Shahin A. Shayan Page 1

Creating Shared Economic & Social ValuesIn Economic Enterprises1

Shahin A. Shayan2

January, 2016

Abstract

In recent years, many business strategists have focused their thoughts on developing the mosteffective and impactful Social Value Propositions (SVP) in corporate economic activities. After the2008 global financial crisis, the focus has gained additional momentum due to the impression ofdegeneration of corporate ethics, lack of corporate governance structures, fraud and insensitivity toSocial, Environmental and Governance (SEG) issues which has led to a corporate "Crisis of Trust". Inresponse to this crisis, some business gurus and think-tanks have focused their thoughts on means andways to develop the soft side of the business in an efficient and effective manner. Various ideas havebeen proposed on ways to merge the corporate economic and social value propositions in order togain back the strategically needed corporate trust, necessary for growth, sustainability and continuityof the businesses. Corporate Philanthropy (CP) and Corporate Social Responsibility (CSR) have beenavailable alternatives in line with such proposals. In recent years Michael E. Porter and Mark R.Kramer from Harvard Business School have proposed a third alternative, called "Creating SharedValue" or the CSV concept. It focuses on the efforts to find a joint synergistic corporate design inorder to merge the economic and social value propositions. In this paper we will try to explain andcompare the three mentioned alternatives and propose a structure at which corporations could use tomanage their CSV ventures more effectively.

Key words: Corporate Governance, Corporate Philanthropy, Corporate SocialResponsibility, Creating Shared Value, Microfinance, Enterprise Wide Risk Management,Synergy Management.

The Basic Concept

The global financial crisis in 2008, made it clear that the lack of corporate ethics,

management controls and governance3 (Shayan, 2014), inadequate triggers to prevent conflicts of

interests and fraudulent acts and short term emphasis on profitability performances without

proper concerns for long term business stability and continuity, were the major contributors to the

instabilities created in the global financial systems. Insensitivities towards social and

environmental issues enhanced the "Crisis of Trust" that developed towards corporate practices.

1This paper was written based on various studies, 8 years of experience in economic empowerment and poverty

alleviation efforts in rural regions of Iran and the knowledge and experience gained by attending the ExecutiveManagement Program at the Harvard Business School on Dec., 2015 related to " Creating Shared Value: EconomicSuccess and Social Impact" with 76 other experts. This was a program organized by Michael E. Porter and Mark R.Kramer from the Harvard Business School. https://www.linkedin.com/in/shahin-a-shayan-772171142 Chairman of the Board at Hoda International Financial Engineering Company in Tehran, Iran3

Corporate Governance can be defined as the set of processes, customs, policies and laws affecting the way a companyis directed, administered or controlled. Although corporate governance is designed for the protection of its funders, italso applies to government, not-for-profit and other membership organization. It includes the defined relationshipsamong the major stakeholders and the goals for which the corporation is governed. The principal players are theshareholders, management and the board of directors. Other stakeholders include employees, suppliers, customers,banks and other lenders, regulators, the environment and the community at large.

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To bring back the lost trust and credibility, long term strategic views on profitability, more

socially aware and conscious corporate cultures have been emphasized. Milton Friedman's

concept of "The Business of Business is Business" has been challenged and the ideas that social

and environmental issues are government or NGO responsibilities have been seriously

questioned.

The efforts to promote Corporate Philanthropy (CP)4 and Corporate Social Responsibility

(CSR)5 were all in response to these paradigm shifts and an effort to bring back the lost

confidence in corporate practices. More recently the concept of Microfinance (MF)6 and looking

at the bottom of the pyramid by serving the underserved or unserved markets as potentials for

enhancing corporate profitability and creating social impacts were all in line with the same

efforts.

The main challenges in these endeavors are the sustainability issues due to a "Cost Centric"

and not "Profit Centric" mentality and the inability to measure the degree of the "Social Impacts"

that they create. The continued funding and cost imposition on shareholders without having the

ability to measure the impacts on the total corporate performance has always been a main

obstacle for the continuation and sustainability of these efforts.

