Framework 68 Shared Value (includes CSR)

Introduction

- it is about how firms can grow profits while delivering value/benefits to the community

- it is a refinement of the concept of corporate social responsibility (CSR). CSR is based on firms donating money to charity and the not-for-profit sector.

- Questions being asked include
i) does it work?
ii) is it good PR?
iii) will it replace CSR?
iv) is it considered an unwanted distraction, ie takes management's focus away from its fundamental responsibility to deliver returns to shareholders.

Two fundamental tests for whether a business strategy qualifies as "shared value"

i) is it generating a profit or an economic benefit for the business?

ii) is it making a measurable impact on an important social issue at scale?

It is about putting philanthropy under the same kind of rigorous, dated-driven analysis (of operations, value chain, etc) that is used in making business decisions so that they are more effective, equitable and efficient.

It has been found that a company has a greater impact on social issues than a philanthropic foundation.

Some of the social issues a company can benefit from include

- an adequate education system to generate the skill workforce needed

- all kinds of environmental and economic development challenges

NB it requires thinking around new and emerging markets

A shared value approach allows business to promote itself to the public and other stakeholders as a caring corporate citizen while boosting the bottom line

"...At its essence it is about how to tackle social issues in a way which will benefit the business, either through new products and services cost savings..."

Ramana James of the Insurance Australia group as quoted by Patrick Durkin, 2015

It is being commercially minded and mutually spirited; it identifies measurable economic value in addressing social and environmental problems. it is about taking Pacific actions that both increase profits and improve the economic and social conditions community where organisations operate.

Some examples include

- Vodafone (UK-based telecommunications firm) and Safaricom (Kenyon mobile network operator). Vodafone developed the M-Pesa mobile money transfer and payment system to target 2.6 b. people who do not have a bank account. Using Kenya as the trial market, around 18 m. customers joined in 6 years. Over 40% of Kenya's GDP is now transacted through M-Pesa and it has around 100% customer loyalty.

- IAG (an Australian-based firm) owns NRMA, CGU & SGIO, has developed a project to design new affordable insurance products to protect the assets of low income families plus a research centre to look at car crashes and road safety

- Westpac (an Australian bank) that since 1817 has initiated disaster relief funds to support communities impacted by natural disasters like floods, bushfires, etc.. It also allocates funds to social and affordable housing plus clean tech and environmental services

- Coles (an Australian-based supermarket) has a partnership with the charity SecondBite which distributes fruits and vegetables that would otherwise go to waste to homeless people.

- NAB (an international Australian bank) working with those struggling with debt payments to lower their debts; it has reduced bad debts by 20% and saved A$ 7.2 m.

Also, it has focused on sustainability in agribusiness lending to producers, ie it has put a value on "ecosystem services", such as the provision of clean water, ie

"...with the data they get from being more efficiently managing their soil and water into the way we look at assessing their credit risk metrics..."

Helen Steel (Executive Director, NAB Shared Value project) as quoted by Theo Chapman, 2017

- Lion Nathan (an Australian-based food and drink producer) which has developed low-alcohol beers and healthier dairy products and drinks

- Bendigo & Adelaide Banks (an regional -Australian banks) that have opened branches in rural communities with agreements that a significant, pre-agreed percentage of any profit will be distributed to local community initiatives, such as sports and other recreational facilities.

It is a franchise model where a community company is formed that has the rights to operate in a geographical area and the revenue they generate out of the branch is shared 50-50; with the operating expenses covered by the community company, the bank pays for computer systems, takes the risk on the credit, uses their balance sheet capital raising, etc. The profits from the community bank company are split 80% to the community and 20% of the shareholders

A shared value approach allows business to promote itself to the public and other stakeholders as a caring corporate citizen while boosting the bottom line

"...At its essence it is about how to tackle social issues in a way which will benefit the business, either through new products and services cost savings..."

Ramana James of the Insurance Australia group as quoted by Patrick Durkin, 2015
(source: Partick Durkin, 2015)

Shared value is the creation of economic value in a way that also creates value for society by addressing its needs and challenges. It is not social responsibility, philanthropy, or even sustainability, and a way to achieve economic success.

It focuses on organisations creating business value by identifying and addressing social problems that intersect with their business.  It is seen as an illusion of corporate social responsibility and works best when it is implemented at the core of businesses operations and strategy. It focuses on organisations creating business value by identifying and addressing social problems that intersect with their business.  It is seen as an illusion of corporate social responsibility and works best when it is implemented at the core of businesses operations and strategy.

