Social Innovation and Shared Value

11.12.2012 Blog

What’s the link between social innovation and shared value and is shared value a useful concept for social innovators?

For most of the 20th Century, political debate hinged on the opposition between free market capitalism and Marxist-Leninism. Since the fall of the Berlin Wall in 1989 the political debate has focused not on replacing or defending capitalism but rather, on reshaping it – to take into account wider social and environmental factors. There have been calls from many quarters for a re-shaped, re-invented, re-booted, re-formed capitalism; one which creates prosperity for people and planet.  This includes, for example, calls for ‘blended value’ and greater ‘sustainability’. Most recently, a new vision for capitalism has been put forward by advocates of ‘Shared Value’.

The death of neo-liberalism

The collapse of Lehman Brothers in 2008, and the economic crisis that has followed, has led to the unravelling of the neo-liberal ‘Washington Consensus’, namely, the idea that markets are self-correcting, allocate resources efficiently and serve the public interest. Even in Wall Street and the US Treasury, there is a recognition that neo-liberal policies of privatisation, deregulation and liberalisation have failed. Alan Greenspan, former Chairman of the Federal Reserve proclaimed that ‘the whole intellectual edifice’ of financial economics, ‘collapsed in the summer of 2008’ while Nobel Laureate Paul Samuelson described ‘how utterly mistaken was the Milton Friedman notion that a market system can regulate itself’. Even Larry Summers, Former President of Harvard University and Secretary of the US Treasury has argued that, ‘large swaths of economics are going to have to be rethought on the basis of what’s happened.’

Milton Friedman’s view that companies exist to maximise returns for their shareholders also seems incredibly misguided. There is now a widespread view that businesses are a major cause of social, environmental and economic problems - companies seem more concerned with short term profits than the needs of their customers or the environmental impacts of their business.

This perception has only been exacerbated in recent years by revelations about bankers’ bonuses, corporate fraud, tax avoidance schemes, exploitative labour malpractices, environmental damage and so on. Since 2008-2009, global trust in business has plummeted. Now, almost 50% of the US population do not trust businesses – the least trusted are banks and energy companies. Trust is even lower in Western Europe. Growing inequality, low levels of trust, together with anger about the current crisis have led to widespread discontent with ‘big business’ and free-market economics. The Occupy, Green and Anti-Globalisation Movements have their roots in this dissatisfaction. 

To many, it seems that businesses are benefiting at the expense of society.  As Umair Haque writes, this is because businesses ‘shift costs to and borrow benefits from people, communities, society, the natural world, or future generations.’ Others describe this process as ‘socialising’ costs or risks and ‘capitalising’ gains. As Dee Hock describes, ‘when a corporation ‘downsizes’ workers, abandons a community, or pays less than a living wage; when it creates and dumps waste in the process of manufacturing or marketing a product, or at the end of its useful life; when it receives a subsidy, guarantee, or relief from taxation by government, it has socialised a cost and capitalised the gain.’

Moreover, there is a sense that the interests of businesses are no longer aligned to national economic interests – it might be in the interest of a company to off-shore and out-source, but this is not necessarily in the interest of the local community, or in the national interest, as jobs, taxes and investment migrate abroad.  In the 1960s, Charles Wilson, the President of General Motors proclaimed that what was good for GM was ‘good for America’. Nowadays, it would be absurd to claim that what is good for ExxonMobil is good for America.

On the global level, Umair Haque argues that the last few decades have been an ‘era of growth driven by the global poor subsidizing the rich to fuel the over-consumption of an array of more and more ephemeral goods and services dependent on steeply diminishing returns economics, where the natural world, communities, and society are marginalised.’ The result has been ‘tremendously unsustainable global macro-economic imbalances.’ 

But now that neo-liberalism and the business practices it justified have been roundly discredited – what’s going to take its place? Who are the ‘new capitalists’, what do they want and why is this relevant to social innovation?

