Shared value is a management principle where businesses grow their balancesheet through solving social problems
Shared Value: Evolution in Capitalism
In An Inquiry into the Nature and Causes of the Wealth of Nations, Adam Smith in 1776 wrote that the pursuit of self-interest would in itself result in social good. In his words:
“Every individual necessarily labours to render the annual revenue of the society as great as he can. He generally neither intends to promote the public interest, nor knows how much he is promoting it ... He intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for society that it was no part of his intention. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.”
The evolution of capitalism, the single most powerful tool to create economic wealth, has since taken a more conscious approach by those who have stood on Smith’s very shoulders. Businesses are starting to realise that growing the balance sheet by solving social problems can enrich both the bottom line and the global community. In the shared value model, externalities are no longer considered unintended consequences of pursuing self-interest, but internal costs to the corporation. Greater carbon footprint means higher energy and transportation cost; factory pollution endangers the health of global communities where employers and customers live, affecting productivity and brand image; and there is business opportunity to be found in alleviating poverty. The more conscious among entrepreneurs are aware that social costs are business costs and doing good is not merely a feel-good-thing, but a smart and sustainable corporate strategy to grow revenue.
The need for a more evolved version of capitalism was accelerated by the US economic crisis in 2008, the subsequent Wall Street bailouts, the painfully prolonged recovery, and the widening gap between the rich and poor in emerging economies like India, which led to an erosion of public trust. More people have begun to question the capitalistic model’s ability to create socially responsible and inclusive growth.
But has the time come to reinvent capitalism itself?
Michael E Porter of Harvard University and Mark R Kramer, co-founders of Boston-headquartered FSG and creators of the term shared value, believe that capitalism has reached a point where it cannot evolve meaningfully without solving broader, social problems.
At FSG’s Shared Value Leadership Summit for 2012 in Boston, Porter and Kramer explored how capitalism can be used to address social issues.
Under this approach, businesses must evolve from a drop-in-the-bucket philanthropy model (donation, volunteering), to the limited impact Corporate Social Responsibility model (CSR, compliance with community standards and good corporate citizenship) to the third level, which is creating shared value (CSV): That is, creating deeper economic value by creating widespread societal value.
As an example, Porter pointed to the pharmaceutical industry, which he said is starting to realise that it missed the unmet needs of several billion low- and-middle-income customers in countries with lesser welfare systems than the West. Now, businesses that are building shared value are learning to redefine their customer.
“We know how to innovate for customers in rich countries. The real opportunity is to serve those other customers. This is going to be your biggest business opportunity,” Porter told the 85 summit participants, mostly senior corporate executives, adding that by doing so, businesses will regain a sense of purpose.
Porter pointed out that the process of creating shared value fundamentally changes the way a business defines itself. For example, Nestle no longer thinks of itself as a food company but as a company that delivers nutrition. Healthcare equipment company Thermo Fisher Scientific, where Porter serves on the board, thinks of itself as a company that enables customers to create a healthier, safer and cleaner planet.
But the process of creating shared value is at a nascent stage.
Kramer acknowledged that there is an ingrained scepticism—that if you’re doing something good for the world, you can’t make money off it. But the rise of social entrepreneurship, he said, is starting to change this mindset.
Implementing Shared Value in India
Measuring Shared Value Creation