It focuses on organisations creating business value by identifying and addressing social problems that intersect with their business.  It is seen as an illusion of corporate social responsibility and works best when it is implemented at the core of businesses operations and strategy.

It focuses on organisations creating business value by identifying and addressing social problems that intersect with their business.  It is seen as an illusion of corporate social responsibility and works best when it is implemented at the core of businesses operations and strategy.Based on current research, we can measure the impact of an organisation's activities on public health and the environment.  It will access whether an organisation has a positive or negative impact on the world. 

Even though environmentally sustainability reporting is compulsory in some countries (especially relating to risk that might affect financial performance), it is hard to verify the claims that many organisations make about their environmental record, social programs and community work.

"Environmental sustainable" refers to operating in a manner that does not compromise the health of the ecosystems it operates in the long-term. Elements of sustainability include climate change, water, food security, health, etc

Some examples
- firms that build wind turbines to displace fossil fuel energy which will result in less air pollution, ie less CO2, less smog, etc. This has a positive impact on human lives by reducing asthma, cardiovascular distress, premature deaths, etc
- firms that produce sugar-laden drinks, like Coca-Cola, have a negative impact on obesity, diabetes and public health, ie the sugary stuff is killing people!!!!

"...it's just a matter of translating environmental damage into human lives, into economic output, and there's multipliers.  So many pounds of toxic chemical or air pollution because of the concentration of the air pollutant......kills so many people..."
Dinah Koehler as quoted by Joanne Gray, 2016

Some statistics
- in China, 1.7 m deaths a year are linked to air pollution
- in USA, the dollar value of a statistical life is around $ 9 m.

Universities are developing metrics which will rate an organisation's net impact on the environment.  More and more data from organisations and governments is becoming available.

NB no organisation and technology is risk-free or squeaky clean (Joanne Gray, 2016b; AFRBoss, 2016)

Firms that do positive work in the community offer a much more sustainable benefit than programs that donate money, for the latter are likely to be cut when times get tough.

Corporate social responsibility is not necessarily a sustainable approach as ability to contribute will depend on your business performance while shared value is integrated into the way you do business. Some examples,

- NAB (one of  Australia's largest banks) set-up a division (NAB Assist) of the bank's collection department. Its staff were trained by mental health organisation, Lifeline, to spot and manage customers in financial hardship. This division has helped 100,000 + customers in financial distress. This program has led to a 20% decline in loan defaults and A$ 7.2 m. in cost savings because of early intervention (Patrick Durkin, 2015a)

- Westpac (one of  Australian largest banks) operates a similar financial literacy and money management program (Jawun) in partnership with Wesley Mission and includes a strong focus on the needs of Indigenous Australians. Since it started around 2000, 1,600+ staff have worked in 100 Indigenous-led organisations as part of their professional development (Patrick Durkin, 2015)

Most organisations have long practised some form of corporate social and environmental responsibility (CSR). There is more focus on CSR becoming a business discipline with the demand that every initiative should deliver business results. On the other hand CSR's main goal is

"...to align accompanies social and environmental activities with its business purpose and values..."

Kasturi Rangan et al, 2015

Some of the benefits of CSR to organisations are mitigating risk, enhancing reputation and contributing to the business results.

The ideal situation of shared value, ie creating economic value in a way that also creates value to society is not the norm. In fact, there is less interest in integrating CSR with business strategy and goals than in devising a CSR programme aligned the firm's purpose and values. Many firms are hampered by poor coordination and lack of logic connecting their programs.

Most firms practics a multifaceted version of shared value or CSR that ranges from pure philanthropy to environmental sustainability. Most CSR activities fall within 1 of 3 theatres, ie
i) philanthropy (involves donations of money or equipment to civic organisations; engagement with community initiatives; support staff volunteering)

ii) operational effectiveness and efficiency (support operations across the value chain, often improving efficiency and effectiveness by increasing revenues and/or decreasing costs like reducing the source use, waste or omissions; investment in employee working conditions and/or health care and/or education which could enhance productivity, retention and reputation)

iii) business model (create new forms of business to address social and environmental challenges with improved business performance based on achieving social or environmental results). For example, Hindustan Unilever's project Shakti (empowerment) recruited village women to reach to remote Indian villages. These women were given access to micro-finance loans and training in how to sell door-to-door products like soap, detergent, etc. More than 65,000 women participated and, on average, doubled their household income while increasing rural access to hygiene products and improving public health. The social gains have been met by business, ie this project achieved more than US$ 100 m in sales. Unilever has rolled out similar programs in other parts of the world. These programs need not be comprehensive, ie

"...Most are narrow initiatives that have focused on this market segment or product line, but with potential to alter the company's social and environmental impact of financial performance..."

