Answering the Critics of Shared Value

The critics of shared value often misunderstand what it is (and isn’t), highlighting the need for more discussion about the role it plays. And I come at this as a practitioner who is working with the principles every day with clients across all sectors, not as an armchair expert.

Recapping ‘shared value’ principles

Put simply, ‘shared value’ is created when a company marries positive societal change with core and profitable business. It’s about finding the social and environmental challenges that, if addressed by the company, help in reducing its costs or increasing revenues. The concept is gaining traction as evidenced by Fortune’s Magazine’s Change the World List using shared value as its criteria.

When Cemex created a new and affordable model for housing construction and renovation in lower income areas in Mexico, it significantly improved housing quality, reduced time and cost and engaged local craftspeople in the work. From the company’s perspective, it created a new product in a new market that has contributed to the bottom line and helped it ride out shocks in more cyclical markets. This is an example of applying shared value principles.

Trust in business and capitalism

Low levels of consumer trust have led to calls to fix capitalism and for companies to be ‘good’. The ideal is valid and strong, however defining ‘good’ is problematic and, more significantly, shareholders will still be seeking profit growth. Shared value principles play a vital role in bridging social good with commercial objectives. It is a ‘lens’ for stimulating corporate innovation that also helps bring greater resources to societal challenges.

Whilst philanthropy is about giving back after profits have been made and corporate social responsibility (CSR) is fundamentally about managing brand risk, reputation and licence to operate, shared value is about finding the overlaps between societal challenges and profitable growth for a company or industry. I’m not saying that shared value replaces the other two forms of social support, they are in fact complementary, because they are addressing different needs.

What are the critics saying?

I’ll reflect on the main source of criticism that many others have cited as influential in their opinions: an online article by Crane referring to a co-authored piece with Palazzo, Spence and Matten.

As per Porter & Kramer’s response, I believe they fundamentally misunderstand what shared value is, firstly by interpreting shared value and CSR as competing rather than complementary options. They serve fundamentally different purposes and I always urge companies make conscious and considered decisions about the portfolio of social initiatives they choose to pursue. Secondly, they suggest that shared value proponents want to sideline ethics and social norms. I would suggest, again, that this is comparing apples with goats, as innovation principles, customer expectations and minimum community standards are different beasts.

Finally, they imply that the advocates of shared value believe it will rectify capitalism. It won’t fix everything, however it does help companies align their products and practices with genuine societal needs. I work hands-on with companies who are taking this alignment piece very seriously from the top down and, if they form a leadership group admired for their commercial results, others will follow.

I am in agreement with the authors in their summation: that collective and collaborative methods are required to address our biggest challenges. In my experience of multi-sector projects, shared value principles have played a role in bringing business to the table in a powerful way. Knocking on the door of a corporate CEO and asking for money is less effective that engaging in a discussion about solving one of their business challenges. More resources, scale and priority will flow to the latter.

When is shared value at its best?

Shared value works at the intersection of meaningful corporate challenges (or market needs) and societal problems. This means that there are also many, many problems for which shared value will play little or no role, and that CSR agendas, foundation grants, government grants, commissioned interventions, policy levers and other means will be the drivers of change.

If there is one shift that I think has been under-estimated through the introduction of shared value as a lens for innovation is that it has led to companies thinking beyond business systems and into much more expansive space, addressing challenges in the ecosystems they operate within.

With all this in mind, what are the types of questions that should be asking and addressing about shared value?

Q. Is shared value about social trade-offs or legitimizing bad business?

Sometimes, yes. The term ‘shared value’ has become a shiny new toy for the corporate world and a lot of claims are being made that wouldn’t stand up to scrutiny. There is no formal control over the use of the term, which can lead to ‘brand-washing’. I found in the early days, around 2013, that many CSR initiatives were re-branded overnight as shared value despite there being no evidence to make that case: an economic business benefit and a measurable, positive contribution to a societal challenge.

What I sometimes see is companies addressing secondary rather than primary issues associated with their products or practices and claiming ‘shared value’ and, while the claim may be valid, it isn’t the best use of resources. Take, for example, the tobacco company or sugary soft drink brand that celebrates a sustainable packaging initiatives; those issues are certainly worth tackling, however they may be far less significant than the primary health impacts associated with their products.

I’ve noticed that Nestle’s bottled water strategy can divide a room: is water a commodity for sale or a basic human right? Do we value a strategy aimed at switching consumers from sugary soft drinks to water? Is such a strategy socially progressive? I don’t have easy answers to the questions posed. However, it’s better to be having the discussion than avoiding it.

