A growing number of multinational corporations—including Unilever, Intel, and Wal-Mart Stores—are embracing a new way of doing business, one that puts societal issues at the core of the company’s strategy and operations. This approach differs from traditional “corporate social responsibility,” which is often built around compliance with environmental and social regulations, improving the corporation’s reputation, and unfocused charitable giving to a variety of causes frequently unrelated to the business.
The new approach to doing business, dubbed “creating shared value” by FSG co-founders Mark Kramer and Michael Porter, extends well beyond those practices. (See their cover story, “Creating Shared Value,” in the January-February 2011 issue of the Harvard Business Review.) Shared value is created when companies generate economic value for themselves in a way that simultaneously produces value for society by addressing social and environmental challenges. Companies can create shared value in three distinct ways: by reconceiving products and markets, redefining productivity in the value chain, and building supportive industry clusters at the company’s locations.
Shared value taps the capacity of global businesses to solve social problems, just as social entrepreneurs do through smaller-scale enterprises. Porter and Kramer believe that widespread adoption of a shared value approach could reshape capitalism and its relationship to society. They also predict that it will drive the next wave of innovation and productivity growth in the global economy as it opens managers’ eyes to immense human needs that must be met, large new markets to be served, and the internal costs of social deficits—as well as the competitive advantages available from addressing them.
The idea that companies should create shared value carries many implications that corporate leaders are only beginning to understand, which is why we brought together corporate practitioners to share their experiences and discuss evolving practices. On Dec. 8, 2010, executives from 10 major corporations gathered at Goldman Sachs’s New York City headquarters to discuss how their companies were implementing shared value. They were brought together by FSG, the Stanford Social Innovation Review, and the Committee Encouraging Corporate Philanthropy (CECP). Some of the companies—such as Cisco Systems, Hewlett-Packard, and IBM—have been taking a shared value approach for some time. Other companies—such as Western Union, Alcoa, and InterContinental Hotels Group—are new to the approach. But all of the participants—which also included Goldman Sachs, Dow Chemical, Medtronic, and PG&E—are enthusiastic about the results and prospects for the future.
The candid discussion, led by Kramer and FSG managing director John Kania, was wide ranging and posited a number of interesting shifts in the way companies address social problems when they pursue shared value. It profoundly changes the relationship between companies and nonprofit organizations, creating a mutual interdependence and heightened accountability for delivering results. Shared value engages companies more deeply in social issues, holding the promise of far greater resources and a multitude of innovations to address today’s most urgent needs. Above all, it accelerates and expands the potential for social impact as major corporations launch initiatives that reach millions of people at a pace and scale that have rarely been achieved by the nonprofit sector. At the same time, as the participating executives acknowledge, shared value demands a delicate balance between social needs and corporate profitability that is not easily achieved.
Talya Bosch, director of corporate social responsibility, Western Union
Roslyn Dickerson, senior vice president of corporate responsibility and public affairs, InterContinental Hotels Group (IHG)
Paul Ellingstad, director of the office of global social innovation, Hewlett-Packard
David Etzwiler, executive director of Medtronic Foundation, and vice president of community affairs, Medtronic (has since left Medtronic)
Reginald Foster, regional manager of corporate citizenship and corporate affairs, IBM
Ezra Garrett, executive director of PG&E Corporation Foundation, and director of community relations, PG&E
John Kania, managing director, FSG
Tony Kingsbury, senior leader, Dow Chemical, and Dow Executive in Residence, Sustainable Products and Solutions Program at the Haas School of Business, University of California, Berkeley
Mark Kramer, co-founder and managing director, FSG
Noa Meyer, vice president, Goldman Sachs
Kathy Mulvany, senior director of corporate affairs, Cisco Systems
Dina Habib Powell, president of Goldman Sachs Foundation, and global head of the office of corporate engagement, Goldman Sachs
Beth Schmitt, director of recycling for Alcoa North American Rolled Products, Alcoa
Mark Kramer: Let’s start with the question of motivation. When did your company begin to adopt the perspective of shared value, and what prompted that change?
Ezra Garrett: At PG&E, a paradigm shift occurred in the aftermath of the mid-2000s energy crisis. Our CEO, Peter Darbee, made a bold public statement: that we believe climate change is real, and that as a member of the utility industry we have to take the leadership role in finding solutions to that problem. So we articulated a vision of being the leading utility company in the United States, and to support that we outlined four simple goals, to be a leader in engaged employees, delighted customers, environmental leadership, and total shareholder return. That reflects the triple bottom line concept of shared value.
We then said, “Why don’t we propose a really aggressive program to help incentivize our customers to use less energy?” Colleagues in the industry—and I don’t mean just the utility industry, but big businesses—asked us: “What in the heck are you thinking? How can you encourage your customers to use less of your product?” But we knew it was the right thing to do and we knew that we could work within that framework to provide offsets to the customers to take those steps.
Where the value creation really happened was when we were able to bake these incentive programs into our corporate strategy. Instead of it being just a PR thing, we really put skin in the game, to make sure that customers actually did reduce their usage. We’re committed to paying a pretty hefty fine if customers don’t meet those goals. And it has worked. Over the past 30 years energy usage in the United States has gone up 50 percent per capita, whereas in our service area it’s remained steady.
The challenge on the philanthropy side of the company was, how do we create a new charitable program that is reflective of our environmental leadership goal? So, for example, we created a program with Habitat for Humanity where we fund the installation of solar on every Habitat home built within our footprint in Northern and Central California. Major change is a challenge for any organization, and for a 100-year-old utility company like us, it really took something as drastic as the energy crisis to get us to initiate that change and see it through.
