From share value to shared value

Harish Damodaran Davos | Updated on January 30, 2011

Ms Indra Nooyi, Pepsico CEO. - Photo: Kamal Narang

Nearly two-and-a-half years after the collapse of Lehman Brothers and the return of a tad of optimism, there is still plenty of introspection among global CEOs

Nearly two-and-a-half years after the collapse of Lehman Brothers and the return of a tad of optimism, there is still plenty of introspection among global CEOs on where things went wrong and the ‘future of enterprise.'

“This was not a financial crisis, but a value crisis, where greed replaced ambition and confidence became arrogance,” noted Mr Paul Bulcke, CEO of Nestle S.A, at the World Economic Forum's Annual Meeting here.

His views found resonance with Ms Indra Nooyi, Chairman and CEO of PepsiCo Inc, “I think financial and trade analysts should be sent back to school to learn the basics of joint stock companies and what they were originally about. A limited liability corporation owes the society a duty of care; it is not a device for individual profit without individual responsibility,” she said, at a session discussing the need to ‘reshape' modern enterprise and counter perceptions about companies prospering at the expense of the broader community.

“There has been an enormous erosion of trust and legitimacy of business,” admitted management guru and Harvard Business School Professor, Mr Michael E. Porter. This, he felt, had to do with a “very narrow” Milton Friedman-inspired view of capitalism. While the job of companies is definitely to make profits, the Friedman School believes that anything going beyond this goal, even in the short-term, is illegitimate.

“Though it may seem very smart, this way of thinking about the value chain is actually not very smart. Corporations must seek to create shared value, which means addressing societal issues such as safety, environment, water, health and well-being of employees,” Mr Porter pointed out. According to him, there is no real conflict between creating ‘shared value' and enhancing long-term shareholder value.

Mr Bulcke went a step further, holding that “shareholder value creation can be successful only if it creates economic value for society at large.” As an example of ‘creating economic value,' he cited his own company, which is in the business of nutrition and production of food and beverages as “carriers of micronutrients.” Besides, Nestle operates 470 factories around the world mostly in rural areas, “where we create sustainable incomes for farmers.”

Making a similar claim, Ms Nooyi said that PepsiCo, as part of its Performance with Purpose (PwP) initiative, was attempting to change its product portfolio. This involved moving away ‘from fun' (as in Pepsi Cola) to ‘better for you' (Diet Pepsi) and ‘good for you' (Tropicana fruit juices). “When I first proposed the PwP plan in 2006, a lot of sceptics questioned me, including investors. They told me it would dilute shareholder value, whereas I maintained that duty of care and ensuring long-term sustainability are not incompatible with making profits,” she added.

Mr Porter said that creating ‘shared value' should not be confused with corporate social responsibility (CSR). “It is not about companies making profits first and then deciding to go in for CSR. There is no philanthropy in creating shared value,” he emphasised.

As an illustration, Mr Porter said that a company might pay farmers a high price for their crop with a pure CSR motive of “being fair.” But a smarter ‘shared value' approach would be to provide farmers with better seeds and working with them to improve yields.

That would create more value for them as well as the company, which is now able to procure at a competitive rate.

The CSR movement and the Friedman School both share a flawed assumption that any move to deal with social issues involves a trade-off with profit goals, he added.

Published on January 29, 2011

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