By Leon Gettler

It’s a captivating proposition: a company’s success is linked to social progress.

Shared value’s biggest champion is Michael Porter, one of the world’s most distinguished strategy gurus. He set out his ideas in the Harvard Business Review in an award-winning piece co-authored with Mark Kramer where they argued executives can address social issues while simultaneously creating economic value for the company and creating new stakeholders. Hence the term “shared value”.

“Shared value is not social responsibility, philanthropy or even sustainability. It is not on the margin of what companies do but at the centre,’’ they write. “We believe it can give rise to the next major transformation of business thinking.”

They argue that the concept of shared value recognises that societal needs, not just conventional economic needs, define markets. The concept also recognises that society’s problems can create internal costs for business. Examples would include wasted energy or raw materials, and costly accidents. Rather than raising costs for business, they say, addressing societal needs and constraints can drive innovation through new technologies, better operating methods and management approaches.

They argue that capitalism is the perfect vehicle for meeting human needs, creating jobs and building wealth. But a narrow conception of capitalism, they say, prevents capitalism from harnessing its full potential to meet society’s broader challenges.  What’s needed is a re-evaluation of capitalism’s true role.

“Businesses acting as businesses, not as charitable donors, are the most powerful force for addressing the pressing issues we face,’’ they write. “The moment for a new conception of capitalism is now; society’s needs are large and growing, while customers, employees, and a new generation of young people are asking business to step up.

“The purpose of the corporation must be redefined as creating shared value, not just profit per se. This will drive the next wave of innovation and productivity growth in the global economy. It will also reshape capitalism and its relationship to society. Perhaps most important of all, learning how to create shared value is our best chance to legitimise business again.”

There are many examples of companies already creating shared value.

Nestlé for example is tackling malnutrition. The company sent a team of researchers to India, who discovered that 70 per cent of children under the age of three and 57 per cent of women suffered from anaemia. They then visited 1,500 poor households to study cooking customs and diets and discovered that spices provided an optimal vehicle for hiding the bad taste of crucial micronutrients: iron, iodine and vitamin A.  

Nestlé went on to launch Maggi Masala-ae-Magic, a micronutrient-reinforced spice product specially priced for low income consumers in India at three rupees. It’s been a real income generator for Nestlé. The company has sold 138 million servings of  Masala-ae-Magic using existing and new non-profit distribution channels to reach the most remote and affected areas of India.

Vodafone’s M-Pesa mobile banking service was set up to give people in less developed countries access to financial services. Vodafone obtained a grant from the British government’s Department for International Development and proponents had to overcome internal scepticism at the telco.

The venture was kept separate from other Vodafone businesses and was put through two years of in-market experiments.

Today M-Pesa (or M-Paisa, as it’s called in some countries) is managed by Vodafone’s national subsidiaries. It is one of the telco’s most important offerings and accounts for 18 per cent of the revenue of Safaricom, Vodafone’s Kenyan subsidiary, in which Vodafone holds a minority stake.

UK retailer Marks & Spencer has developed a programme in support of Oxfam’s collection of used clothing, some of which is passed on to people who need it and some of which is recycled.

Realising that many of its customers had full closets, Marks & Spencer brought in a “schwopping” programm which combined shopping and swapping: customers are encouraged to bring a piece of clothing they no longer want when they come to Marks & Spencer to buy something new. They drop the clothing in a convenience box at the store, receiving a coupon entitling them to a discount on their purchase.

In Australia, 40K Consulting works with young professionals to promote shared value.  

It works as a business collective, made up of three separate companies, including the 40K Foundation. The profits that the businesses turn are designed to take the foundation staff off payroll so that the donor’s contributions are going to straight to educating children.

The companies are united by one important aim: to make a positive social impact. 40K’s general manager is Antony Tow CA, and the organisation has a variety of programmes in place.

It works with young professionals in big business, encouraging them to seek out inventive opportunities where making money and doing good can be incorporated into their business.

It runs an after-school education programme for children in India. The programme is supported by donations and 40K Consulting income. The families sending their children to 40K PLUS pay $1 a month.

It also runs a one-month social entrepreneurship programme open to tertiary students and career-breakers wanting to learn about life in India. The aim is to get them to create a useful, sellable product or service using only local resources.

How to create shared value

Writing in the Harvard Business Review, Marc Pfitzer, Valerie Bocksette and Mike Stamp identify five elements to creating social and business value simultaneously.

There has to be a social mission embedded into the business culture, one that can invest in innovations to address social problems. Research is required to identify social problems, the barriers to progress and the options for creating change. It is necessary to analyse how much social change is needed to unlock business value and consider various options for designing the best financing governance and management systems, and finding ways to co-create with external stakeholders, for example non-profits.

Measuring the return on investment (ROI) from shared value activity is more complex. ROI analysis is not always possible because the numbers are difficult to find. Also, NGOs, community groups and activists collaborating with the company don’t usually use standard accounting practices or have the budgetary rigour found in business.

Even when business systems are built into these sustainability initiatives, the quality of the reporting can vary wildly. While traditional financial models are built around trackable monetised results, the benefits of these initiatives are more intangible, providing a bank of goodwill that bolsters a company’s reputation and enhances its brand equity. All this requires a completely different approach to ROI.

Chartered Accountants Australia and New Zealand has identified it as a business innovation issue (see box above left). As it says in its thought leadership paper: “Nationally and internationally, impact investments are being used to finance initiatives in a wide range of areas, including the arts, aged care, community development, education, employment, health, environmental management, sustainable agriculture, renewable energy, justice, social housing and international development.”

Watch this space.

Leon Gettler is an independent journalist and presenter.

This article was first published in the September 2014 issue of Acuity magazine.