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Creating Shared Economic & Social Values In Economic Enterprises1

Shahin A. Shayan2

January, 2016

Abstract

In recent years, many business strategists have focused their thoughts on developing the most effective and impactful Social Value Propositions (SVP) in corporate economic activities. After the 2008 global financial crisis, the focus has gained additional momentum due to the impression of degeneration of corporate ethics, lack of corporate governance structures, fraud and insensitivity to Social, Environmental and Governance (SEG) issues which has led to a corporate "Crisis of Trust". In response to this crisis, some business gurus and think-tanks have focused their thoughts on means and ways to develop the soft side of the business in an efficient and effective manner. Various ideas have been proposed on ways to merge the corporate economic and social value propositions in order to gain back the strategically needed corporate trust, necessary for growth, sustainability and continuity of the businesses. Corporate Philanthropy (CP) and Corporate Social Responsibility (CSR) have been available 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 Shared Value" or the CSV concept. It focuses on the efforts to find a joint synergistic corporate design in order to merge the economic and social value propositions. In this paper we will try to explain and compare the three mentioned alternatives and propose a structure at which corporations could use to manage their CSV ventures more effectively.

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

1 This paper was written based on various studies, 8 years of experience in economic empowerment and poverty alleviation efforts in rural regions and the knowledge and experience gained by attending the Executive Management Program at the Harvard Business School in Dec., 2015 related to " Creating Shared Value: Economic Success 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-77217114 2 Chairman of the Board at Hoda International Financial Engineering Company

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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. 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 3 Corporate Governance can be defined as the set of processes, customs, policies and laws affecting the way a company is directed, administered or controlled. Although corporate governance is designed for the protection of its funders, it also applies to government, not-for-profit and other membership organization. It includes the defined relationships among the major stakeholders and the goals for which the corporation is governed. The principal players are the shareholders, management and the board of directors. Other stakeholders include employees, suppliers, customers, banks and other lenders, regulators, the environment and the community at large. 4 Corporate Philanthropy (CP) is when a corporation provides funds for social caring, nourishing and resolving a social need. The most conventional modern definition is "corporate and private initiatives, for public good, focusing on quality of life". Instances of corporate philanthropy commonly overlap with instances of corporate charity, though not all corporate charities are philanthropy, or vice versa. The difference commonly cited is that corporate charity relieves the 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 of society 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 their profits, but also how they make them. It goes beyond philanthropy and compliance and addresses how companies manage 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 seen to extend beyond the statutory obligation to comply with legislation and sees organizations voluntarily taking further steps to improve the quality of life for employees and their families as well as for the local community and society at large (Harvard Kennedy School, 2008). 6 Microfinance (MF) is the provision of financial services such as credit, savings, insurance, pension, investment and remittance on a micro-scale to the poor and low-income individuals that have been excluded from formal financial systems. 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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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.

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

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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: Corporate Approach Description Centricity Sustainability Social

Impact Economic

Impact CP providing funds for social caring,

nourishing and resolving different social needs by the corporation

Cost Centric Low Low Low

CSR considering the interests of the society by choosing social responsibilities that create an impact through a corporate SVP

Cost Centric Low to Medium Low to Medium

Low to Medium

CSV Creating synergistic joint EVP and SVP in corporate activities Profit Centric Medium to High Medium to

High Medium to

High 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 developing

new customer needs, products and markets a company can create social impacts while generating current or future profits. Providing Mobile Banking services to rural or hard to reach regions by utilizing the IT infrastructures at low costs will open up new banking service markets and will create huge social impacts in underserved and unserved regions.

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

3. Building supportive industry clusters at the company locations; through creating or supporting the creation of business clusters that includes geographic concentration of firms and related businesses, suppliers, service providers, logistic infrastructures in special 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 to develop an Agricultural Infrastructure Corridor the size of Italy, to enhance and develop 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 and

wellness business service model with positive social impacts through improving individual's health in the society.

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

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

4. "CVS Health" in America; redefined its strategy from being a retail pharmacy chain to a full health care service company while creating a new health care delivery model. 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 international organizations, to enhance and develop related corporate and other agri-businesses in the region.

6. "Nestle" in Switzerland; repositioned itself strategically as a nutrition, health and wellness (NHW) company, building factories in developing countries, utilizing locally 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 reinforced spices profitably to millions of malnourished families in India.

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

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

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

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 company 2. Define the Social Need that the company wants to address 3. Determine the Measurement Metrics to manage and have scalable operations 4. Determine the right and Innovative Structure to implement the plan 5. 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.

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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 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 is recommended that they be implemented

8 Enterprise Wide Risk Management (EWRM) system is a management process, effected by a large organization’s board of directors, management and other personnel, applied in strategy setting and across the enterprise, designed to identify potential events that may increase the organization’s business uncertainties, and its abilities to manage risks to be within its risk tolerance levels or appetite and to provide reasonable assurances regarding the Business Continuity and 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 a management process where existing and potential synergies all across the company are detected, measured, monitored managed and reported. This system will try to enhance and facilitate different entities cooperate advantageously for a final outcome or promote the concept that the whole becomes greater than the sum of the individual operations.

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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 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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