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Ideas for Leaders #663

How to Create Shared Value for the Firm and Society

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Key Concept

The new Creating Shared Value (CSV) mandate that calls for business to focus on both making profits and helping society is criticized as naïve wishful thinking. The interface of business and society is not always win-win. An international team of academics answers the critics with a CSV+ framework that covers all situations — even the win-lose or lose-win ones.

Idea Summary

In a seminal 2011 Harvard Business Review article, Michael Porter and Mark Kramer urged companies to abandon the ‘old narrow view of capitalism’ in which the sole purpose of companies is to make profits. Instead of focusing exclusive on share value, they argued, corporations have a duty to also address the challenges of society — that is, in their terminology, to Create Shared Value (CSV). The result is a win-win: a win for business and a win for society. Failing to follow the CSV mindset undermines the legitimacy of corporations and industries, they argue. The 1984 Bhopal gas leak disaster, for example, undermined the legitimacy of the chemical industry.

Critics of the CSV framework call it ‘wishful thinking’ because it ignores the tension that often exists between the needs of business and the needs of society. Not every situation is win-win.

For Porter and Kramer, managers faced with win-lose or lose-win situations (i.e., when either the company wins and society loses or society wins and the company loses) should follow legal and ethical norms. For example, while polluting a nearby river may be the cheapest (and thus most profitable) solution for the disposal of waste, corporations must comply with the legal norms governing this activity, specifically anti-pollution regulations.

In a recent California Management Review article, authors Gaston de los Reyes, Jr. of George Washington University, Markus Scholz of FHWien University of Applied Sciences, and N. Craig Smith of INSEAD argue that CSV remains a powerful legitimizing framework for business. However, they also recognize its weaknesses as a guide for management action in certain situations. What happens in win-lose situations in which the legal and ethical norms are absent, obsolete or illegitimate in some way?

In other words, simply saying, ‘follow legal and ethical norms’ is not enough for the ‘B cases,’ as the authors call win-lose or lose-win situations. Which norms and what if norms don’t exist? To answer these questions, the authors introduce a CSV+ approach that combines CSV with two ethical frameworks:

  • a norm-taking framework for finding the appropriate ethical norms to follow
  • a norm-making framework for creating norms when there are no viable legal and ethical norms to follow

For norm-taking, the authors suggest that managers should seek out micro-social and hyper-social norms, as described in the Integrative Social Contracts Theory (ISCT). Micro-social norms are specific to economic communities; hypersocial norms are higher-level, transcultural norms, often rooted in or evolving from secular and religious traditions.

Here is one example of a B case: The managers of a forestry concern have to choose whether or not to bring profits into the company by cutting down a South American forest, despite the harm it will do to the habitat of the indigenous people in that region. At the hypersocial level, there are norms concerning human rights — codified in such documents as the United Nations Global Compact and the Universal Declaration of Human Rights — that put global ethical constraints on the actions of foresters. At the micro-social level, the forestry industry formed the Forestry Stewardship Council (FSC), which provides specific ethical norms to guide the activities of its members.

However, not every industry or situation will have clear legal and ethical norms in place. For example, in 2013, a building in Bangladesh containing several garment factories collapsed, killing more than 1100 people. Could the international brands who outsourced their manufacturing to those factories be held responsible for the disaster? Public opinion has put pressure on brands to monitor labour and safety conditions in the factories of its suppliers, but does this include construction?

In short, when legal and ethical norms are absent, obsolete or illegitimate in some way — when there is, in the authors’ term, a ‘regulatory void’ — it is time to begin norm-making. One compelling example of norm-making is the decision by pharmaceutical companies to throw-out their traditional competitive norms and offer their HIV vaccines for free to the distressed people of sub-Saharan Africa. In this example, companies drive the norm-making. Norm-making can also occur through multi-stakeholder initiatives, such as the Accord on Fire and Building Safety in Bangladesh, established by affected companies, NGOs and labour unions after the tragic building collapse cited above.

Business Application

While proponents and critics alike may emphasize the public policy facet of CSV, the authors of this article emphasize that CSV is notably a guiding strategic framework for managerial action and decision-making.

In practical terms, managers can synthesize the framework in two questions:

  1. Is there a win-win opportunity to create shared value? Look for sustainable shared value rather than focusing on short-term share value.
  2. Are there legitimate ethical norms to follow? In win-lose or lose-win situations, base decisions and actions on legal and ethical norms. If no legitimate norms are in place, work with other companies, within the industry or across industries and/or with other stakeholders, to develop applicable norms.

CSV revolutionizes the criteria for capitalistic success from only generating profits to also addressing societal challenges. This paper adds a rigorous how-to component to the theory, enabling its application to all situations. 

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Authors

Institutions

Source

Idea conceived

  • March 2017

Idea posted

  • August 2017

DOI number

10.13007/663

Subject

Real Time Analytics