In a recent report on the 100 Best-Performing CEOs in the World, published by the Harvard

Business Review (Ignatius, 2015), the metrics for evaluating corporate performance was changed

from only including financial indices to a more diverse joint financial and social measures. It now

puts 80% weight on the corporate financial performances and 20% weight on the social value

impacts created. The social value measurements were based on an independent rating of the

corporate Social, Environmental and Governance (SEG) efforts for each company. In 2015, Novo

Nordisk, a health care company in Denmark was first in the overall rankings and 6th in financial

and 15th in SEG performance rankings. Interestingly, Amazon a retail company was ranked 1st in

financials, 828th in SEG and 87th in the overall performance rankings.

4 Corporate Philanthropy (CP) is when a corporation provides funds for social caring, nourishing and resolving a socialneed. The most conventional modern definition is "corporate and private initiatives, for public good, focusing onquality of life". Instances of corporate philanthropy commonly overlap with instances of corporate charity, though notall corporate charities are philanthropy, or vice versa. The difference commonly cited is that corporate charity relievesthe pains of social problems, whereas corporate philanthropy attempts to solve those problems at their root causes.5

Corporate Social Responsibility (CSR) is a concept which encourages organizations to consider the interests ofsociety by taking responsibility for the impact of the organization's activities on customers, employees, shareholders,communities and the environment in all aspects of its operations. It encompasses not only what companies do with theirprofits, but also how they make them. It goes beyond philanthropy and compliance and addresses how companiesmanage their economic, social, and environmental impacts, as well as their relationships in all key spheres of influence:the work place, the market place, the supply chain, the community, and the public policy realm. This obligation is seento extend beyond the statutory obligation to comply with legislation and sees organizations voluntarily taking furthersteps to improve the quality of life for employees and their families as well as for the local community and society atlarge (Harvard Kennedy School, 2008).6 Microfinance (MF) is the provision of financial services such as credit, savings, insurance, pension, investment andremittance on a micro-scale to the poor and low-income individuals that have been excluded from formal financialsystems. Provision of financial services to the poor increases household income, builds assets, reduces vulnerability,creates demands for goods and services and can stimulate the economy.

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The revised and more comprehensive rankings, does not look at the synergistically joint and

profit enhancing effects of the SEG efforts. It views the SEG efforts as CSR without the positive

and measurable joint synergistic effects on the overall corporate profitability.

Corporations, business think-tanks, researchers and strategist are all looking for the best

sustainable business model to synergistically merge the economic and social value proposals in

corporate activities.

In line with these efforts, the idea that corporate impacts of the SEG efforts on the society

can't be separated from the created economic values and must be looked at jointly and

synergistically, has been proposed recently by Michael E. Porter and Mark R. Kramer (Porter,

Kramer, 2011). They emphasize that it is possible to find corporate Social Value Propositions

(SVP) jointly with the Economic Value Propositions (EVP) such that in a synergistic manner

corporate profitability is enhanced and a strong social impacts created. They have termed this

approach the "Created Shared Value"7 or in short the CSV method. It states that companies must

think more carefully and innovatively for the detection and creation of joint economic and social

value propositions.

Creating Shared Economic and Social Values

Creating Shared Economic and Social Values or in brief "Created Shared Value - CSV", is

an innovative way to look at the common denominator between the economic and social value

propositions of a company such that a synergistic and profitability enhancing effect is created. It

requires a careful and creative look at how the corporate economic activities could satisfy an

existing social need in ways that could enhance the company profitability. CSV is a "Profit

Centric" approach for creating social impacts and it is therefore different from CP or CSR

approaches. CSV will bond the economic activities of the firm with the society and if managed

properly can enhance and stabilize profitability, social image and the reputation of the company.

The following table shows a simple comparative analysis for the three alternatives presented:

CorporateApproach

Description Centricity SustainabilitySocial

ImpactEconomic

Impact

CPproviding funds for social caring,nourishing and resolving differentsocial needs by the corporation

Cost Centric Low Low Low

CSR

considering the interests of thesociety by choosing socialresponsibilities that create animpact through a corporate SVP

Cost Centric Low to MediumLow to

MediumLow to

Medium

CSV Creating synergistic joint EVP andSVP in corporate activities

Profit Centric Medium to HighMedium to

HighMedium to

High

7 Created Shared Value (CSV) is the ability to create a joint synergistic corporate effect in the economic and socialvalue propositions of a firm such that either cost is reduced, income is increased leading to increased profits andenhanced medium to long term performances with strong social impacts.

