Micheal Porter and Mark Kramer on the concept of Shared Value and why the argument does not hold

Michael Porter

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A revisit to one of my older posts. Here I have tried to give some interplay to the dogma that everything about business is about the strategic advantage and very little has to do with ethics and the ability for business to operate. I think that it does give food for thought that business role in society is much more important than business would like to think and that it goes beyond profit and individual strategic advantages which one can gain in the short run.

Porter and Kramer have published another article on Corporate Social Responsibility called “The Big Idea: Creating Shared Value” in Harvard Business Review. They proposed a revised CSR that redefines some of the key notions we have about capitalism and businesses relationship in society. The concept is called Corporate Shared Value (CSV), as opposed to philanthropy or social enterprise which, according to them, does not take into account business place and role in society.

“Shared value, then, is not about personal values. Nor is it about “sharing” the value already created by firms—a redistribution approach. Instead, it is about expanding the total pool of economic and social value.”

Porter and Kramer’s view on business is again limited to the impact on business on the local community and how they directly impact the possibilities for the community to develop.

“A community needs successful businesses to provide jobs and wealth creation opportunities for its citizens. This interdependence means that public policies that undermine the productivity and competitiveness of businesses are self-defeating, especially in a global economy where facilities and jobs can easily move elsewhere. NGOs and governments have not always appreciated this connection.”

“The best companies once took on a broad range of roles in meeting the needs of workers, communities, and supporting businesses. As other social institutions appeared on the scene, however, these roles fell away or were delegated. Shortening investor time horizons began to narrow thinking about appropriate investments.”

There is no doubt in my mind that companies have to create shared value. But, and yes there is A But, has it not always been the truth about business that if it was not able to create shared value it could not claim legitimacy in the society it was operating? As we have seen a number of companies outsource their production to places like India and China they have lost their traditional role in society. Because of this lack of local association, businesses have turned to other ways to legitimise their operation, strongly encourage by governments, media and critical stakeholders.

CSR is, in my opinion, more a manifestation that Business to a large degree has lost it local foundation. Just look at who are engaging themselves in CSR related activities. Global companies like Wal-Mart, Maersk and BP have all too some extent had to engage in stakeholder engagement activities in order to emulate local connection. Wal-Mart in the US on placement of new retail stores, Maersk in relation to works rights in China and BP had to talk to the local fishermen in the Gulf of Mexico. Common for all is that they have lost the local footing because of their global reach, but have forced to engage with the communities were they are active.

The article continues to argue that;

“We need a more sophisticated form of capitalism, one imbued with a social purpose. But that purpose should arise not out of charity but out of a deeper understanding of competition and economic value creation. This next evolution in the capitalist model recognizes new and better ways to develop products, serve markets, and build productive enterprises.”

My argument would be that we need a less sophisticated form of capitalism that returns the system to its basic concepts. We have since the 1980ties seen a explosive raise in legislation and international trade agreements which have created numerous loopholes and possibilities for companies with the right resources to find ways to cheat the system. For example is the IFRS guidelines some one thousands pages or the Sarbanes-Oxley act in the United States that have done nothing to prevent a global financial meltdown. The systems have rather made us disregard some of the most obvious attempts at fraud because we were all lulled into a false sense of security. We all thought that the ‘systems’ would protect us from any harm while it in fact made us even more vulnerable  to people that wanted to do evil. Even though sentences for fraud were increased  of up to 20 years in prison did not help us in any way.

So when Porter and Kramer looks for shared value as something that “should supersede corporate social responsibility (CSR) in guiding the investments of companies in their communities.” It is more a cry for help because everything else seems to have failed. If we can’t legislate and control capitalism, we might ask if capitalism would be so kind not to steamroll us by creating the image that it is in the interest of the economic system to create something called shared value.

According to the two distinguished gentlemen is “CSR programs focus mostly on reputation and have only a limited connection to the business, making them hard to justify and maintain over the long run. In contrast, CSV is integral to a company’s profitability and competitive position. It leverages the unique resources and expertise of the company to create economic value by creating social value.” I think the quote in very real terms shows that they have not understood what CSR is and how it is used in today’s world (and according the KPMG) is CSR not merely a PR exercise but foremost a system of business ethics and economic common sense. By economics I mean that business need to have a positive relation to its surroundings in order to be given ‘license to operate’ and CSR can provide organisations with a management and communicative framework which will do just that.

So to summarise there is some merit to Porter and Kramer’s argument that companies should create shared value within the communities that they are active in. However, according to them the concept requires an adjustment of our current economic system and that business should embrace CSV as something more that their current CSR activities. Even though they are already engaged in the activities that CSV prescribes. In my view is the new concept of shared value outdated from its outset. It prescribes medicine for a disease that does not exist for patients who are not interested.

You can judge for yourself by reading the article here:

The article can be found at “The Big Idea: Creating Shared Value” by Michael E. Porter and Mark R. Kramer HBR January–February 2011

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A shark by any other name…The Corporation

The Corporation

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I begin my lesson in organizational communication by asking. Now that you are going to be experts in organizational communication and guide business managers in how to effectively communicate you will have no problem in answering this simple question. What is a Corporation?

