The meaning of the term Sustainability and Business is undergoing a transition, and companies and business leaders are beginning to change the way they are approaching their responsibilities to business and society. The MIT Sloan Management Review explored recent trends and issues transforming the business environment, in their summer issue 2012 and also in a Social Report, highlighting the significance of social business. The key issues include sustainability and innovation, social business, management innovation, and new intelligent enterprise.
The link between business and society
Companies are now beginning to understand that in order to create bigger returns on investment and profits, they need to give more emphasis to the social value of business as well, and move beyond the goal of just profit maximization. An article by Eccles, Perkins and Serafeim “How to become a sustainable company”, published in MIT Sloan Management Review (June 1, 2012), discusses that the public is no longer satisfied with corporations focusing on short-term profit maximization and wants them to focus on broader societal needs.
A recent study comparing stock market performance between companies that adopted environmental and social policies and companies that didn’t, found that the “High Sustainability” companies had “an abnormal stock market performance that was 4.8% higher that the “low sustainability” companies on a value-weighted basis”. They also exhibited lower performance volatility.
More and more socially responsible companies are moving away from the conventional definition of CSR – which largely focuses on improving the reputation of the corporation in compliance with environmental and social regulations, and charitable giving which is often not connected to the company’s business – to a concept which is gradually changing how companies approach their business and their responsibility to business and society: “Creating Shared Value” (CSV).
What is CSV?
Founded by FSG co-founders Mark Kramer and Michael Porter, the concept of “Creating Shared Value” was first introduced in the Harvard Business Review article “Strategy & Society: The Link between Competitive Advantage and Corporate Social Responsibility”, and expanded in their last article “Creating Shared Value” (January 2011 issue). Creating Shared Value extends even beyond the enhanced CSR thinking, where a company’s business strategy is driven by the triple bottom line (people, planet, profits).
CSV is beyond corporate philanthropy, social responsibility, or even sustainability, and puts societal issues at the core of the companies’ moperations and strategy. It promotes that by addressing societal needs and problems, companies have the potential to derive a great deal of economic value as well as value for its shareholders and the society at the same time. This has the potential of resulting in massive innovations and productivity growth across markets, both nationally and globally where companies operate.
Presented as the next evolution of CSR by Porter and Kramer, the CSV approach delivers value to both company and society equally, and yields “huge cost savings, revenue gains, and employee leadership development and retention, among other benefits”.
A standard definition of CSV, developed by Porter and Kramer, states CSV is: “Policies and practices that enhance the competitiveness of a company while simultaneously advancing economic and social conditions in the communities in which It operates”.
Another brief definition of shared value states that CSV is “new thinking, new technologies, and new approaches to management”. CSV is closely connected to CSR 3.0, the central concept of which is integration of companies’ strategies and actions up and down the value chain. In short, John Paluszek, (senior counsel, Ketchum, and immediate past-chair of The Global Alliance For Public Relations and Communication Management) states that “CSR is now becoming recognized as a means of addressing a spectrum of stakeholder expectations, thereby, not incidentally, improving profit and increasing shareholder value.”
In order to realize the full potential of CSV, companies need to transform their way of thinking about the purpose of business – they need to focus on developing new skills and knowledge, an in-depth understanding of societal needs, and collaborating across profit/non-profit boundaries. Different from the conventional Corporate Social Responsibility model, CSV propagates that the bottom line for companies is not just financial success and profits, but also to create shared value.
In 2010, a roundtable headed by John Kania and Mark Kramer on Shared Value was held at Goldman Sach’s headquarters in New York city, attended by 10 major corporations. An important thought that the business leaders shared at the roundtable discussion illustrates the basis of CSV: Shared value engages companies more deeply in social issues, holding the promise of far greater resources and a multitude of innovations to address today’s most urgent needs. Above all, it accelerates and expands the potential for social impact as major corporations launch initiatives that reach millions of people at a pace and scale that have rarely been achieved by the nonprofit sector.” This means that corporations have a much higher potential to solve societal needs and problems than NGO’s and government sector alone.
Creating shared value: A structured framework
Shared value initiatives and innovative products/services require a structured framework to drive innovation and generate stakeholder collaboration. Therefore, the fundamental question that arises in our minds is how do companies create shared value?
Furthermore, the roundtable discussion promoted that companies can create shared value, by following a structured model, in three distinct ways:
- Re-conceiving products and markets accessing new markets, lowering costs through innovation
- Redefining productivity in the value chain – improving quality, quantity, cost, reliability of inputs and distribution, driving social and economic development
- Building clusters and framework conditions – driving competitive advantage, engaging local and external stakeholders and partners, improving infrastructure, and enforcing effective compliance.
A report by Social Impact Consultants, FSG, on Creating Shared Value, states that companies need to make CSV at the core of their vision and what they do, create a strategy tailored to a company’s products and value chain, that creates economic and social value through identifying clear goals and specific societal issues and problems that are connected to their business.
Furthermore, companies must engage employees and partners across the company, as well as external partners and stakeholders for effective delivery of CSV initiatives. And finally, develop a framework for measuring results and monitoring performance.
CSV: Benefits and Challenges
CSV has the potential to result in various benefits for the company – discovery of new markets, employee development and retention, new talent attraction, and new opportunities and innovations, via positive engagement and collaboration with internal and external stakeholders, partners and communities. However, in implementing this framework to create shared value, companies can face a number of hurdles. CSV requires a change in the mindset of how leaders approach their business and responsibility towards society, a change in company culture and norms, and openness to new ideas and innovation. This can be challenging at best.
