Going by the current ESG norms and other related demands on enterprises today, businesses are no longer judged solely by their profitability. Instead, the ability to create both economic and societal value is becoming the new benchmark of success.
This shift is rooted in the concept of “shared value,” a powerful approach introduced by Michael Porter, whose competitiveness model got a beating in a world where opportunities are short-lived and entry barriers almost non-existent. To get his relevance back, he mooted this shift in 2011 post the financial meltdown. This was the time question marks were raised on the capitalism model, where maximising shareholder value was the maxim. Rita McGrath had come up with a very relevant model for being relevant in the marketplace, arguing against the long-term competitiveness model of Porter.
Shared value goes beyond traditional Corporate Social Responsibility (CSR). While CSR often involves supporting good causes and mitigating negative impacts, it typically remains on the periphery of a company’s operations. CSR is often seen as a defensive strategy, aimed at enhancing a company’s image rather than driving its core business objectives.
In contrast, shared value is about embedding societal impact into the very fabric of a company’s business model. It involves rethinking products, markets, and value chains to create economic value in ways that also generate societal benefits. This approach is not just about doing good; it’s about aligning business success with social progress.
A prime example of shared value in action is Mastercard’s Centre for Inclusive Growth. Recognising the global issue of financial exclusion, Mastercard set out to provide financial services to 500 million people who were previously unbanked or underbanked by 2020. By 2019, the company had already reached 400 million individuals. This initiative helps millions gain access to essential financial tools, and also expands Mastercard’s customer base, driving long-term economic growth for the company.
In 2018, Mastercard allocated 20% of its fiscal benefits from tax reforms in Europe and the USA to this initiative, amounting to $500 million. This illustrates how shared value can create a win-win scenario: social impact for underserved populations and economic gain for the company.
Another compelling example is SodaStream, which has made significant strides in reducing plastic waste. By offering a product that allows consumers to make sparkling water at home, SodaStream has helped to reduce the use of single-use plastic bottles. Families using SodaStream products contribute to a decrease in plastic waste, benefiting the environment. At the same time, SodaStream has tapped into a growing market of environmentally conscious consumers, driving its business growth.
Levi’s Water<Less jeans initiative represents a transformative approach to the value chain. Traditional jeans production is water-intensive, using approximately 3,000 litres per pair. However, through the Water<Less initiative, Levi’s has reduced water usage by up to 96% in some of its products. Beyond altering its own production processes, Levi’s is working with the cotton industry to develop more sustainable farming practices and exploring fabrics that require less water. This approach reduced environmental impact and positioned Levi’s as a leader in sustainable fashion, appealing to consumers who value environmental responsibility.
Perhaps the most ambitious example of shared value by a global enterprise is Nestlé’s approach to building a dairy industry in developing countries. Instead of simply importing milk, Nestlé invests in improving local infrastructure, offering farmers better prices and low-interest loans, and providing veterinary support. This “total” approach enhanced the quality of milk for Nestlé while raising the standard of living for entire communities. (Amul could be a good example but it came from a cooperative movement to a brand). Nestlé’s investment in local ecosystems goes beyond business interests; it contributed to the overall development of the regions in which it operates. This holistic approach created long-term benefits for both Nestlé and the communities, embodying the essence of shared value.
In contrast, the principle of “maximising shareholder value” has been the biggest culprit in growing greed and profiteering by corporations, leading to the creation of inequalities in society. Take a look at the negative impacts of this thinking:
Rising inequality: One of the most glaring failures is the widening gap between the rich and the poor. According to the World Inequality Report, the top 1% of the global population holds 38% of all wealth, while the bottom 50% owns just 2%. This disparity is not just a moral issue but also a threat to economic stability.
Environmental degradation: The relentless pursuit of profit has come at the expense of the environment. The Global Footprint Network reports that humanity uses the equivalent of 1.7 Earths to meet the demands of our consumption patterns. This unsustainable approach has led to climate change, biodiversity loss, and resource depletion, all of which threaten the long-term viability of our planet.
Corporate short-termism: Many corporations, driven by the need to maximise shareholder value, focus on short-term profits rather than long-term sustainability. This short-sighted approach has led to underinvestment in innovation, employee welfare, and environmental protection. Most CEOs are mandated to show short-term results as soon as they are appointed.
Labour exploitation: The constant chase for profits stresses cost-cutting and efficiency, which has resulted in the exploitation of workers. The International Labour Organisation (ILO) estimates that 24.9 million people globally are trapped in forced labour, with many more working in precarious conditions for minimal wages. This exploitation is not just a violation of human rights but also a source of social instability.
The transition from a shareholder value to a shared value approach represents a significant evolution in the way companies operate. By integrating social impact into their core strategies, businesses can create value for society while also driving their own growth and competitiveness. In an era where societal challenges are becoming more urgent and interconnected, the shared value approach offers a sustainable path forward for companies looking to make a positive difference in the world.
As businesses explore this new paradigm, the ability to create shared value will be a key differentiator. Companies that successfully integrate societal impact into their strategies will enhance their own competitiveness and also contribute to a more sustainable and equitable world.
In the end, the pursuit of shared value will always beat out the narrow focus on shareholder value, as it offers a more holistic and forward-looking approach to business success. Herein lies the opportunity for those CHROs aiming to be power leaders.