6 steps to create shared value in your company

[Editor's Note: This is Part 2 of a two-part series on Creating Shared Value. Read about the CSV controversy in Part 1.

What would it take to redirect the popular understanding of Creating Shared Value back to a basic business principle, applicable to all the company’s activities and employees?

Step 1. Publicly state that the company’s objective is not only creating value for shareholders, but also value for the company’s key stakeholders including consumers, employees, suppliers, distributors and business partners, as well as the natural environment. This commitment has far reaching implications for the way the business is run, and requires the approval of the board of directors as well as genuine adoption by all levels of management.

Step 2Align corporate compensation systems with long-term value creation and the CSV principle. This is perhaps the most difficult but most necessary of the required steps to adopting a CSV approach. CSV depends on long-term business thinking, which is only possible if the management compensation system rewards long-term thinking and performance.

One reason, I believe, that CSV enjoys only limited adoption (for instance, fewer than 50 for-profit companies, other than consultants, ever attend FSG’s annual Shared Value Summit) is that it is difficult for managers to adopt the long-term perspective that is necessary for creating shared value when they are paid based on short-term results. While compensation systems are becoming more long-term in some companies, short-term profit levels and current share price are still the dominant factors in determining senior management compensation, particularly in the United States.

Step 3. Implement the CSV principle throughout all areas of business operations, not just programs or initiatives aimed at social impact. CSV is a principle to be adopted throughout the company aimed at building trust and collaboration, regardless whether it is focused on solving social problems. This includes core line management functions, marketing, manufacturing, distribution, human resouces, compliance, sustainability and human rights. In fact, Johnson & Johnson’s position reflects this same focus on trust, rather than measurable business results.

Nestlé CEO Paul Bulcke describes CSV as follows: “Creating Shared Value, these three words, are the fundamental way we want to behave as a company, and by nature, also as persons; it is the fundamental way we want to go about our activities; it also is linked with the conviction that in order to be meaningful and successful, a company must intersect with society in a very positive and constructive way. It is part of the pride, also, of over 330,000 Nestlé employees that are part of it. (...) People are buying our products because there is trust.”

4. Focus on strategic areas crucial to the business. The key areas for stakeholder value creation depend on the nature of each business and of the company itself. When Novo Nordisk focused on diabetes education and training, it was a part of an overall business strategy because it is one of the world’s largest insulin producers.

Nestlé chose nutrition, water and rural development as three core areas of stakeholder value creation — not because Nestlé decided to solve social problems in a way that improved profitability. These had been the three key elements supporting Nestlé's business strategy for decades. As a nutrition company, it has owed much of its profitability to the success of nutrition products since the 1860s. It began helping poverty-stricken farmers in Latin America develop profitable businesses in the late 1920s because the farmers’ success was key to ensure a growing supply of raw materials for its factories. The company first addressed water protection in the 1930s in order to protect water used for food processing as well as livestock and crops.

While the aim of these actions was to ensure a sustainable and growing business, a significant social impact resulted from the way the company did business based on the CSV principle (before the term was ever used.)

Step 5. Make the CSV principle work through all aspects of sustainability, not just through those that are profitable. A true application of the CSV principle doesn’t just look for increased profits through environmental measures, but rather seeks to do the right thing for the planet, and then finds a way to make it work within the business plan. This often requires tough decisions regarding capital expenditures that can eat into short-term profits. In the long run, the company’s operating environment is preserved and legal/reputational risk is reduced. But the corporate benefit of Creating Shared Value through sustainability is often difficult to quantify in increased profitability in annual company financial reporting.

Step 6. Don’t try to replace CSR with CSV, but implement CSV through CSR. Some confusion has been created by references to CSR by Michael Porter as “the old way of thinking” and to CSV as the “new way,” and the need to “supersede CSR with CSV.” He seemingly refers here to primarily superficial efforts where companies make donations to worthy causes in order to burnish their image under the heading of Corporate Social Responsibility.

Interestingly, when I first asked the FSG consultancy of Porter and Kramer to help publicize the term Creating Shared Value, they included it at the end of a 2006 Harvard Business Review article dealing primarily with “Strategic CSR." A number of experts have stated that today CSV still strongly resembles Strategic CSR.

Whatever you call it, corporations can create significant societal value through actions aimed at corporate social responsibility, including working to protect human rights, eliminate child labor, fight against corruption and improve working conditions. These all strengthen the business context and reduce long-term risk, but are hard to justify in terms of measurable business results.

I believe that implementing CSV as a core business principle affecting all employees, stakeholders and business activities, is the fundamental change that both business and society need in order to make economic, social, and enviromental progress. As Nestlé Honorary Chairman Helmut Maucher — who laid the foundation for what Nestlé is today — once told me, it is nothing more than good long-term business thinking.

Top image by hin255 via Shutterstock.