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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Mattel and Disney under pressure again for Human and Labour rights violation

According to a resent study done by Sacom is the toys produced by Disney and Mattel who also make the Barbie dolls produced under poor working conditions. This is not the first time that Mattel in specific have been under scrutiny on their ethics.

A Chinese factory that produces, among other Disney characters, Fisher Price toys, Barbie dolls, have been accused of using child labor, toxic chemicals and to push employees to illegal overtime.

These claims have been put forward by the Hong Kong-based human rights organization Sacom who has studied the working conditions at the factory Sturdy Products.

The factory, located in Shenzhen city, has more than 6,000 people on the payroll, and according to the survey, employees were among other things pressured to work 120 hours extra a month.

In addition, they must work for a salary far below minimum wage, and earlier this year one of the employees, a 45-year-old woman, committed suicide after several supervisors had yelled at her.

Among the accusations that is made by Sacom are:

■ The employment of a 14-year-old. Staff also reported the presence of other child workers, according to the investigator.

■ Routine excessive overtime. Employees produced a “voluntary” document they said they had to sign agreeing to work beyond the maximum overtime legal limit of 36 hours a month, along with wage slips that suggested they were averaging 120 hours of overtime a month.

■ A harsh working environment in which workers complained of mistreatment by management. One worker injured on the production line was shouted at and ordered back to work despite needing medical treatment.

■ Concerns about the chemicals in use and poor ventilation. Employees claimed three workers had fallen ill. They said they had to hide pots of adhesive and thinners during audits of the factory by its client companies.

■ They also claimed that they were paid by the factory to give misleading answers during audits and that they were fined for failing to hit targets. The calculation of wages for different workers was described by Sacom as arbitrary.

Disney and Wall Mart are prone to take action

As this is not the first time that the big retailers Mattel and Wal-Mart is under pressure to get more control over their supply chain.

“We take reports like this very seriously and we will implement a corrective action plan if our investigations confirm any of the findings,” said Wal-Mart spokeswoman Megan Murphy told the South China Morning Post

“As soon as we learned of the suicide at the Sturdy Products Factory, we immediately launched an investigation.”

According to the Human rights group was Wal-Mart also in contact with the International Council of Toy Industries (ICTI), a trade association that certifies legal compliance and decent working conditions in toy factories worldwide, which was pursuing a separate investigation.

Winson, who owns Sturdy Products, According to The Guardian newspaper declined to comment on the new report from Sacom. But the study has however shaken Disney Group, and supermarket chain Walmart, which sells some of the products being produced at the factory.

Disney said in a statement that they “always take cases dealing with licensees and business partners very seriously” and that the group, will now “evaluate the situation” from the information they have available. Wall Mart, which has more than 8,500 giant stores around the world have decided to, launched an independent investigation of working conditions.

This and other instances where factories in China or some of the other market in Asia have been monitored using different types of codes just shows the limits of what these can do for business when it comes down to running the everyday business. Big companies in the developed world can implement and make supply chain partners sign as many Codes of Conduct or Ethics as they want to if it is not followed by real action it will mount to little more than window-dressing.

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.

UN Guidelines leads the way for Business and States but were to?

United Nations Human Rights Council logo.

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After six months stakeholder communication is the UN guiding principles for Human and Labour Rights finally finished. The aim was to create some form of standard which both business, countries and not least NGO and CSO could positive respond to. In total has the principles been under way for about six years with several draft and papers for discussion been issued during the period.

Again it is the three guiding principles that Ruggi presented some three years ago that makes up the cornerstone of the work, Protect, Respect and Remedy. 

The principles are interpreted as “The Guiding Principles highlight what steps States should take to foster business respect for human rights; provide a blueprint for companies to know and show that they respect human rights, and reduce the risk of causing or contributing to human rights harm; and constitute a set of benchmarks for stakeholders to assess business respect for human rights.”

The principles are organized under the UN Framework’s three pillars:

  • The State Duty to Protect Human Rights
  • The Corporate Responsibility to Respect Human Rights
  • The need for greater Access to Remedy for victims of business-related abuse.

 

While states are a fairly established entity on this planet there are still debate what role business should take. To what degree do we want corporation to take over some of the functions that we normally contribute to the umbrella of responsibility of the state? In the framework presented is “The role of business enterprises as specialized organs of society performing specialized functions, required to comply with all applicable laws and to respect human rights.” Of cause referring to the functions of business in relation to the three principles described. With this description we can’t narrow the responsibility to just organizations operating within an economic rational but must include organizations as a whole in whatever form they take. The principles go further and state “These Guiding Principles apply to all States and to all business enterprises, both transnational and others, regardless of their size, sector, location, ownership and structure.”

Furthermore states must provide jurisdiction if there is none to business enterprises basically meaning that business should be empowered to uphold Human Rights. “This requires taking

appropriate steps to prevent, investigate, punish and redress such abuse through effective policies, legislation, regulations and adjudication.”

But are we really interested in that business takes over the role of the state even if the state is weak? What will happen when the state get back on its feet and wants its power back will business give it back voluntarily or will there be strings attached which is dictated by the company itself. These are largely unanswered questions which both business and states need to address in order for the framework to be really effective. In the list of the biggest economies in the world there are now companies like Wal-Mart, Shell, Exxon, BP, Toyota and Total all with significant influence on national economies and not least politics as I have argued before.    