Ben & Jerry’s, now owned by Unilever, is a celebrated brand for its social remit and B-Corp status, and yet it produces and sells products high in sugars and fat, which must surely be challenging for an ethical purist.

It illustrates another key point: there is seldom a clear delineation between what’s right and wrong in terms of social impact. It’s fifty shades of grey. The interactions between companies, communities, citizens and governing bodies are infinitely complex and beauty is in the eye of the beholder, so to speak.

The introduction of shared value thinking hasn’t led to the discovery of new social problems, they are well known, however it has in some cases caused companies to think more strategically about their approach. I’d argue this is positive in trend terms, even if specific actions are debated. Large, legacy businesses are slow moving beasts; cut them some slack but, at the same time, hold them accountable for their approaches and the goals and milestones they set.

The takeaway: Constantly challenge companies with respect to the prioritisation and relevance of the societal issues they take on as well as honestly acknowledging their limitations. Celebrate the successes that are embedded in core business and question poor practices.

Q. Is it acceptable to profit from addressing societal challenges?

This is a real sticking point because social progress and profitability can be uncomfortable partners. What we find, though, is that many NGOs are enthusiastically participating in shared value dialogue because they believe that the charity and sustainability agenda alone will not be sufficient to bring the level of change required. Former President of the Rockefeller Foundation, Judith Rodin, made remarks to this effect at the 2013 Shared Value Summit:

The resources, scale and innovation of business are needed in order for us to make real headway on social issues.

In the Cemex example, would it have persisted with this strategy if it made no money? I doubt their CSR budget would scratch the surface in terms of creating the delivery model required. Given they are making money out of it they will keep doing it, and that is effectively the value proposition embedded in shared value principles.

Why is shared value attractive to NGOs? Because it’s about core corporate strategy rather than an add-on and, as such, can bring much greater resources, innovation and scale to the problem at hand. Like Cemex, I doubt Cisco would have spent $350 million partnering with public institutionsto provide online curricula, teacher training and professional development for instructors if it wasn’t seeking to improve labour market skills to support its own product growth agenda.

Linking the support of societal challenges to profitable business creates a reinforcing loop, one that is less likely to fall away when times are challenging. My first consulting assignment (many years ago) was with a crisis accommodation charity that lost 20% of its funding when the CEO of a supportive company moved on. It gave them a strong incentive to develop deeper and more strategic partnerships.

The takeaway: If we can accept that deriving profits from social initiatives or strategies gives business an incentive to sustain its investment and commitment to social impact, shared value provides a very good framework for doing so. At the same time, balancing those objectives takes discipline and skill.

Q. Does shared value have to comply with legal and ethical standards?

Every company should comply with rules, regulations and laws and I don’t think shared value advocates would be suggesting anything but that. Overall, creating shared value shouldn’t be confused with compliance because it is primarily about innovation and increasing competitiveness.

Whether companies conform to ethical standards is a far bigger question than the topic of shared value. In ethical investing, companies are screened in or out based on an ethical criteria prescribed by the investment manager. Different managers will set different standards so there is no one set of rules that everyone will agree with. I have personally found the application of black and white judgments to a raft of issues that have shades of grey to be challenging. Consider alcoholic beverages where it’s easy to make a good case either way: it causes many people harm and, at the same time, is a beverage enjoyed in moderation.

The boundaries of ethics are too fluid for mine. In my former working life as an investment manager I recall the large, progressive US pension fund that proudly announced that it was divesting from forestry companies … and later had to re-include some types of forestry companies because, along with all of their other exclusions, they were starting to run out of things to invest in.

With shared value, we are attempting to link social impact with economic outcomes. As such, there is an underlying assumption of good management, that companies operate to decent legal and ethical standards. Shared value should encourage executives and managers to think through the longer-term implications of their practices and where they brush up against ethical norms.

One thing shared value does do is to encourage the assessment of materiality, meaning that, for example, recycling coffee cups in the staff cafeteria is rated as far less important as, say, an industrial company reducing supply chain waste by 10%. In other words, focus resources on the biggest issues and payoffs on offer.

The takeaway: every company should operate to decent legal and ethical standards, however also make sure materiality is factored into your analysis.

Q. Is shared value a new form of imperialism, giving Western companies legitimacy in high growth developing markets?

There’s no denying multinationals are moths to the developing market flame and shared value could be used as a means for highlighting beneficial aspects of a company’s operations and diverting attention away from problematic practices. As a practitioner, I work with companies in developed economies and do not profess to have the requisite knowledge to answer developing market questions with confidence.