V. Kasturi Rangan et al, 2015a

Programs in 1 theatre can influence those in another. For example, Grupo Bimbo in Mexico, Nespresso (Nestle) in South America, Tata in India, Target in USA, etc: reputations are built, in part, on those firms' philanthropic and community engagement.

- Grupo Bimbo is a family-owned Mexican-based baking company with a workforce of around 100,000 and a similar number of small retailers. It provides free education services to help staff complete high school, offers supplementary medical care and financial assistance for staff and their dependents, and provides a strong micro-finance program to help family retailers

"...The programmes are intended to increase efficiency and effectiveness......they have improved employee performance and retention and strengthen Bimbo's distribution chain..."

V. Kasturi Rangan et al, 2015a

- Nespresso (part of Swiss food and beverage conglomerate, Nestle) has been involved in developing sustainable farming principles (called AAA sustainable quality program) for its coffee growers in South America like Costa Rica, Brazil, Colombia, Nicarague, Peru. This has been expanded to Ethiopia, India, Indonesia, Kenya, Mexico, South Sudan, Vietnam, etc.

"...The multi-billion-dollar single-portion coffee sector is the fastest growing segment of the global coffee market, ie the number of coffee machines owned by consumers has grown at a faster rate than cafe visits over the past 5 years reflecting demand growth for premium coffee..."

Tess Ingram, 2016

Since it started in 1986, Nespresso has dominated this market as it has strategically positioned itself as the luxury brand despite selling to the broader market. The quality of its product is the main key to its success, ie driving its image and maintaining its loyal customer base.  As only around 2% of the world's green coffee meets its strict quality standards, the company is taking responsibility for how they conduct business at every level of their supply chain so that it produces the perfect bean.

This is linked with consumers demanding better transparency and seeking products that are certified as organic, sustainable or fair trade.

Since 2003, Rainforest Alliance has worked with Nespresso to focus on conserving biodiversity and ensuring sustainable livelihoods using its 296 sustainable criteria plus quality and productivity criteria, ie aiming for economic viability, environmental soundness and social equity; it is a marriage between sustainability and quality. This initiative involves more than 63,000 farmers. Nespresso aims to source 100% of its coffee from AAA farmers by 2020 plus reduce the carbon footprint of its machines, increase its aluminium capsule recycling. Part of the program involves Nespresso providing farmers with market data and to technical expertise via several hundred agronomists who provide year-round assistance and training in sustainable farming methods, pest management and record keeping. Also, the farmers must meet certain criteria to obtain Rainforest Alliance certification plus Nespresso quality standards to qualify for a price premium, ie around 10%. In addition to the price premium, farmers received greater benefit from improved yields and quality. Some of these benefits took several years to bear fruit. Overall, it means working with the farmers

"...to ensure sustainable growing environments, earning farmers loyalty and making farming a more attractive his career option for the next generation...... to produce higher quality coffee...... about safeguarding Nespresso's supply in the future..."

Tess Ingram, 2016

For years, the coffee industry has been under threat with declining coffee prices and increasing input costs, like the land, labour, etc.  Harvesting accounts for around 50% of growers' annual costs; with another 25% attributed to fertilisers. Both coffee prices and fertiliser costs are outside growers' control. Thus Nespresso had focused on productivity, ie get more coffee from the same amount of land, while sustaining the environment. As a result, over a 5 year period, some farmers have doubled their annual yield in a sustainable way, eg increased the amount of protected forest on their farms, as the latter is very important to the eco-system and weather. The forest creates a microclimate in the farm and helps to enhance the quality of coffee. One farmer has reduced the amount of water consumed on his farm, reduced fertiliser use (around 7 times) and switch to organic pesticides.

In the past, Nespresso and its shareholders' growth and profit imperatives haven't always resulted in improving the livelihood of coffee growers.  In fact, even though coffee is the second-largest raw commodity traded in the world after oil, it has been blamed for creating poverty and social inequality in many growing countries. All this has put increased pressure on Nespresso to make coffee growing attractive. As a result, Nespresso has committed to spending around US$ 500m. between 2014 and 2020.