The word Governmentality comes to mind when companies are being tasked with governing themselves beyond the real control of a single state authority but rather with a pseudo from of governance which is more unreal than real power.  Maybe this is what Ruggie is refereeing to when he says that “Endorsement by the Council would enable the global community to move beyond the confusion and polarization of the past by establishing an authoritative point of reference that recognizes the central role that States need to play, gives businesses predictability in what is expected of them, and provides other stakeholders, including civil society and investors, the tools to measure progress where it matters most – in the daily lives of people.”

Norwegian oil fund excludes company number 51 from its SRI portfolio

Erik Keiserud, Norwegian jurist, chairman of T...

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The Norwegian fund that administers all the oil money that the Norwegian people have accumulated over the year has been going through a time of serious soul searching. Last year the Fund was faced with accusations over its investments in companies in Burma in EarthRights International’s Broken Ethics report. This caused some turmoil both inside and outside the fund organization and not least among the Norwegian people who have a difficult time reconciling with the fact that they had been contributing to the oppression of the Burmese people. In a recent development has the NOK3.1trn (€405bn) Norwegian Government Pension Fund excluded the Malaysian logging company Lingui Developments Bhd on the recommendation of the Council of Ethics, an internal function within the fund that oversees the investments. Lingui, which operates in the tropical rainforest, has been blacklisted “based on the risk that the company contributes to severe environmental damage” the Norwegian Ministry of Finance said. The fund held shares worth NOK 2.7 million in Lingui Developments Berhad at year end 2009. “The divestment from the company has been completed,” the Norwegian Ministry of Finance continued.

The move brings the number of companies excluded from the fund’s investment universe to 51. There are now 10 firms excluded for severe environmental damage which for the majority is involved in mining operations. The company Lingui is a subsidiary of Samling Global, which was excluded by the fund in August 2010. Also among the excluded companies we find Wal-Mart stores for what is claimed to be “the systematic human rights violations” the company have been involved in.

For its part, Lingui says its wood products are derived from forests “managed in accordance to approved international and local regulatory standards”.
The Ethical Council based its recommendation on satellite images, documentation and field visits.

Wal-Mart is “Slimming” its supply chain

Street sign for Wal*Mart Drive, south of Gordo...

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Wal-mart has announced a plan to introduce more health food into it shops. If this effort has the same effect as we saw with when they greened their supply chain there is good reason to think that they will drive a global trend.

The plan is to lower its products content of unhealthy salts, fats and sugars, and to drop prices on fruits and vegetables. In addition will the Wal-mart work to reduce prices on products made from whole grain.

While the costs associated with a lower price on fruits and vegetables will come out of the Wal-marts own revenue and will not be transformed into supplier pressure or so the company claims at least. “This is not about asking the farmers to accept less for their crops,” says Leslie Dach, Wal-Mart’s executive vice president for corporate affairs.

The changes in purchasing and supplier relations will be introduced over a period of five years, to give the company time to overcome technical hurdles and to give consumers time to adjust to foods’ new taste, Mr. Dach said. “It doesn’t do you any good to have healthy food if people don’t eat it.”

Changing Wal-mart purchasing strategy is not something that will be an easy fix but with a five year implementation span it just might happen. The plan which has the support of Michelle Obama is composed of five elements:

  1. Reformulating thousands of everyday packaged food items by 2015 by reducing sodium 25 percent and added sugars 10 percent, and by removing all remaining industrially produced trans fats. The company will work with suppliers to improve the nutritional quality of national food brands and its Great Value private brand in key product categories to complete the reformulations;
  2. Making healthier choices more affordable, saving customers approximately $1 billion per year on fresh fruits and vegetables through a variety of sourcing, pricing, and transportation and logistics initiatives that will drive unnecessary costs out of the supply chain. Walmart will also dramatically reduce or eliminate the price premium on key “better-for-you” items, such as reduced sodium, sugar or fat products;
  3. Developing strong criteria for a simple front-of-package seal that will help consumers instantly identify truly healthier food options such as whole grain cereal, whole wheat pasta or unsweetened canned fruit;
  4. Providing solutions to address food deserts by building stores in underserved communities that are in need of fresh and affordable groceries; and
  5. Increasing charitable support for nutrition programs that help educate consumers about healthier food solutions and choices.

One can always argue if Wal-mart is doing enough or if it is just taking one step back from the ten steps it took forward when it sold unhealthy food in the first place. It is well known that obesity is one top health hazards in the US so even the most rudimentary steps towards more health food is welcomed.

The question that remains is what the impact could be on the rest of the world. Wal-Mart is by far the biggest “consumer” on the planet so will they be able to drag the rest of the world supermarkets with them to the altar?

If the lessons from the efforts to green the supply chain are to be used as a guide the answer would be a big YES? Today I have a significant bigger range of different ecological, fair-trade and low carbon emission product to choose from in my local supermarket than I had before and at a price which I can afford. Of cause I can’t say that this is all due to the actions taken by the company. But their actions put “green” on the world map told producers around the world that there was a market if they wanted to produce in a more sustainable way. Supermarket chains in the UK, Germany and Scandinavia that I know of has at least to my knowledge done a huge effort to offer a variety of sustainable products in the product line.  

Before you go off and get real upset about my promotion of Wal-Mart as the big savior of the world from obesity. I would like to remind you that the companies do fail on other key issues related to good governance and labour rights as documented by the NGO Wal-Mart watch. There is no doubt that the company has a long way to go in ways of improving its relations with its own employees and the communities that the stores are part of.