….

Silence

….

One hand appear. It is an economic entity (according to Wikipedia). Another says it is a more of a legal thing like a person (I think they got deeper into the googeling)

Being a teacher at a relative big business school I sometimes wonder if we really know the answer to this very obvious and straight forward question.

But when does a business then become a corporation well according to Joal Bakan, and others might agree, it is when it loses it soul. One can say that a business has lost it soul when decision are being taken not because they are right or wrong but when they are based on rational and logical explanations. This might sound weird but it does make sense when you see what corporate managers are doing out there in the “real” world.

The corporation is an externalizing machine, in the same way a shark is a killing machine … There isn’t any question of malevolence or of will; the enterprise has within it, and the shark has within it, those characteristics that enable it to do that for which it was designed.” (Bakan, 2004:70). So basically the corporation is a feeling less “monster” we let loose and of which we have been convinced it is the best of possible solutions to our need for prospering and happy society. (les affairs capitalism and Milton Friedman and Freidrich Hayek ring a bell)

But as people have found out that just letting the monster go did have some side effect they put pressure on companies to change their behavior. Just think of BP, Wall-mart, Nike, Apple, A.P. Moller-Maersk. When looking up Sweatshops, Nike even have their own entry on the web being synonymous with the concept.

So corporations invented Corporate Social Responsibility (CSR) in order to counter some of these attacks on their ability to make a profit. Some would say that it is against the nature of the beast or even unethical to have the corporation imitating human feelings in this way. But the result has been that companies have implemented systems that enable them to immolate to a certain degree human feelings. Corporation basically show that they care by donating their hard earned money to different causes or venture into different “feel good” programs like the UN Global Compact (UN GC) or UN principles for Responsible Investments (UN PRI) tapping into the goodness discourse. One company (Novo Nordisk) even had to explicitly say that they were a business and not a NGO-of-sort as their communication was so effective that some people had come to confuse the two when they debated intellectual property rights.

If CSR is a way for companies to emulate human feelings on a grand scale how come that they continue to make the same mistakes. If one goes back to the quote above it is because even though the corporation is painted in a different “color” it remains the shark it was from the starting point and that, I think, is the lesson to be learned.

Different but still the same

This is the time for annual reporting and by that also comes all the nonfinancial statements. CSR reports are being produced which in principle should give all of us a insight into how the organizations are doing on Environmental, Social and Governance issues. But after I have been going through about a dozen it dawns on me that even though I’m all for standardization and systems etc. the reports isn’t really telling me anything.

It is almost as if the CSR reporting from all the big companies around are being produced by the same person(s).

For example these example from Eriksson

“Reducing our own environmental impact and that of our products is an important part of Ericsson‘s sustainability focus.  Ericsson is on track with the Group target to reduce its carbon footprint by 40 percent over five years (2009-2013).”

Or A.M.Møller-Maersk

“Our largest business unit and contributor to our carbon footprint, Maersk line, have set an ambitious goal of a 20% reduction of Co2 per container transported by 2017. We will reach our goal through efficient operations and technological innovation.”

Or Danisco

“We have reduced environmental impacts at our manufacturing sites since 2007 by: 21% Energy, 15% for C02, 30% for water.”

My question is now. These are all activities which show that these companies can do stuff so what is the impact of all these activities? They are no were to be found which means that these companies are very active reducing their emissions but have no idea why or of it really matters.

Just food for thought that when you look at the next report then try to notice if the company have even bothered to investigate what the real impact of their actions are.

A.P. Moller-Maersk and strategic philantrophy

A. P. Moller-Maersk Group

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The Danish oil, shipping, airline and retail giant A.P. Moller-Maersk (APM) donates free transportation to victims of the earthquake in Japan. It is not the first time that APM steps up and helps out using its core capabilities in line with strategic CSR.

Senior Consultant in APMs CSR department Jens Munch Lund-Nielsen was quoted by Reuters to say that the offer of free transport is sent out via diplomatic channels from the Danish Embassy in Japan. The beneficiaries are governments and organizations.

“We have allocated one million U.S. dollars for relief ship transport. So far we have received response from the UN and an Eastern European country that will send emergency relief. In this situation we can do what we do best” says Jens Munch Lund-Nielsen.

The donation follows A.P. Moller-Maersk same line as the flood disaster in Pakistan last year and the earthquake in Haiti, where it also sailed with free emergency assistance. At the same time the Danish Red Cross can look forward to a nice cash donation from APM and the many thousands of employees in more than 130 countries.

“We have started a collection among the staff through the Danish Red Cross. It runs until 15 April. The sum of this collection among the staff is being doubled up by the company” says Jens Munch Lund-Nielsen.

APM have for several years have been lacking on the CSR front but one of the things that the company always have done well it is to use it resources and knowledge as strategic philanthropy.

With the company ideally situated as the biggest freight forwarder in the world it can use it ships and terminals to help at a fraction of the expense that other companies would have to pay for a similar service. While APM have plenty of other issues that it have to deal with around the world especially related to Human and Labour rights this is one instance were the company really does things well.