Why Companies Should Switch from Corporate Social Responsibility to Creating Shared Value
The UN’s Sustainable Development Goals (SDG) could open economic opportunities worth up to $12 trillion and increase employment by up to 380 million jobs by 2030.
Each year companies spend millions of dollars on corporate social responsibility (CSR). More precisely, Fortune 500 companies spend around $20 million a year on CSR projects. A common definition says that “Corporate social responsibility is a type of international private business self-regulation that aims to contribute to societal goals of a philanthropic, activist, or charitable nature by engaging in or supporting volunteering or ethically-oriented practices.” The main idea behind the CSR business concept is that companies get a chance to deliver on their responsibility to do good by solving some critical social or sustainability issues. The goal is to reduce or recompense for the negative impact that their business might have on a particular community, their employees, or society as a whole.
It is known that Starbucks, for example, is a company dedicated to giving back to the community and its essential stakeholders through various social activities. One of them is the concept of “fair trade,” which means that Starbucks pays a fair price for the coffee they purchase in the developing countries. Another good example of CSR is when TOMS committed to donating a free pair of shoes to a child in need whenever a pair was sold. This resulted in over 60 million pairs of shoes being donated. Other socially responsible activities refer to various philanthropic programs, reducing negative environmental impact, helping underprivileged populations, or employee well-being programs.
An important aspect of CSR is that it has mainly been considered a non-profit activity; apparently, its purpose is to give back to the community and not try to profit from these activities.
The logical question is then: why do private companies involve themselves in non-profit activities? Why do they spend thousands and millions of dollars on CSR? Are they really doing this for nothing in return?
The simplified answer would be — social pressure. Business and society have been pitted against each other in a way where a business is seen as one of the most negative influencers on society and sustainability. Although neoclassical thinking says that the business of business is to do business, and not deal with social improvement, the increasing pressure that comes from consumers has pushed companies to compensate for their negative impact through socially responsible projects. What companies are paying through CSR is their brand reputation.
What is wrong with CSR?
Corporate responsibility programs — a reaction to external pressures — have surfaced mainly to improve brands’ reputations and are treated as a necessary expense from a profit perspective. Since CSR has only a limited connection to the business’ bottom line, it is hard to justify and maintain it over the long run. On the other hand, consumers often criticize companies for launching CSR only as a means for gaining greater publicity. As a result, business is caught in a vicious cycle. If a company doesn’t invest in CSR, it risks weakening its reputation in the eyes of more and more conscious consumers; once it does, their activities are often seen only as public relation instruments (which they often are).
What needs to be done is changing the perspective of how companies deliver on their responsibility to do good in society. Relying only on CSR is not sustainable in the long term for the business itself, nor does it completely solve important societal or environmental problems. Companies must start taking care of all their stakeholders and producing economic and social value as parallel processes. They must begin creating shared value.
What is CSV and how is it different from CSR?
The idea of Creating Shared Value (CSV) was first raised by Michael Porter and Mark Kramer in the Harvard Business Review in 2011, where they describe it as “policies and operating practices that enhance the competitiveness of the company while simultaneously advancing the economic and social conditions in the communities in which it operates.” The shared value idea’s roots lie in the view that a business needs a successful community, as much a community needs successful businesses. This framework is moving away from the old, narrowed view of capitalism and business-NGO dichotomy, and the authors are attacking Milton Friedman’s argument that conducting a business as usual is sufficient social benefit.
In his article, Michael Porter says that “societal needs, not just conventional economic needs, define markets, and social harms can create internal costs for firms.” That means that social harms such as wasted energy, raw materials, or costly accidents, actually create internal costs for the company. Moreover, addressing those social harms will actually lead to an increase in the company’s productivity, effectiveness, and market expansion.
A good example of how to empower stakeholders while increasing economic and social value can be found at Nespresso, one of Nestle’s fastest-growing divisions, which has experienced annual growth of 30% since 2000. Instead of putting money in “fair trade” or other CSR campaigns, the company has invested in working intensively with coffee suppliers from rural areas of Africa and Latin America to address issues such as low productivity, poor quality, lack of technology, and environmental degradation. They didn’t merely pay more for the beans; they helped suppliers to create the premium beans that they can offer to consumers as a premium product. This way, everyone is gaining — the suppliers (and their community), the consumers (who are getting a better quality product), and the company’s bottom line. As Porter and Kramer said, “While Fair Trade can increase farmers’ incomes by 10 percent to 20 percent, shared value investments can raise their incomes by more than 300 percent.”
From doing “either good or making the profit”, to the model that can improve the world
CSV shows that financial, societal, and environmental benefits can be accomplished simultaneously. Although critics say that it is tough to achieve it, there is in fact a substantial financial incentive for many businesses to deal with societal and environmental challenges. A report by the Business and Sustainable Development Commission revealed that sustainable business models related to the UN’s Sustainable Development Goals (SDG) could open economic opportunities worth up to $12 trillion and increase employment by up to 380 million jobs by 2030. For businesses, that means a vast range of possibilities to make a shift from doing CSR as a means to get more publicity and maintain a positive brand reputation, to the model that will increase the societal value and their bottom lines at the same time.
However, a recent survey of the world’s top 300 investment firms reports that only 13% of their USD50 trillion investments are linked to SGDs. This tells us that we’re moving slowly towards the goal of achieving the SDGs and creating shared value ecosystems.
Whether the next ten years will make any difference to what has been done so far is mainly the responsibility of business leaders, who need to make another more important shift — to acquire a needed understanding of societal and environmental issues in order to move beyond today’s CSR approaches and start the next evolution in capitalism. It’s about time for business leaders to start making the shift, stop wasting their money, and start doing what the world really needs.