One of the biggest hurdles that a company faces when adopting a new approach is resistance from, and inflexibility of its own employees towards change, and also from stakeholders who might have narrow, special interests vested in the company. Some examples of status quo messages in companies include pulling back to the old framework and behaviours, resistance to putting the company’s financial and human resources into a new system and resistance to redesigning, reinvestment, experimentation and transparency – the key factors which are needed for any change or innovation to take place. Bringing innovation into a company can be challenging at best.
Every corporation has a set of organization structures that are designed to keep its operations running smoothly. Management and process innovation will always face resistance from other units and institutions in the value chain, and successful implementation of any change requires that management will need to compromise and work with them. Sivakumar Alaguchami, Manager Quality at Cert Infotrack Telematics Pvt. Ltd., states “Process innovation is the need of the hour to look in all directions that could improve the business performance”.
In order to create shared value and drive sustainability and innovation, “companies need leadership commitment, an ability to engage with multiple stakeholders along the value chain, widespread employee engagement and disciplined mechanisms for execution”, state Eccles, Perkins and Serafeim in their article, ‘How to become a sustainable company.’
AFCSR 2012: “Innovative Approaches to Create Value for Business and Society”
The good news is that companies in Asia are increasingly moving towards the CSV approach. The past few years have seen increasing awareness of CSV and transformation in the mindset of companies about business and social responsibility. Several conferences and forums are being held on the subject of creating shared value, and how businesses can create shared value initiatives to drive economic success and simultaneously address societal needs. The Asian Forum on Corporate Social Responsibility (AFCSR), launched in 2002, is the largest annual conference on CSR in Asia Pacific, backed by one of the first research centers in Asia concentrating on such issues.
The theme of the AFCSR held last year in Manila, and attended by over 580 delegates from 31 countries, was “Strategic CSR: Creating Shared Value”. The theme of this year’s AFCSR, to be held in Bangkok in October, is “Innovative Approaches to Create Value for Business and Society”. The conference’ objective is “to explore ways and means to accelerate the process of CSR innovation so that more stakeholders benefit much earlier.”
Nestle’s CSV approach
Nestle is a good example of a company that has adopted the CSV approach to business. For Nestle, Creating Shared Value means: “For a company to be successful in the long term and create value for its shareholders, it must also create value for society.” At Nestle, CSV is well-established and in practice for years and translates into a “series of progressive measures and goals, and reporting on these” to monitor and track its positive impact.
Core areas for joint value optimization
Nestle identified three key areas of Nutrition, Water and Rural Development, where the company found, lies the “greatest potential for joint value optimization” for both business and society. Its business model is built on the foundations of environmental sustainability and compliance, which includes its own business principles and compliance with international laws and codes of conduct. The foundation of its CSV approach is its employees as well as engaging and collaborating with a range of stakeholders and organizations across the globe. Through such engagement, Nestle identifying emerging issues and markets, redefines productivity in its value chain and builds functioning clusters to drive its CSV initiatives, innovations and productivity growth. Nestle also holds CSV forums for global business leaders to offer innovative thinking on the business-society synergy to drive business and social goals.
Nestle is involved in over a 100 social and economic projects which cover a broad range of themes around nutrition, water and rural development, driven in collaboration with partners from industry, agriculture, governments and non-governmental organizations. Nestle’s objective is to ensure its initiatives are beneficial for both its shareholders and the countries in which it operates. It enforces compliance strongly, and abides by national laws, and its global values and principles.
Key drivers of shared value
Nestle ensures continual improvements through key drivers of shared value, that is, innovation, investment, learning and collaboration.
The Company uses a science-based approach to help improve nutrition, address deficiency in vitamins and minerals at one end of the spectrum and obesity at the other. Nestle realizes the grave issue of water scarcity in many parts of the world. Driven by the six elements of the UN Global Compact CEO Water Mandate, Nestle is helping to reduce the impact of our water use and promote good water stewardship globally. The third key area, rural development is a crucial one. For Nestle, the overall well-being of farmers, rural communities, small entrepreneurs and suppliers is intrinsic to the long-term success of its business, yet an estimated 70% of global poverty is concentrated in rural areas. Nestle is working to support rural communities surrounding its operations in building a better future.
Globalization and increasing benefits of CSV
In order to create shared value and drive innovation, “companies need leadership commitment, an ability to engage with multiple stakeholders along the value chain, widespread employee engagement and disciplined mechanisms for execution”, state Eccles, Perkins and Serafeim in their previously mentioned article. In an era of rapid globalization, increasing integration and dependence of economies on each other for economic growth, the potential of the shared value approach will be truly realized as more and more companies in the world place CSV at the core of their vision, business strategy and operations.
This change will come gradually and not without resistance from various institutions and hurdles. However, if companies are tempted to wait until technology matures or there is more evidence to support social value, then this approach may delay achieving its potential to the detriment of the company’s “marketing, innovation, leadership and operations”.
According to MIT professor Alex “Sandy” Pentland, “Like any emerging technology trend, social business can seem perpetually just out of reach. Let’s wait a year, the thinking goes. It’s not quite real, not quite ready for prime time. If that’s your approach to social business, you may be overestimating the amount of effort it takes to start putting this trend to work for your organization today”.