“Capitalism is under siege…diminished trust in business is causing business leaders to set policies that sap economic growth…business is caught in a vicious circle…the purpose of the corporation must be redefined around Creating Shared Value” – Harvard Business Review
What is Shared Value?
Shared value refers to the policies and operating practices that enhance the competitiveness of a company, while simultaneously advancing the economic and social conditions of the community in which the company operates. The creation of Shared Value focuses on the identification and expansion of connections between societal and economic progress. Its premise is that economic and societal progress must be addressed using value principles, and that value is defined as benefits relative to costs, not just benefits alone.
The business and social sector (government and NGOs) have tended not to think in terms of the creation of value, instead being focused on profit alone (business) and benefits achieved (NGOs/Governments). In the new paradigm advocated here, there will be increased cooperation between business, NGOs and government.
The Traditional Approach
Over the years companies have optimised short term financial performance while ignoring broader influences that determine their longer term success. These can include the well being of their customers, the depletion of natural resources, the viability of key suppliers and the economic success of the communities in which they produce and sell.
Governments and civil society have often exacerbated the problem by attempting to address social problems at the expense of business. As a result, the presumed trade-off between economic efficiency and social progress has been institutionalised. Many companies are aware of the problem, but are locked in a CSR mindset, with social issues at the periphery and not the core.
The Solution lies in the principle of shared value, namely the creation of economic value in a way that also creates value for society, by addressing needs and challenges. Business must reconnect company success with social progress, as Shared Value is not social responsibility or even sustainability. Rather, it is the best way to achieve economic success.
Shared Value requires leadership that possesses a deep understanding of society’s needs, a greater understanding of the true bases of company productivity and the ability to collaborate across non-profit/profit boundaries. The purpose of the corporation must redefined to address the creation of shared value, not just profit per se, as the concept of Shared Value recognises that societal needs define markets.
Shared Value is not about personal values, nor is it about redistribution. Rather, it is about the expansion of the total pool of economic and social value. Shared Value focuses on improving production techniques and strengthening the local cluster of supporting suppliers and other institutions, in order to increase local business efficiency, yields, product quality and sustainability These all lead to bigger revenue and profits that benefit both local businesses and the companies that buy from them. For example, studies of cocoa farmers have suggested Fair Trade can improve profits for farmers by 10-20%, whereas SV initiatives can increase it by over 300%.
Creating Societal Value
A business needs a successful community, not only to create demand for its products but also to provide critical public assets and a supportive environment. At the same time, a community needs successful businesses to provide jobs and wealth creation opportunities for its citizens. There are three ways in which societal value can be created in order to develop economic value.
re-conception of products and markets – the starting point for SV is to identify all the societal needs, benefits and harms that could be embodied in a company’s products;
redefinition of productivity in the value chain – striking improvements in energy utilisation through better technology all create SV; heightened environmental awareness and advances in technology mean new approaches in areas such as use of water, raw materials and packaging; increasingly companies realise that suppliers must be nurtured by increasing access to inputs, sharing technology and providing financing – when companies buy local heir suppliers get stronger, increase their profits and hire more people on better wages – that’s shared value; distribution of financial services, eg Microfinance; employee productivity is improved by better pay, wellness, training and career advancement as well as reducing days lost through illness; local communities are increasingly important due to rising costs of carbon emissions and energy and and also the costs of a highly dispersed production system.
building supportive industry clusters at the company’s locations – the success of every company is affected by local communities and infrastructure. Without a supporting cluster productivity suffers – deficiencies in a cluster create internal costs for the company. As companies become disconnected from communities so their influence declines and costs grow. Initiatives that address cluster weaknesses that constrain companies will be much more effective than community focused CSR programmes which have limited impact because they take on too many areas without focusing on value.
Corporate Social Responsibility
- Values – doing good;
- Citizenship, philanthropy, sustainability;
- Discretionary or in response to external pressure;
- Separate from profit maximisation;
- Agenda is determined by external reporting and personal preferences;
- Impact limited by corporate footprint and CSR budget.
Example: Fair Trade Processing
Creation of Shared Value
- Values – economic and societal benefits relative to cost;
- Joint company and community value creation;
- Integral to competing;
- Integral to profit maximisation;
- Agenda is company specific and internally generated;
- Realigns the entire company budget
Example: Transforming procurement to increase quality and yield.
About the Author
Mark Jenkins advises clients on Corporate Social Responsibility (CSR), security and risk management issues affecting the viability of on and off-shore energy, mining and infrastructure sector projects in Europe, the Middle East and Africa. Mark’s experience has been focussed on creating reliable community support for projects through the development of a Social License to Operate (SLO) based on effective CSR initiatives. The success of these initiatives has been based on a thorough understanding of local environmental, commercial, and cultural dynamics, especially Islamic ones.
Prospect Law is a multi-disciplinary practice with specialist expertise in the energy and environmental sectors with particular experience in the low carbon energy sector. The firm is made up of lawyers, engineers, surveyors and finance experts.
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This article is not intended to constitute legal or other professional advice and it should not be relied on in any way.
For more information or assistance with a particular query, please in the first instance contact Adam Mikula on 020 7947 5354 or by email on [email protected].
Click on the links below to read Mark’s previous articles on Shared Value