12 February 2011

Reforming Capitalism

Posted by Admin under: Accounting; Economy; Forum; Future; History; Policy; Science; Sustainability .

I generally don’t have much time for economists, who in my view have mostly sought to elevate blinkered cynicism to the level of a science; and I have also not been a great fan of Michael Porter, the Harvard economist whose study of “clusters” in New Jersey seemed to me an exercise in the blindingly obvious.

But his latest work, “Creating Shared Value: How to reinvent capitalism—and unleash a wave of innovation and growth” (Harvard Business Review, Jan-Feb 2011; while you need to be a subscriber to reach the full article, you can get a lot of it by watching his “Reinventing Capitalism” video) seems to me to be nothing short of brilliant; while it is not entirely new, it is indeed a “big idea,” and it’s been put together by Porter and Mark R. Kramer in a novel and powerful way.

Porter and Kramer start from some of the readily apparent, but not always acknowledged, realities of today’s global economy:

The capitalist system is under siege. In recent years business increasingly has been viewed as a major cause of social, environmental, and economic problems. Companies are widely perceived to be prospering at the expense of the broader community.

Even worse, the more business has begun to embrace corporate responsibility, the more it has been blamed for society’s failures. The legitimacy of business has fallen to levels not seen in recent history. This diminished trust in business leads political leaders to set policies that undermine competitiveness and sap economic growth. Business is caught in a vicious circle.

What we hear from most of our politicians and corporate leaders is that whatever is good for business (usually, greater short-term profits) is good for society, but the evidence is otherwise. Porter’s deepest insight is to turn this on its head: what is good for society needs to be, and often is, good for business.

I’ve been waiting for a long time to hear an established mainstream intellectual make the obvious point that if the justification for capitalism is that it harnesses individual self-interest to the service of greater social good, then the measure of its success has to be the actual good it creates, not some promised future “trickle-down” benefit for the poor, along with the conspicuous overconsumption of resources by an increasingly powerful and concentrated wealthy class.

But Porter and Kramer repeatedly nail this in a way that seems irrefutable:

A big part of the problem lies with companies themselves, which remain trapped in an outdated approach to value creation that has emerged over the past few decades. They continue to view value creation narrowly, optimizing short-term financial performance in a bubble while missing the most important customer needs and ignoring the broader influences that determine their longer-term success. How else could companies overlook the well-being 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? How else could companies think that simply shifting activities to locations with ever lower wages was a sustainable “solution” to competitive challenges? Government and civil society have often exacerbated the problem by attempting to address social weaknesses at the expense of business. The presumed trade-offs between economic efficiency and social progress have been institutionalized in decades of policy choices.

Not only is the harm that is caused a problem for society; it is also, increasingly, a problem for business. And turning it around is the real opportunity available to drive sustainable economic growth today.

Capitalism is an unparalleled vehicle for meeting human needs, improving efficiency, creating jobs, and building wealth. But a narrow conception of capitalism has prevented business from harnessing its full potential to meet society’s broader challenges. The opportunities have been there all along but have been overlooked. Businesses acting as businesses, not as charitable donors, are the most powerful force for addressing the pressing issues we face. 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 legitimize business again.

This may not be an entirely appealing prospect to social progressives; but it is, in my view and that of most of my colleagues, the only one that is really available to us. Business has been a large part of the problem, but in many ways it’s all we’ve got that can create change on a global scale, and hence it needs to be a large part of the solution as well.

Companies must take the lead in bringing business and society back together. The recognition is there among sophisticated business and thought leaders, and promising elements of a new model are emerging. Yet we still lack an overall framework for guiding these efforts, and most companies remain stuck in a “social responsibility” mind-set in which societal issues are at the periphery, not the core.

The solution lies in the principle of shared value, which involves creating economic value in a way that also creates value for society by addressing its needs and challenges. Businesses must reconnect company success with social progress. Shared value is not social responsibility, philanthropy, or even sustainability, but a new way to achieve economic success. It is not on the margin of what companies do but at the center. We believe that it can give rise to the next major transformation of business thinking.

This highlights much of what is novel here: this is not a call to tack on some degree of “social responsibility” to firms whose economic mandate is to externalize their costs whenever possible; it’s a call to radically transform the very rationale for business itself. Capitalism, as the 18th-century Jesuit priest Dominique Bouhours first noted about money, makes a good servant but a poor master. Our economy needs to serve society, not the other way around.

There is a great deal more here, from the idea of redefining “value” to the role of social enterprise, from the implications for policy and for regulation, to describing in detail the differences between the shared-value approach to traditional CSR.

There is enough in this concept, as Porter and Kramer suggest, to serve as the basis for “the next evolution in capitalism.” But what stands out most clearly is the willingness to challenge the received notions of both neoclassical economists and today’s most rabid Tea Partisans on the right.

Consider this:

No all profits are equal—an idea that has been lost in the narrow, short-term focus of financial markets and in much management thinking. Profits involving a social purpose represent a higher form of capitalism—one that will enable a society to advance more rapidly while allowing companies to grow even more. The result is a positive cycle of company and community prosperity, which leads to profits that endure.

