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