This post was originally published in the Harvard Business Review.
The capitalist system is under siege. 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.
Even worse, the more business has begun to embrace corporate responsibility, the more it has been blamed for society's failures. The legitimacy of business has fallen to levels not seen in recent history. This diminished trust in business leads political leaders to set policies that undermine competitiveness and sap economic growth. Business is caught in a vicious circle.
A big part of the problem lies with companies themselves, which remain trapped in an outdated approach to value creation that has emerged over the past few decades. They continue to view value creation narrowly, optimizing short-term financial performance in a bubble while missing the most important customer needs and ignoring the broader influences that determine their longer-term success. How else could companies overlook the well-being of their customers, the depletion of natural resources vital to their businesses, the viability of key suppliers, or the economic distress of the communities in which they produce and sell? How else could companies think that simply shifting activities to locations with ever lower wages was a sustainable "solution" to competitive challenges? Government and civil society have often exacerbated the problem by attempting to address social weaknesses at the expense of business. The presumed trade-offs between economic efficiency and social progress have been institutionalized in decades of policy choices.
Companies must take the lead in bringing business and society back together. The recognition is there among sophisticated business and thought leaders, and promising elements of a new model are emerging. Yet we still lack an overall framework for guiding these efforts, and most companies remain stuck in a "social responsibility" mind-set in which societal issues are at the periphery, not the core.
The solution lies in the principle of shared value, which involves creating economic value in a way that also creates value for society by addressing its needs and challenges. Businesses must reconnect company success with social progress. Shared value is not social responsibility, philanthropy, or even sustainability, but a new way to achieve economic success. It is not on the margin of what companies do but at the center. We believe that it can give rise to the next major transformation of business thinking.
What Is "Shared Value"?
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. Yet our recognition of the transformative power of shared value is still in its genesis. Realizing it will require leaders and managers to develop new skills and knowledge -- such as a far deeper appreciation of societal needs, a greater understanding of the true bases of company productivity, and the ability to collaborate across profit/nonprofit boundaries. And government must learn how to regulate in ways that enable shared value rather than work against it.
Capitalism is an unparalleled vehicle for meeting human needs, improving efficiency, creating jobs, and building wealth. But a narrow conception of capitalism has prevented business from harnessing its full potential to meet society's broader challenges. The opportunities have been there all along but have been overlooked. Businesses acting as businesses, not as charitable donors, are the most powerful force for addressing the pressing issues we face. The moment for a new conception of capitalism is now; society's needs are large and growing, while customers, employees, and a new generation of young people are asking business to step up.
The purpose of the corporation must be redefined as creating shared value, not just profit per se. This will drive the next wave of innovation and productivity growth in the global economy. It will also reshape capitalism and its relationship to society. Perhaps most important of all, learning how to create shared value is our best chance to legitimize business again.
Moving Beyond Trade-Offs
Business and society have been pitted against each other for too long. That is in part because economists have legitimized the idea that to provide societal benefits, companies must temper their economic success. In neoclassical thinking, a requirement for social improvement -- such as safety or hiring the disabled -- imposes a constraint on the corporation. Adding a constraint to a firm that is already maximizing profits, says the theory, will inevitably raise costs and reduce those profits.
A related concept, with the same conclusion, is the notion of externalities. Externalities arise when firms create social costs that they do not have to bear, such as pollution. Thus, society must impose taxes, regulations, and penalties so that firms "internalize" these externalities -- a belief influencing many government policy decisions.
This perspective has also shaped the strategies of firms themselves, which have largely excluded social and environmental considerations from their economic thinking. Firms have taken the broader context in which they do business as a given and resisted regulatory standards as invariably contrary to their interests. Solving social problems has been ceded to governments and to NGOs. Corporate responsibility programs -- a reaction to external pressure -- have emerged largely to improve firms' reputations and are treated as a necessary expense. Anything more is seen by many as an irresponsible use of shareholders' money. Governments, for their part, have often regulated in a way that makes shared value more difficult to achieve. Implicitly, each side has assumed that the other is an obstacle to pursuing its goals and acted accordingly.
Blurring the Profit/Nonprofit Boundary
The concept of shared value, in contrast, recognizes that societal needs, not just conventional economic needs, define markets. It also recognizes that social harms or weaknesses frequently create internal costs for firms -- such as wasted energy or raw materials, costly accidents, and the need for remedial training to compensate for inadequacies in education. And addressing societal harms and constraints does not necessarily raise costs for firms, because they can innovate through using new technologies, operating methods, and management approaches--and as a result, increase their productivity and expand their markets.
Roger Ehrenberg: Another Internet Startup Bubble? Depends Where You're Standing
Great work, but it's still CSR and it's not that new - just an excellent way of capturing some of the latest thinking and practices.
The equitable, socially responsible, enforceable, and fully justifiable solution is to apply taxes ONLY on those investments that hurt our society.
Bonds are rated by their ‘risk level’ for individual investors, but externality risk assessed would be based on the harm that could be done.
A rating of corporations for investment would be done by a regulatory body—- let’s say the EAC (Externality Assessment Commission), which would assess the negative externality impact of all given corporations (and investments therein).
Like bond rating the most important aspects of this process would be unbiased expertise and AVOIDING capture. An example might be categories of corporations for investment; those with high/terrible negative externality cost dumping risks C-, slightly less dangerous to society Bb, and up to corporations that create positive externalities AA.
The capital gains tax rates would be variable—- higher rates for those which cause the most harm (negative externalities) down to ‘almost no tax’ for those that benefit society with positive externalities.
This approach is done today in the area of SRI (the socially responsible investment industry), although the SRI research applies subjective ‘filters’ for environmental damage, weapons, tobacco, etc. instead of a more methodical and objective ‘negative externality cost’ index.
