put their consumers at risk and decrease worker productivity. To combat obesity, Tresmontes Lucchetti, a Chilean food company, partnered with the Institute of Nutrition and Food Technology to create Healthy Space, a program that works on nutrition education with children and parents, to reduce childhood obesity. The program reduced the prevalence of childhood obesity by 50%.
Despite these examples, shared value has been criticized as another buzzword, another retelling of an “old story of economic rationality.” Because there is no standard paradigm for what it means to pursue a shared value strategy, it is difficult to verify what actions are evidence for the efficacy of shared value creation. Moreover, it can be hard to discern the difference between shared value creation and the basic principles of economics. After all, the premise is the same: firms work to maximize profits. The concept of shared value creation just calls for a longer-term approach when measuring profits. While shared value dictates that businesses seek to solve societal problems, because doing so increases profits, it fails to answer the question of what firms should do when social wellbeing and profit maximization are at odds.
Perhaps the most important thing shared value has contributed to the field of management is proposing a reconciliatory attitude between the private and public sector by pointing out that interests of both are aligned. Firms such as Nestlé have created contests in which prizes are awarded to programs or social enterprises that strive to improve conditions in the area of nutrition, water, or rural development. While this may not be an example of a firm internalizing the lessons of shared value creation in their business strategy, it certainly shows that firms consider the idea of shared value creation of importance. So while shared value creation has made waves, with firms providing financial assistance to commendable social change efforts, are these actions just another marketing strategy or something more?
Featured image courtesy of Wikimedia Commons.