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

What is Money? – And the consequences of inflation

It would seem that the whole world evolves around the subject of money for as long as anybody care to remember the world have focused on getting money or capital. Even in the Soviet Union there was a relentless pursues for getting capital, by boosting their own money (the Ruble) they tried to get their hands on as much foreign capital as possible. In the end they, as we all know, failed to get their hand on enough of the stuff to keep their communist paradise working but that just support the fact that the world is just hungry for the stuff.

There is of cause an alternative to money. If you chose to live and work in a isolated place were all exchange is made based on a economy based on the things you produce you really do not need to invent money. However, we have chosen to invent money because it is the easiest way to exchange wares and information. It also makes things less complicated, while we think that the globalised world of economics is a complicated system think of it if we had to exchange everything with a proportionate amount of things. How much coffee in Africa would you be able to buy for a Danish cow and how much of the cow would be given to the transporter? If you made paperclips how many would you have to pay the people who made them at your factory and what would they be able to buy for those clips in their local bakery? One could only imagine how cumbersome bartering as it is called would be if we implemented it on a large scale.

So money makes things easy. They are tokens of what we as people appreciate as value. This does not mean that we from time to time will accept other forms of currency. Like the exchanges seen on black markets around the world were exchanges are made in natural resources. An example can be the cigarette economy we see in prisons or in the post World War 2 or the exchange we make with the neighbour when we exchange a favour.

So the main characteristics of money are:

  1. It is generally accepted as payment for other things.
  2. It is a way of measuring the price of other things
  3. It can be saved, so you can keep the value it represents until later
  4. It is relatively easy to transport
  5. The unites of money are, or should be, standard and easy to recognise
  6. The supply of money must be controlled

It is the last of these very true statements about money, which I think is the most important because it controls all the others either directly or indirectly.

At the time when money was born we used Silver and Gold as the medium of exchange. The king or government who controlled the flow of money could make coins that could be used for exchange but which also carried a real value in themselves, namely the value of the gold or silver that made up the coin in the first place. However, what happened was that in time of trouble kings and governments tried to forge the coins by using less of the valuable metals. This practice worked well as the king could mint more coins this way and by that ‘inflating’ the value of his fortune. This lasted until somebody found out that this practice was undertaken and people adjusted the price according to what the king had done. But as it was difficult to say exactly what the amount of gold or silver that was exchanged in the coins it was more like a qualified guess of what the inflation was. So even f the king started to print money with the right value it would continued to be undervalued for a period of time until the price could be adjusted and the market had confidence in what the king was doing. We actually used gold as the standard to determine the value for money all the way until after the Second World War, which can serve as a witness as to the confidence that people and governments had in the standard.

What happens when you have more money than needed in the system? Well basically it becomes worth less. Like in our barter economy if you have too many paperclips in circulation the price will start to drop. This is exactly what the central banks of Europe and the US is doing when they keep the interest rates down. As money is flowing out of the system because of the crisis they are pumping money in by printing more money than is flowing out. So what will this mean to you and me.

Well if you won a house you will properly be paying less money for it on a monthly basis. By having cheap interest rates you will be able to borrow more money at a cheaper price and thereby you will be able to buy a bigger place to live in. Also other types of loans will be cheaper so you can buy the new Apple IPhone or a new car by going to the bank and getting cheap cash. Some stores even let you lend money at a zero interest if you buy one of their products. But cheap money also leads to higher inflation because just like the kings of the Middle Ages people cant be certain what the real value of the money that they have in hand is really worth.

The consequences of inflation are that the things you need to buy for cash becomes more expensive. So when you go to the supermarket the price for food will be higher, when you want to get something for the wife or you husband it will cost you more. While some of this increase in price can be contributed to the dynamics of the market and society in general one will not be able to explain the whole increase. The testimony that support this claim can be found in the fact that the price for food all around the world is on the increase and have been for some time.

Another consequence of inflation is on everybody that has savings in the bank. If you have money saved you might get every were from 0.2 % to 1 % interest but if the inflation is 4% you will loose money. So what people do if they have enough and can look at substantial loos is to invest their savings either though a pension fund, through investment companies, or make the investments them selves. This works well as log as the market is expanding and everybody is making a profit but in times like these investors can look at substantial looses and even more than they would have if they had kept the money in the bank on a regular account. This can lead to even more speculation and risk taking leading to even greater instability on the market, which again leads to even more money disappearing from the system.

Some would claim that monetary inflation is actually a tax by which government or kings for that matter transfers wealth from its people to itself. Inflation is perhaps the most destructive tax that can be imposed on people but it is unfortunately also the easiest one for a government to impose – it just needs to print more money than needed. It results in the transfer of enormous amounts of wealth from the hands of people to the hands of those speculators shrewd enough to take advantage of the price volatility inflation causes in the markets.

