Can Companies Satisfy Shareholders and Stakeholders?
Shared value management helps companies find business opportunities in addressing social and environmental problems.
What should be the role of corporations in society?
Discussion and debate on this issue have been ongoing for decades. More recently, however, the 2007-2008 global financial crisis unleashed a huge wave of hostility towards multinational firms and financial institutions and even greater animosity among those on the political Left who do not believe that profit-making should be the sole purpose of the corporation.
The result has been that for nearly two decades, whether by choice or necessity (external pressure), companies have jumped on the bandwagon of “corporate social responsibility” activities and implemented environmental, social, and governance (ESG) measures to demonstrate to investors, employees, and the public that they contribute to the welfare of society.
But do companies have to choose between the pursuit of growth, profitability, and return on equity for their shareholders, and employing their financial resources for non-business endeavors in pursuit of noble social, economic, and environmental goals?
Clearly, there should be a middle ground. And there is: “shared value.” As conceived by Harvard faculty members Michael Porter and Mark Kramer, shared value is a management strategy in which companies find business opportunities in addressing social and environmental problems. An example would be a consumer goods firm that lowers its cost of packaging (saving money) while decreasing its environmental footprint at the same time. For Porter and Kramer, shared value is manifested in three ways: reconceiving products and markets, redefining productivity, and strengthening local clusters.
We propose broadening the “trio” by enlarging it to a “quintet”—adding the indispensable features of ownership and accountability. By upgrading and broadening the concept of shared value, we refer to it as the shorthand “Me to We” (M2W).
When it comes to ownership, a sense of ownership must permeate the organization and its value chain. This entails a clear definition of responsibility and expectations within a culture of engagement and inclusivity. Firms such as Hilton, Cisco, and employee-centric enterprises like Patagonia embody this concept.
To illustrate, in the automobile industry’s value chain, price, design, quality, service, and reliability are the critical features in car-purchasing decisions. To be effective and sustainable, workers responsible for each feature must feel empowered individually and as a group.
As for accountability, it starts with leadership’s example (i.e., Mary Barra at General Motors and Reed Hastings at Netflix). It requires responsibility for individual and team results and an acknowledgment that one’s actions have an effect on others’ ability to accomplish their objectives and goals. At times, this means taking responsibility for failure.
Accountability also requires changing the way success is measured at the institutional level, shifting from output metrics to outcome metrics. For example, generating a smaller carbon footprint due to a specific change in manufacturing operations. Finally, accountability cannot be delegated but must be front and center of a culture shift to make it one of the highest priorities of an enterprise.
Recognizably, a company is not a social welfare organization; and irrespective of the altruistic missives put out by corporate public relations departments, shareholders have a singular goal: ensuring that the company they are invested in relentlessly turns a profit.
While the Business Roundtable’s 2019 “Purpose of a Corporation” statement, signed by 200 CEOs, emphasizes a commitment to all stakeholders and an economy that serves all Americans, the bottom line is … well … the bottom line.
Be that as it may, given the growing convergence of shareholder-stakeholder relations in shaping the business ecosystem, Me to We (M2W) will gain even more influence and impact. Since the approach is bottom-up as well as top-down—closing the loop—it creates a win-win for all with a clear sense of shared responsibility.
One need only peruse Fortune magazine’s Change the World list that honors companies that use the creative tools of capitalism to address society’s unmet needs. Companies that create value can outperform their peers and produce superior returns both to society and shareholders. MasterCard is a prime example with a focus on growth through financial inclusion, yielding greater social value and shareholder returns. Other outstanding firms with a shared value emphasis include Unilever, AB InBev, and H&M.
We firmly believe that the concept of Me to We could invigorate capitalism and its relationship to society. It could quite possibly 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. Attaining it will require managers to develop new skills and knowledge, and governments to learn how to regulate in ways that enable a Me to We approach rather than work against it.
Ricardo Ernst is a professor of operations and global supply chains and the Baratta Chair in Business at Georgetown University.
Jerry Haar is a professor of international business at Florida International University and a global fellow of the Woodrow Wilson International Center for Scholars in Washington, DC.
Their book From Me to We: How Shared Value Can Turn Companies into Engines of Change is now available.