David Etzwiler: For Medtronic, the shift began when we moved into emerging markets. It became clear to us that the old innovation model that we had used in the United States and other developed countries is not effective when you try to develop and sell products for the middle and the bottom of the economic pyramid. Instead, we had to go into a community and start from scratch by asking the question, “What’s not happening here that could happen, and how do we address it?”
Sometimes the answers to that question are coming from those of us who spend time with NGOs. Other times it’s coming from our government affairs folks. And other times it’s coming from our business model innovation folks. As a result, there was a slowly developing Aha! moment—that we’re really learning innovation through shared value. Our CEO absolutely drank the Kool-Aid with us. He assigned a top-level executive committee to oversee this work. And we engaged in a process that led us to underscore the vision of working to serve folks in the middle and bottom of the economic pyramid.
Kathy Mulvany: At Cisco it really began with our employees. In the early days of Cisco we were based in East Palo Alto [California], which is not the safest neighborhood in the world. Some of our employees wanted to get engaged in the community. We happened to be next to a school, and we thought, “We’re a technology company, let’s go in and wire the school for Internet access.” But as often happens, we realized that it’s one thing to give technology. It’s another thing for that technology to actually have some benefit if nobody knows how to use or maintain it.
Out of that realization, an employee said, “Why don’t we teach the students how to use the technology?” John Morgridge, who was our CEO and chairman at the time, liked the idea, and it led to the creation of the Cisco Networking Academy. It was driven both bottom-up and top-down. You have to have executive leadership that absolutely believes in it and is passionate about it, as John was then, and John Chambers, our current CEO and chairman, is today. He absolutely believes it is relevant to the business. He continually says that social investment and giving back to communities is the right thing to do, and it’s also very good for business.
Roslyn Dickerson: The beginning for IHG was new leadership at the company and a shift in our strategy. Heretofore, we approached the business as an operating company. Heads in beds. We didn’t much care about their experience. We just wanted them in our hotel.
Our new CEO came from Cadbury Schweppes, a consumer brand company, and he began our transition to a brand-led company. Now it isn’t just about the head in the bed. It is the guest’s experience that matters. Our mission as a company today is to create great hotels guests love.
In our research we found that there are a few things that factor into the customer’s experience. First, we discovered that the customers’ love of the experience is directly correlated with the service they receive. If the person working at the hotel is happy, I [the customer] know I’m going to get better service. If they’re better trained, I’m going to get better service. If they’re using healthier products, I know I’m going to get better service.
Another factor that arose in our research about the customer’s experience was the notion of safe hotels. We expected customers to bring up the importance of having a safe hotel. What we didn’t expect was that a safe hotel was associated with having a safe environment and a safe planet. And last, we began to consider a very interesting philosophical question that our board of directors raised after looking at all of the data. And that question was, what’s the role of a hotel in society today? That took us down a path of understanding what the hotel represents to a community. Hotels are a very intimate thing. If you live in a small town, you know. They are the place where you have bar mitzvahs and weddings and some of the best experiences in your life. And it’s also where you go for shelter in times of need. We learned that we already had a connection to the community that we just weren’t leveraging.
Those were the catalysts for us. We’ve got a lot of data and good anecdotal information. Now we’re pulling it together to represent both the environmental sustainability component of this work and the community component of this work.
Reginald Foster: IBM has a long commitment to contributing to society, but recently we found that more and more of our customers were talking and thinking about these things. We did global CEO studies, which found that CEOs as a group were ahead of the public in being concerned about sustainability, climate change, and these kinds of issues. They were worried about the impact on them, on their kids, and so on. So one of our new programs is something called the Smarter Cities Challenge, which will award $50 million in grants over three years to 100 cities around the world to help them solve health, traffic, safety, grid, water, these kinds of problems that are all related to growth and sustainability.
Paul Ellingstad: In the last 10 years Hewlett-Packard has gone though an interesting time. Under our former CEO, Carly Fiorina, we were really engaged in social innovation. It was like clockwork. She would be in Davos one week and in South Africa the next week. We did some fascinating things around digital inclusion in South
Africa in particular. Unfortunately, at that time the company’s financial and operational performance did not consistently match the amazing things that were being done in terms of social impact.
The pendulum then swung under CEO Mark Hurd; the next five years were very focused on financial and operational performance and social impact reverted to a more traditional corporate philanthropy model. Since late 2009 we’ve undergone a transformation, moving from the philanthropy model to begin really looking at how we leverage the 300,000 employees and all the expertise we have in solving social problems.
Kramer: It’s clear that the reason a company embarks on a shared value strategy can vary widely. The shift can be driven by customers, employees, CEOs, markets, and external events. Before we dive into some other questions, I’d like to hear from the rest of you about your shared value programs. Noa, what is Goldman Sachs doing?
Noa Meyer: The Goldman Sachs Foundation is focused on economic growth and opportunity, which is aligned closely with the work of Goldman Sachs the company. We launched 10,000 Women about three years ago, based on research that looked at how increasing the participation of women in the labor force increases GDP. Today, more than 3,000 women in 22 countries have graduated from the program. A little over a year ago we launched 10,000 Small Businesses in the United States. We started in New York and are also in Los Angeles and New Orleans.
Goldman Sachs employees are clamoring to assist those two programs by serving as mentors and providing feedback on business plans. There’s just an enormous amount of interest and desire by our employees to be involved. Our work is obviously serving the communities in which we live and work, but it is also providing the roughly 30,000 people who work for Goldman Sachs opportunities to use their skills in ways that are meaningful for them.
To read much much more, go to http://www.ssireview.org/articles/entry/qa_roundtable_on_shared_value/