Inflation is a strike against the welfare state. In most western countries a large majority of employees work for the government either directly or indirectly. All the funding for the states activities comes from the taxes it is able to impose on its citizens so there is a clear interest for the state to decrease the wage demand from the public servants and the money they spend on behalf of taxpayers. However, when the wages in the private sector increase as we could see post 2007 then there becomes a demand from the public servants to get paid more. The money to fund this increase can either be found in continuing to have a significant wage gap between the public and private sector, by increasing taxes or by decreasing government spending. But many governments have opted to do neither because it was politically unsound so what they have done if they could was to increase inflation either though printing or though borrowing. This is what we have seen in Greece, Italy and the US who have resorted to systems were they are spending significantly more than they GDP would normally allow for.

So what can governments do? And this is where it becomes tricky and more a thing belonging to ideology or theology. One ideology would prescribe to cut government spending at all costs and decrease the budget to what is actually is coming in in the form of tax revenue. Another group would go the other way and use money to boost the market and crate jobs feed by government activity like infrastructure or better education etc. The thing is that we do not really know the dynamics of a globalised economy at the scale we see today. There is no theory that will prescribe what to do if we want to keep our welfare state in some form of working order and keeping an society which can provide the benefits which we have fought hard to get over one hundred years.

The Marx Solution in times of trouble – The Communist manifesto

The grave of Karl Marx in London.

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In time of trouble we tend to think that back in the days everything somehow were better, that the economy was better, more had jobs, that there were more peace and security, etc. And when we face a situation as we do now with large and even global scale problems we might think about what alternatives that is out there.

In the preceding year and for sure in the coming month we will see proponents of fundamental socialism come forward and offering solutions which at the outtake might seem attractive. So I would like to remind you what fundamental socialism is all about and why it is a dangerous road to tread.

  1. Abolish all property in and applications of all rents of land to public purpose.
  2. A heavy progressive or graduated income tax
  3. Abolition of all rights of inheritance
  4. Confiscation of the property of all emigrants and rebels
  5. Centralization of credit in hands of the state by means of a national bank with state capital and exclusive monopoly
  6. Centralization of the means of communication and transport in the hands of the state.
  7. Extension of factories and instruments of production owned by the state; the bringing into cultivation of waste lands, and the improvement of the soil generally in accordance with a common plan
  8. Equal obligation of all to work. Establishment of industrial armies, especially for agriculture.
  9. Combination of agriculture with the manufacturing industries; gradual abolition of the distinction between town and country, by a more equitable distribution of the population in the country.
  10. Free education for all children in public schools. Abolition of child factory labor in its present (1848) form. Combination of education with industrial production, and so on.

The manifest is of cause a product of its time and we have in the western economies no longer as much industry as we had in the start of the century. But even translating the words into a modern contact does not make them any more appealing and it would be difficult to imagine that such principles could be implemented without the extensive use of violence. Just imagine what would happened if we took everybody’s right to inheritance away and gave it to the state or if we nationalised the banking system. Which was actually proposed by some left-wing activist during the 2008 crisis. Or what if we told certain percentage of the population that they had to farm the land even though they had lived in the city all their lives.

I for one would not like to live in a country were the tax was even higher than it is now (I live in the number one or two most taxed country in the world) or see that immigrants or people who were in opposition had their estates confiscated just because of their ethnicity or the belief system they subscribe to.

So think about the alternative when contemplating what we can do and what we should do in the future and that the easy solution seldom is the best in the long-term.

A short list of events that Karl Marx anticipated would happen but didn’t includes:

  • It was anticipated that the rate of profit would decline because of the inability to exploit workers forever – This has never been the case and even more capital have been accumulated over time as new markets and products have been introduced.
  • The working class has not fallen into greater and greater misery. Wages for one have risen almost on continues bases ever since the manifest was written. All the industrialised countries have seen a dramatic increase in living standards for the average worker and they have never been as educated as they are today. The middle class have not disappeared but have rather expanded to such an extent as we talk about different layers of middle class.
  • There is little or no evidence that industries have concentrated in the capitalist societies. One could argue that Industry clusters is a type of concentration but these are drive my totally different incentives such as access to labour, infrastructure and skill.
  • None of the socialist societies have been prosperous or given any benefits to the people who live in them, which have not been, surpass by capitalist countries. In all areas capitalism have outperformed socialist countries like healthcare, technology, education, innovation, small business, human rights, labour rights, environmental issues the list just goes on.
  • Despite several setbacks in the form of depression, bubbles, recessions large scale fraud and even evil doing the capitalist system seem to prevail and flourish as never before.
  • Marx believed that price and labour were dependent on each other and there for more labour intensive product would be more expensive than capital driven business. However, it seems to be the other way around that the more labour your are able to take away from the product the more value you are able to add to the final outcome.

