A narrow view about how to create profit has created a disconnect between businesses and society. 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 might be useful for teachers and students looking at the limitations of corporate social responsibility as an approach to the conduct of business activity. (click here to listen)
“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.
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