What I do know is that the products, practices and partnerships that result from applying shared value principles typically involve government, NGO and community engagement. At the same time, especially in the retail and agricultural sectors where supply chains are long and complex, the line could easily become blurred. While we can frame this partly as an internal governance challenge for multinationals, it’s also about breaking away from the old model of “selling to” to a model that is “listening, evaluating and co-creating with”. Global companies are good at building business systems and they are fairly new at working with ecosystems. Such a mindset shift, assuming companies can make that shift, will surely be positive in the eyes of critics of shared value.

The takeaway: Continue to question what is being done and why, and whether companies are shifting to an ecosystem mindset.

Q. Should shared value strategies only be aimed at dire social needs?

While several headline examples of shared value strategies are addressing major health or poverty issues, there is a much wider opportunity set. In developed countries, employment of mature age workers is an emerging issue that companies like CJ Korea Express are learning to address in a win-win way.

And there are new product opportunities that go with the social and environmental trends of the day. The Toyota Prius was cited by Porter & Kramer in their 2006 paper, Strategy and Society, as an example of a company leading on an environmental issue in a profitable way. In Australia, Lion had success with its Four-X Gold mid-strength beer, providing an alternative that increases the safety and sociability of alcohol.

Life insurance provider, Discovery Health, has developed the Vitality program where customers can opt-in to increasing their health and fitness with rewards, including lower premiums, on offer. It has created a new model for life insurance, where health assessment and risk assessment is a dynamic rather than static process.

The takeaway: Encourage companies to focus on societal problems relevant to their business as well as scanning for opportunities related to social and environmental trends.

Q. Does every social initiative need to exhibit shared value?

Definitely not. Corporate philanthropy, community investment, sustainability goals, maintaining a license to operate and stakeholder management activities are all part of a broad portfolio that corporations need to manage. Some of them may become pathways into shared value strategies as insights are gained and relationships develop.

An industrial company I was recently dealing with was practicing corporate philanthropy and, through local community circumstance, an opportunity arose for employees to become engaged in social issues that were on their doorstep. As much as I’d like to be helping them frame it as a shared value project, it just won’t deliver the commercial component for them. That doesn’t mean they shouldn’t do it.

The takeaway: Encourage companies to make conscious, sensible choices about their ‘portfolio’ of social initiatives.

Q. Will shared value solve all of our social problems and save the world?

No. Shared value provides an alternative lens for corporate innovation and competitiveness; one that aims to deal with social issues that are directly or indirectly impacting on financial performance. There will always be interventions required by government and NGOs for an array of issues and causes that shared value will not address. However, shared value does provide a stronger connection between company resources and social issues, a link that has been somewhat forgotten or missing in recent corporate history.

The takeaway: The conditions are ripe for shared value strategies to have a significant impact on societal improvement.

Q. Does shared value promote self-interest?

Yes it does. It is the connection with profitability that is the fundamental driver of shared value strategies. The strategies that companies pursue will operate at different levels: they may be company specific, or they may require collaboration on a regional, industry or market basis.

The Extractives Industry Transparency Initiative is an example of industry level collaboration to improve local governance for transparency and accountability. The corporate driver is to increase returns on funds invested in countries where governance is weak.

The takeaway: It is self-interest that drives corporate commitment to sustained investment in societal outcomes.

Q. What questions need to be added to the list?

I’ve done my best to raise key questions and answer them in the context of my own interpretation of shared value. I challenge you to identify:

• What’s missing?
• What needs expanding on?
• How could we improve the level and quality of dialogue on this topic?

When I read critiques or tough questions posed by others about shared value, I sense that we are all on the same side and our skills are complementary – we just have different ways of framing and influencing change.

Links to related commentary

• Tobias Webb on Weekend reading: Good recent FT debate about the pros and cons of “Shared Value”
• Thomas Dyllick on The opposing perspectives on creating shared value
• Andrew Crane on Premise of ‘creating shared value’ risks misleading MBA students
• Crane et al on Contesting the Value of Creating Shared Value
• Porter & Kramer’s response to Crane et al in What’s the Value of Shared Value?
• Thomas Donaldson on Shared values that are lost in translation
• John Elkington on Sharing Value en Route to an Early Grave

Phil Preston is an expert in aligning profit with social purpose and the author of of Connecting Profit With Purpose. He can be contacted via [email protected] or +61 408 259 633.

This first appeared as a blog on Phil's website.

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