Another example is IKEA. "People and payment" initiative calls for a entire supply chain to be 100% sustainable by 2020 as well as doubling sales. They will have to radically alter their furniture design practice and devise new models for collecting and recycling furniture.

Yet another example is impact investments. This involves investing in areas that have a social benefit, without sacrificing returns. Therefore, these investments reflect your values.

Types of investments that meet the social impact criteria include

- bonds which have an environmental or social aim

- managed property funds that only invest in real estate with a social purpose like schools, hospitals, green buildings, social housing, etc

- venture capital that invests in firms in the developing world that improves the livelihoods of the working poor.

Some high-profile examples of this policy include Mark Zuckerberg (Facebook) offering free Internet, Bill Gates (Microsoft) trying to eradicate malaria.

They are changing the dis-connect between doing well (becoming wealthy) and doing good (helping those less fortunate). Too often wealthy people have made their money at the expense of other people; however, often after accumulating their wealth they become philanthropic.

Research is being done to determine accurate measurement of the impact of these types of investment. One framework is the United Nations Sustainable Development Goals (SDG, 2016). SDG has 17 principles and 169 targets. For example, firms' commitment to sustainable energy can be measured against factors such as access to emerging markets, clean energy and efficiency. The general consensus in the investment community has been that the more you care and invest in issues about social good like sustainability, etc, the less money you make. This myth is being busted.

"...financial institutions like Deutsche Bank and NAB - as well as private unlisted equity funds are investing in companies striving to improve health care, education, environmental sustainability, gender equality, etc. These investors are not sacrificing wealth for impact..."

Danny Almagor (Medivac) as quoted by Patrick Durkin, 2016d

Most impact investors are expecting to make a market rate of return. It is not about sacrificing profits. It is estimated that there are several trillion dollars invested in this area

Process (4 Steps):

Step 1 (prune and align existing programs)
Review existing programs in order to reduce or eliminate initiatives that do not meet important social and environmental challenges in keeping with the firm's purpose, identity and values. Linked to this is the staff's eagerness to engage in the cause, programs' alignment with the firm's orientation and provision of a significant benefit to the community

Step 2 (metrics to gauge performance
This involves measuring non-financial outputs, ie social and environmental impacts. In addition items like time spent by volunteers on different projects, recipients' improved performances, etc  as well as more tangible impacts like revenue, costs, source savings, etc

Creating societal value needs to be linked with the value produced and the financial results. For example, Jain irrigation (an Indian-based global group irrigation equipment supplier) has a business model designed to benefit India's small, low-income farming land-owners. The firm offers farmers micro-finance loans to help them purchase equipment, provide technical assistance and buys their outputs at guaranteed prices. The benefits to farmers are improvements in crop yields and the firm retaining operating profitability.

Step 3 (coordinating programs)
CSR activities need to form a coherent portfolio, consistent with the firm's business purpose and values.

For example, Ambuja Cements (an Indian subsidiary of Swiss conglomerate, Holcim) became involved in communities where it sourced limestone and operated kilns. Some of the activities included water management and increasing the use of alternative fuels; the use of the latter led to educating farmers about productivity practices including recovering farm waste material that the firm buys to use as biofuel. It also had a water neutral program in its mining operation that led to replenishment of aquifers and other groundwater. As a result, adjoining farmland has become more productive and tracts of mine land have become arable, ie

"...Ambuja has pushed for a business model transformation......where it can offer reclaimed land with good water ( plus cash compensation) for new land to mine..."

V. Kasturi Rangan et al, 2015a

Its aim is to give back more than it takes and to clean up more than it pollutes.

Step 4 ( an interdisciplinary strategy)
Ideally firms have established a position for somebody whose prime responsibility is to integrate issues across all areas involved in shared value or CSR.
NB There are 2 approaches, eg top-down or bottom-up

Firms seeking to coordinate established portfolios begin with step 1 which focuses on rationalising the programs; while firms building their first portfolios start with step 4 which focuses on interdisciplinary strategy

In summary

"...Best practice companies operate coordinated and interdependent CSR programmes. Some initiatives create shared value; some, as intended, create more value for society than for the firm. Yet each is aligned with the company's business purpose, its important stakeholders' values and community needs where it operates. Such companies stand in stark contrast to those who focus solely on creating value for shareholders..."

V. Kasturi Rangan et al, 2015a

(sources: V. Kasturi Rangan et 2015a & b;Tess Ingram 2016; Patrick Durkin, 2015a)

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