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It has been proposed that, there are three corporate approaches in creating shared values

(Porter, Kramer, 2011) and they are:

1. Reconceiving products and markets; through finding, recognizing or developingnew customer needs, products and markets a company can create social impactswhile generating current or future profits. Providing Mobile Banking services to ruralor hard to reach regions by utilizing the IT infrastructures at low costs will open upnew banking service markets and will create huge social impacts in underserved andunserved regions.

2. Redefining productivity in the value chain; through reducing the CO2 emissions,energy and water usage or eliminating waste from manufacturing processes throughproductivity enhancements. This would help increase profitability and at the sametime reduce environmental problems.

3. Building supportive industry clusters at the company locations; through creating orsupporting the creation of business clusters that includes geographic concentration offirms and related businesses, suppliers, service providers, logistic infrastructures inspecial fields or industries. Business clusters can enhance personnel life styles,corporate innovation, productivity and regional business growth. Examples include;Diamond cutting cluster in India or "Yara International" strategy in Tanzania todevelop an Agricultural Infrastructure Corridor the size of Italy, to enhance anddevelop related corporate and other businesses in the region (Porter et al., 2015).

Examples of CSV ventures by corporations include:

1. "Discovery Limited" in South Africa; created a new profitable health insurance andwellness business service model with positive social impacts through improvingindividual's health in the society.

2. "Walmart" in America; restructured its stores and value chains to become moreenvironmental friendly and provide new products and services to rural markets andcustomers. It also increased its sourcing produce for its food sections from localfarms near its warehouses and saved on transportation costs.

3. "Bridge International" Academy in Kenya; developed a profitable model to buildand manage schools for the poor individuals in rural regions, based on scale and anefficient management system, at a cost of $4 a month per student.

4. "CVS Health" in America; redefined its strategy from being a retail pharmacy chainto a full health care service company while creating a new health care deliverymodel. In doing so, it created new markets, products and customers.

5. "Yara International" in Norway; developed an Agricultural Infrastructure Corridor(as big as Italy) in Tanzania, in partnership with 60+ other internationalorganizations, to enhance and develop related corporate and other agri-businesses inthe region.

6. "Nestle" in Switzerland; repositioned itself strategically as a nutrition, health andwellness (NHW) company, building factories in developing countries, utilizinglocally produced raw materials and changing insourcing practices benefiting,educating and providing financial help to thousands of smallholder farmers in Asia,Latin America, and Africa. It also provided inexpensive micronutrient reinforcedspices profitably to millions of malnourished families in India.

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7. "Novartis" in Switzerland; provided essential medicines and health services to 42million people in 33,000 rural villages in India through a business model that becameprofitable after 31 months.

8. "Novo Nordisk" in Denmark; redefined its strategy from being a pharmaceuticalcompany to a full health care service company. While doing so it created newmarkets, products and customers.

9. "Coca Cola" in America; increased profitability through reduction in its worldwidewater consumption by 9% from a 2004 baseline targets and helped the environmentby reducing water waste, globally. It also started a “Coletivo” initiative in Brazil thatincreased the low income youth and young adult’s employments leading to increasedsales through strengthening the company’s distribution channels and brandawareness.

To make CSV ventures operational, the following five basic steps need to be taken by

corporations (Pfitzer, Bockstette and Stamp, 2013):

1. Determine the Social Purpose and strategy for the company2. Define the Social Need that the company wants to address3. Determine the Measurement Metrics to manage and have scalable operations4. Determine the right and Innovative Structure to implement the plan5. Determine the right Partnership Structure to bring in other interested parties

Having the proper metrics for any CSV venture is essential. Otherwise progress and

impacts can’t be accessed and managed. There are current research efforts underway to determine

metrics and standardization for the CSV evaluation methods (Porter et al., 2012), but nothing

concrete or universal has become available. It could very well be that due to different cultures,

views and values no universal standards will become available. In the meantime the suggestion is

that each corporation develops its own internal CSV model and as long as it provides the right

direction and measurement metrics, it should be utilized.

