Profit maximisation is passe

Shift the goalpost: And change the game for the better

A takeout from the 2008 crisis is that businesses must create ‘shared value’ for all stakeholders

In the West, there is a growing realisation that the role of corporations in society is not just to focus on shareholder wealth maximisation. Academics such as Roger Martin, from the University of Toronto, have argued post the financial meltdown of 2008 that shareholder wealth maximisation may be an end product of actions of a corporation, but the real role of business in society is serving the needs of people in a community. This is done by providing them with superior goods and services, which in turn maximises the wealth of their shareholders.

Taking this a step further, Harvard scholar Michael Porter and Mark Kramer have put forth the idea of “creating shared value”. Simply put, it can be understood as an amalgamation of the best practices and scale of corporate strategy to solve the problems that people in communities face.

Thus, when corporate strategy is used as a tool for enabling economic development, a lot of problems that the non-profit sector ‘sees’ and ‘hears’ can be solved by building partnerships with business.

Philanthropy, CSR and CSV

The concept goes beyond corporate social responsibility and philanthropy as these are thought to be acts of ‘charity’ that businesses do as a voluntary exercise based on their moral obligation towards society. However creating shared value inverts the problem by saying that the role of businesses is to make goods and services that in turn have embedded social and environmental consciousness in the DNA of a business enterprise.

The business model itself recognises the role of corporate strategy to solve problems that one sees in communities. This way, people in the communities get better products and services, businesses earn profits, non-profits see solutions for the challenges they observe, and employees experience the satisfaction of working in an enterprise that seeks to do better by doing good in society. Thus, a tectonic shift is being seen in the way businesses can help alleviate challenging social, environmental and technological problems that people face in their communities.

It is particularly more relevant in emerging markets as the States are often inadequately equipped to solve people’s problems. Productive economic activity at the business level is what is at the core of this next evolutionary form of capitalism. Education, healthcare, law and order, and infrastructure are just some of the public challenges on which the Indian state, even after almost seven decades of independence, has not been able to deliver entirely.

This is because in the context of a developing country such as India, the resource allocation is often inadequate, and even where it is adequate it is inefficient. The solution, therefore, does not seem to be a ‘bigger state’ but a more efficient and effective one that focuses on enabling solutions and outcomes. Rule-based private sector development based on appropriate regulation can end up achieving the social and community goals that are essential to this more humane form of capitalism.

Shared value

The initiative recently mapped enterprises that have been engaged in the ideation and, more importantly, the practice of moving towards creating shared value, and celebrated their achievements and ways and means to take the movement forward. This was done by the creation of an ‘inclusive business’ list. Inclusive businesses show businesses that are moving towards the practice of creating shared value but are yet not there. This list had enterprises that have contributed to enabling societal development through their business models, and are moving towards the practice of creating shared value in India.

In 2015, quite a number of such enterprises were identified. These enterprises were committed to bringing a change in understanding the key societal challenges and addressing them through their business models.

In a way, it was a unique initiative to identify, assess and recognise the organisations operating in India that are creating a measurable socio-economic value by identifying and addressing social and environmental problems that intersect with their business.

In India, several companies have been doing commendable work as Inclusive Businesses. The list is truly diverse with businesses operating in distinct sectors of the economy. These include enterprises such as Jain Irrigation, Amul, Novartis, Vaatsalya, and Godrej that have done commendable work for societal development at the same time generating profits for these enterprises. All of the companies on the list have enabled societal development and at some level are trying to embed the principles of creating shared value in their business models.

Through this list of enterprises, Shared Value Initiative India (SVII) is trying to inspire the next generation of enterprises to adopt a corporate strategy that is in consonance with the broader social and environment good of people in India. The idea is also to move beyond older ideas that have limited capability to solving the most pressing problems of our time.

Future expectations

SVII has just barely scratched the surface of what can be a revolution to solve the most critical challenges that India is facing in varied spheres. It has had a delightful journey so far in India. The inclusive businesses are the first step towards creating shared value in India. It is hoped that India’s vibrant democracy and the emergence of a new entrepreneurial class, as well as the established corporations, will aid in developing the shared value vision in the country in the years ahead.

Policymakers, civil society and most importantly enterprises must see growth but with the purpose of bettering the well-being of people. The country and its institutions must move beyond the basic ideas of CSR as these have a limited scope and capability for improving people’s lives, and hope to become inclusive businesses in the journey to become shared value enterprises.

In the future, the need is for corporations to move towards a shared value paradigm. It is hoped that by bringing forth ideas and implementing them there will be an acceleration of the economic and social progress of Indian society. The initiative is looking at businesses to move from being inclusive businesses to being shared value enterprises by thinking about societal development as a part of their corporate strategy.

Kapoor heads SVII. Sharma is a senior researcher at the Institute for Competitiveness, India

Published on February 15, 2016