A new perspective on value creation

According to Michael Porter and Mark Kramer the current situation results from an out dated view that companies still have of value creation. Companies define value far too narrowly, focusing on short term profits to the detriment of broader factors which have a significant effect on longer term performance. Porter and Kramer  ask, ‘How else could companies overlook the wellbeing of their customers, the depletion of natural resources vital to their businesses, the viability of key suppliers, or the economic distress of the communities in which they produce and sell?’  

Instead, the authors put forward a new idea of ‘shared value’ which involves ‘creating economic value in a way that also creates value for society by addressing its needs and challenges.’ In this way, shared value differs from Corporate Social Responsibility (CSR); meeting social and environmental needs is core, not ancillary to business activity. Porter and Kramer argue that shared value ‘will reconnect company success and community success in ways that have been lost in an age of narrow management approaches, short term thinking, and deepening divides among society’s institutions.’ They also claim that shared value will ‘drive the next wave of innovation and productivity growth in the global economy.’

This is echoed by Umair Haque who argues that industrial age companies create ‘thin value’. Thin value is artificial because it is gained through harm to or at the expense of people, communities and society. And it is ‘unsustainable, because it is created at the expense of forgone benefits tomorrow; and it is meaningless because it often fails to make people, communities, and society durably better off in the ways that matter to them most.’ Instead, he advocates the creation of ‘authentic, sustainable and meaningful value’. 

Haque, Kramer and Porter point to organisations which embody these principles of ‘shared’ or ‘thick’ value. According to Porter, social entrepreneurs and social businesses embody this new practice by pursuing social objectives alongside economic goals. And in his New Capitalist Manifesto, Haque showcases organisations adopting 21st century – or ‘constructive capitalist’ - business practices. These include: moving from value chains to value cycles by renewing resources rather than exploiting them; moving from value propositions to value conversations by becoming more responsive to customers and democratising decision making powers (i.e. engaging customers); completing rather than protecting markets by catering to the under-served (for example, the world’s cheapest car, the Tata Nano) and; shifting production and consumption from goods to betters (i.e. “products and services that make a  difference to people, communities, and society” in order to create meaningful experiences for customers. 

Shared value and social innovation

Many of the practices Haque highlights could easily be described as social innovation.  In this sense, there is a significant overlap between those who seek to create shared value and social innovators – both seek to develop new products, services and processes which deliver benefits to citizens, communities, society, and future generations.  Moreover, it seems inevitable that there should be some overlap - social innovation is affected, shaped and guided as much by failures in the market as by social and environmental needs. Notable examples include fair trade, the co-operative movement, micro-credit and work insertion social enterprises. In this sense, calls for social innovation and shared value emanate from the same frustrations and the same desire to create value for society.

However, while there may be some overlap between social innovation and shared value, there are reasons why those who are interested in social innovation should be weary of calls for ‘shared value’. 

Some will argue that there are always trade offs and that the need to maximise profits will always trump meeting social needs. Others question whether shared value is new at all – and whether it’s simply the older concepts of ‘blended value’ and ‘sustainability’ repackaged for a new audience.

But these aren’t the things that concern me. Personally, I think all businesses should attempt to create ‘thick’ or ‘shared value’.  And, as Kramer says in a Guardian article, “shared value cannot solve every problem. Many challenges cannot be met by profitable solutions.”

Rather, I’m interested in the politics of shared value. What is the role of the government in a society where companies create shared value? Do governments take a step back and encourage companies to meet the needs of citizens and communities? How could governments encourage companies to do more in their communities? Or, is this simply another argument for limiting the role and scope of the state by making the case that it’s possible for companies to meet the needs of citizens and communities? And what about market failures? Are there some needs that can’t be satisfied by companies? If so, which ones and do these mark the limits of shared value? And lastly, how do you deal with the reality that value is subjective?  After all, what might be good for one community might be bad for another. Who decides?

If the concept of shared value is to be embraced more widely, then there needs to be much more debate to begin to answer some of these questions