Related articles

Capitalism and CSR

I just read an interesting paper by Wayne Visser. He criticizes what he believes is the failure of CSR, or what he names as CSR 1.0 as it current is being practiced. He makes the comparison between CSR and the developments within the internet moving from Web 1.0 to Web 2.0. He believes that there should be five guiding principles for a new form of CSR namely: Creativity (Sustainable Business innovation), Scalability (The ability to transfer individual experience into a systematic approach), Responsiveness (meeting the needs of the community), Glocality (a rewrite of being global but acting local) and Circularity (A cradle to cradle approach)  

His article looks into some of the key areas of CSR and comes up with a DNA model for responsible business. His key point is that companies of the future that practices CSR, or CSR 2.0 as he put it, will have to include four basic “codes” into all aspects of their business. These building blocks are Value Creation, Good Governance, Societal Contribution and Environmental Integrity.

I must admit I like the approach that Visser present. Especially one point, which he includes and I think that many CSR professionals tend to miss in their argumentation, is that companies have to make a profit in order to be able to contribute the society. While Visser thinks that “our modern capitalist system is faulty at its core” and points out that it is basically a limitless system dedicated to endless consumption of our global resources. He argues that Adam Smith and his “invisible hand” were wrong and that the resource consumption of capitalism should somehow be controlled. His basic argument is that nothing lasts forever and if business continues to exploit the resources of the earth we will all suffer.

As a firm believer in both CSR and in Capitalism (faulty as they both seem to be) I have to say a few words on behalf of our current economic system.

First, capitalism is not the perfect system assuming that one’s goal is that we should have a perfect harmonious world. Actually it has disharmony as one of its central points as markets strive in the vortex between demand from those who want and the ability of business to produce in order to meet that want.

When business operates it will always try to produce at the lowest cost possible at the right quality in a timely manner. This is because we as consumers wants to buy quality at the cheapest price available and that the owners wants as much out of their investment as possible. In a globalised world we are able to produce our products in one end of the world and sell on the local market in another, at a fraction of the price it would take produce the same thing locally.

In theory all should be happy, we as consumers (because we can afford the product), workers in the developing world (because they have jobs), Society (because we all pay tax and contribute to local community) and the environment (as we disperse a possible impact).

However, we are not as happy as we could be. Because consumers lose their jobs when their place of work is moved, as the working conditions in the developing world is far from what we have come to expect, as corruption and tax schemes tend to eat up all the potential benefits that having big business do investments should come with and because there is no effective local government to enforce en environment standards. And of cause because there are evil people who are willing to make others suffer in-order to make a buck.

But as flawed as it might be it seems to be the only system that we as humans are able to make work.

Secondly, Because of these tensions in the capitalist system and the access to information that have become available through the web about the impact of global business we have invented CSR. Or rather business has invented CSR, as it is not a system that governments have promoted, actually quite to the contrary actually. Think of strategic philanthropy and how giving company products to schoolchildren. Think about the controversy this raised among the public. So, why should capitalist endorse CSR? Well they already do because they want what every business desire namely growth, prosperity and market share, and in order to do so they need to manage risk, reduces costs, be ethical, retain and attract employees, manage their stakeholder relationships, have a positive brand, innovate and learn, and not least understand their business even better than it does today.

In this context is CSR a tool that business can use to be ahead in the future. Visser claims that business thinks short term, but I do not think that this is necessarily true. What I do think is that shareholders (e.g. us, through pension funds, bank connections, unions etc.) think short term and “we” pressure companies to do the same.

Third, should we leave the market alone? No of cause not, we need to manage capitalism and we need to have some form of business control and transparency. There are plenty examples that evil and corrupt people can do real harm to the world. Just think of Enron, Lehman brothers, Arthur Andersen, etc. and one can easily se that no control is REALLY a bad thing. So systems of control need to be put in place so that the biggest impacts of global capitalism can be mediated. These systems are being formulated as hyper norms or institutionalized norms through organizations like the OECD, UN, EU etc. where politicians and professionals alike find out and not least learn how capitalism can be gently pushed in the right direction for all of us.

One last note for you to think about as one put more and more on the shoulders of companies around the world. We shouldn’t leave it to business to solve the problems that governments can’t seem to agree to solve themselves. COP 15 and for that matter COP16 showed that politicians are unable and to a large extend unwilling to solve the issues that we are all becoming victims of.