Or this:

The opportunity to create economic value through creating societal value will be one of the most powerful forces driving growth in the global economy. This thinking represents a new way of understanding customers, productivity, and the external influences on corporate success. It highlights the immense human needs to be met, the large new markets to serve, and the internal costs of social and community deficits—as well as the competitive ad- vantages available from addressing them. Until recently, companies have simply not approached their businesses this way.

Creating shared value will be more effective and far more sustainable than the majority of today’s corporate efforts in the social arena. Companies will make real strides on the environment, for example, when they treat it as a productivity driver rather than afeel-goodresponsetoexternalpressure.

Why haven’t we heard this before? Why are we always stuck in debates about the “trade-offs” between economic and social objectives? Why are intelligent policies always trumped by the dogmas of neoclassical economics? Why do economists claim to be realists while driving both developed and developing economies over the cliff?

As Porter and Kramer suggest,

The moment for an expanded view of value creation has come… We need a more sophisticated form of capitalism, one imbued with a social purpose. …that purpose should arise not out of charity but out of a deeper understanding of competition and economic value creation…

Creating shared value represents a broader conception of Adam Smith’s invisible hand. It opens the doors of the pin factory to a wider set of influences. It is not philanthropy but self-interested behavior to create economic value by creating societal value. If all companies individually pursued shared value connected to their particular businesses, society’s overall interests would be served. And companies would acquire legitimacy in the eyes of the communities in which they operated…

And finally, the academic and political preeminence of neoclassical economists needs to end:

Creating shared value represents a new approach to managing that cuts across disciplines. Because of the traditional divide between economic concerns and social ones, people in the public and the private sectors have often followed very different educational and career paths. As a result, few managers have the understanding of social and environmental issues required to move beyond today’s CSR approaches, and few social sector leaders have the managerial training and entrepreneurial mind-set needed to design and implement shared value models. Most business schools still teach the narrow view of capitalism, even though more and more of their graduates hunger for a greater sense of purpose and a growing number are drawn to social entrepreneurship. The results have been missed opportunity and public cynicism.

The time is now to restore a sense of social purpose to the world of business. As Porter and Kramer conclude, not all societal problems can be solved by shared value solutions. But many can, and addressing them is the best way for businesses to “earn the respect of society again.” It’s also the best way for businesses to ensure both our and their own future.

(Unless otherwise noted, all articles posted to this site are written by Jonathan Cloud, [email protected])

2 Comments so far...

matt polsky Says:

13 February 2011 at 10:47 am.

Michael Porter’s ideas on business and society are always welcome; in part because he’s Michael Porter…and it doesn’t hurt to invoke him to a complacent mainstream business audience.

Certainly his new idea for shared value has merit, which I don’t get into below. It will probably be useful for those would-be change-makers inside companies and elsewhere most comfortable with his assumptions that an evolving capitalism is best framed as one which seeks to create business value and pursue opportunities–still through self-interest, but with the simultaneously benefit of improving society.

However, he uses a constrained view of CSR (which is not uncommon) as philanthropy or greenwash to distinguish his concept. He is utilizing a straw man. Within the CSR field, there are lots of debates about its coverage and direction, although it is fairly commonly accepted there is already business value to practicing it; as well as whether CSR should be totally voluntary, whether it is only practiced at the peripheral level, and recently a breakthrough asking whether its potential should be limited to the ability to “make the business case” for it. Porter’s view overlooks the vibrancy and potential of the concept.

Further, I wonder how many more-or-less synonymous concepts we need when it’s such a struggle to move the mainstream to any progressive concept at all beyond “business-as-usual.”

In reality, while Porter wants to stay with self-interest as the only necessary motivating factor–and that’s certainly OK for some–he himself recognizes that more and more business graduates want more. If they’re motivated by making a diferenence or even philanthropy, why not speak to them as well and seek their participation in “reinventing capitalism”?

Matt Polsky

Admin Says:

13 February 2011 at 11:44 am.

Hi Matt: Great to have your comment. Perhaps because I was predisposed not to agree with him, I was surprised to find his argument covered so much ground, and melded so many ideas together in a way that I think will appeal to mainstream businesspeople, academics, and activists.

I understand your defense of CSR, and if you think of what the central idea of “social responsibility” is, he is of course espousing it.

But I think he really is going beyond it, in two ways: first, because CSR has been mostly lip-service; and second, because even where it is well-meant it has typically been “tacked on” to what is supposed to be business’s first responsibility (making money for shareholders), and he is seeking to make the concept of “creating shared value” central to the business vision.

I was a little taken aback at his claim that CSV is also “beyond” sustainability, but I can also see his point here: being sustainable has to be a baseline, but creating shared value goes beyond this to contribute to what humans actually want, which is meaning and purpose (and even enjoyment) beyond mere survival.

So I’d argue that it is not just adding a “more-or-less synonymous concept” to get people to move beyond BAU; it’s attempting to shift the goal of capitalism itself — back to what the original thinkers thought it should be, a way to allow individuals to be maximally creative and innovative, and to have them contribute to overall societal well-being through their myriad individual actions.

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