One suggestion is that companies implement an Enterprise Wide Risk Management

(EWRM)8 and Synergy Management (SM)9 systems, jointly. This would allow them to measure

the economic value of the CSV ventures more accurately. Through the Synergy Management

system the synergistic joint economic and social values created will be determined and through

the Enterprise Wide Risk Management System the risk reduction effects of the CSV efforts will

be calculated. Finally, in an Economic Capital Analysis of the risk reduction impacts of the CSV

efforts, companies can determine how much less economic capital is required or created through

8 Enterprise Wide Risk Management (EWRM) system is a management process, effected by a large organization’sboard of directors, management and other personnel, applied in strategy setting and across the enterprise, designed toidentify potential events that may increase the organization’s business uncertainties, and its abilities to manage risks tobe within its risk tolerance levels or appetite and to provide reasonable assurances regarding the Business Continuityand the achievement of its Vision, Mission, Goals and objectives in a Prudent, Resilient, Stable and Holistic manner.9 Synergy, from the Greek word syn-ergos, means working together. Synergy Management (SM) system is amanagement process where existing and potential synergies all across the company are detected, measured, monitoredmanaged and reported. This system will try to enhance and facilitate different entities cooperate advantageously for afinal outcome or promote the concept that the whole becomes greater than the sum of the individual operations.

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the CSV efforts. This is a relatively complicated approach which requires the EWRM and SM

systems in place. If companies implement these two systems, they can have a clear, systematic

and advantageous position in managing their CSV ventures.

Conclusions & Recommendations

The principle of "Created Shared Value" does have some commonality with the ethical,

social and religious impact investments (Chung, 2013). Creating Shared Value focuses companies

on the kind of profits that create societal benefits rather than diminish them (Porter, Kramer,

2011). The CSV concept can hold the key for unlocking the next wave of business innovations

and growth. It can reconnect the company and the community successes in ways that have been

lost in the age of corporate "Crisis of Trust".

It is recommended that the following steps to be taken if corporate CSV ventures are to

become operational:

1. Establish a CSV Committee, with clear responsibilities to manage and develop the

required CSV governance structure, strategies, operational policies and measurement

metrics. Due to the inter-functional nature of CSV activities, the committee should

report directly to the president.

2. Based on the nature and size of the CSV ventures the committee should:

a. Determine the Corporate Social Purpose and Strategy

b. Define the Environmental and Social Needs

c. Determine the Measurement Metrics

Note: In case of not having an EWRM and SM systems jointly, it isrecommended that they be implemented

d. Determine the right and Innovative Structure through;

i. Reconceiving products and markets

ii. Redefining productivity in the value chain

iii. Building supportive industry clusters at the company locations

e. Determine the right Partnership Structure

3. Determine individuals responsible for supervision, execution and operations.

4. The committee should be responsible for developing the required CSV culture and

develop the required teamwork through education, lectures and seminars all across

the corporation.

It seems that if the CSV concept is developed and implemented properly, corporate

profitability will be enhanced and social, environmental and governance problems will be

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reduced in a sustainable and continuous manner. A win-win situation will develop for corporate

shareholders and the society and a more socially friendly and trust worthy view would replace the

current negative corporate image.

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REFERENCES

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Harvard Kennedy School, John F. Kennedy School of Government (2008). CorporateSocial responsibility Initiative, Defining Corporate Social Responsibility. Retrieved August15th, 2014, from http://www.hks.harvard.edu/m-rcbg/CSRI/init_defined_p.html

Pfitzer, M., Bockstette, V. and Stamp, M. (2013). "Innovating for Shared Value". HarvardBusiness Review, September Reprint R1309H. Harvard Business School. Cambridge, MA.

Porter, M.E. and Kramer, R.M. (2011). "Creating Shared Value: How to Reinvent Capitalism andUnleash a Wave of Innovation and growth". Harvard Business Review, January-FebruaryReprint R1101C. Harvard Business School. Cambridge, MA.

Porter, M.E., Hills, G., Pfitzer, M., Patscheke, S. and Hawkins, E. (2012). "Measuring SharedValue - How to Unlock Value by Linking Social and Business Results". FSG Consulting.Boston, MA.

Porter, M.E., Kramer, R.M., Ramirez-Vallejo, J. and Herman, K. (2015). "Yara International:Africa Strategy". Case: 9-715-402. Harvard Business School. Cambridge, MA.

Shayan, S.A. (2014). "Corporate Social Responsibility and Maximization of Shareholder Wealth".California Coast University, August. Santa Ana, CA.