Here’s a brief article on the subject, to deal with this seminal problem of the 21st century.
http://www.opednews.com/Diary/Externality-Assessment-Com-by-Alan-MacDonald-110110-603.html
Tax = Prime rate % + Base Corporate tax + % of unemployed Americans + % of employees NOT employed in America
So if you're a big company that has 25% of your employee base outside US your tax base is 3.25% + 10% + 9.4% + 25% = 47.65%
If you're a big company that has 10% of your employee based outside US the rate would be 15% less.
While I don't consider this a serious solution you get the point -- if you want to influence behaviors you need to include measures which include the welfare of the community. Companies that both improve the umemployment rate and lower the number of outsourced jobs would be rewarded with lower taxes.
Now before someone goes and shows me all the assumptions I've made and how it's unworkable -- realize I'm only making a point. It's just an example of how strongly policies influence decisions.
I think it’s a small minority who view business as a cause of those problems. The majority doesn’t seem to believe this, even those who have been victimized. An example: Obama’s health care reform was criticized as containing death panels which are imaginary. But no one says a whisper about the real ones in private health insurance companies. It seemed Gulf residents were angrier at Washington than BP during the spill.
The bulls of Wall Street have become rabid wolves: predatory capitalism. Corporations sometimes behave psychotically (e.g., consumer abuse). See the documentary, “The Corporation.†Why would any rational enterprise screw its customers?
http://compenetration.wordpress.com/2008/06/26/corporation-legal-personality-with-psychopaths-traits/
But the vast majority seems to have swallowed the kool-aid regarding the sanctity of free markets. “Social†is a dirty word, even without the “–ism†attached to it. If one says anything about the corporation’s social responsibility, they are labeled as an Obama Marxist. Obama derangement syndrome. I am less worried about Marxism in D.C. than the Wall Street oligarchy.
Get real...I mean REALLY get real. Corporations care about one thing and one thing only: the bottom line is the dollar sign. Say that few times until you understand it.
When push comes to shove and corporations perceive their survival as one of applied Darwinism, they`re going to do their best to slaughter their opponents and then buy up what`s left of the corpse (if there`s anything of `value). In some cases (such as mergers), a marriage of convenience is sometimes the best policy. In all of these cases, the good of society and the greater world is nothing more than a touchy-feely advertisement to win the hearts and minds of the consumers.
Throw shareholders (and politicians) into the mix and the whole thing becomes even more ruthless as the bottom line (profit) is pursued relentlessly.
Much as I`d love to see a more humane, decent set of ethics in business, the mechanisms of the market don`t often allow that (I can only think of something like The Body Shop in the UK as an exception, although there may also be a few more).
Maybe if some of these businesses didn`t act in such a rapacious, hard-nosed way, and perhaps if the mavens of finance and business hadn`t screwed the world up, then corporations - and by extension, capitalism - may not have such a poor image.
Also what incentive do businesses that are reaping huge profits right now and hoarding away their wins have for taking and honoring this pledge? From what I can tell, cash is their master.
They start with the well-articulated premise that "[t]he capitalist system is under siege" and explain how "[b]usiness is caught in a vicious circle" because of the inherent problems of the capitalist system, which they have just described.
Yet despite the evidence and their own almost correct reasoning based on it, they come back to their (irrational, in face of the contrary evidence) belief that "[c]apitalism is an unparalleled vehicle for meeting human needs, improving efficiency, creating jobs, and building wealth." It is not the capitalism itself that has failed -- practiced here for long enough to allow any course corrections, if such were possible -- but just its "narrow conception."
Right. If we invent better snow (i.e., shared value), we'll surely build that snowman in hell.
P.S. I see that things shared and sharing in general are in vogue among our elite opinion makers these days. Yesterday, Klaus Schwab pontificated on "new (shared) norms" without being unduly specific as to what they may be, and today we have this proposal of "shared values," one that's equally vague and utopian. Apparently sharing is not as easy as it sounds at first.
You articulated the thing better than I ever could...
You've earned a 'Fan' and a 'Fav'.
Without the article providing examples, it's a bit hard to know how to respond to it fairly. I'm suspicious of "shared value" because Porter and Kramer have described it only in the vaguest of terms If "capitalism is an unparalleled vehicle for meeting human needs", then the vehicle has a flat tire. Who is to say there won't be more flat tires down the road. Without increased regulation, flat tires are almost a certainty. All business is cyclical. A corporation that could one day provide a "shared value" may the next day not be able to meet their self-defined social obligations. Who will be there to pick up the slack? It's a rather piecemeal approach that is desperately in need of coordination and planning on a grander scale that corporations working individually can provide. Areas such as infrastructure construction and renovation, and health care are certainly not areas that individual corporations can tackle. Government still has its critical uses.
Corporate monopolies, used by Wall Street/City of London, have been creating a empire where the aim is to put a McDonalds in every country or a Wal Mart.
Based upon a 'franchise model', the Federal Reserve can create unlimited amounts of money, from thin air, by their so-called 'investment banks', underwriting the IPO and bonds of their companies, so they can literally collect a global 'rent' from countries who just use a brand name.
So when a country's population refuses to close their small business so they can trade it for a 'brand name franchise', then suddenly a friction is caused between the local government and the U.S. government.
We don't want to expire our patents, so new innovation can be released, therefore we try to force a collection of 'rent' on intellectual property; forcing third-world countries to never develop.
Combine that with the whole rigged 'bond market' and their fraudulent rating agencies, you have a system where labor remains cheap in foreign countries, thus making it attractive for our very pension/retirement funds to direct the companies, they own in shares, to move jobs overseas.
The whole system must be reconstructed if 'society and business' can be brought back together.
Until then, society will continue to lose confidence in business, especiallly since justice has went-out-the-window too.