‘Creating Shared Value’ by Michael Porter and Mark Kramer, Harvard Business Review, January 2011

This article had to be a certainty for review because Porter was perhaps the leading figure in strategic thinking during the second half of the last century and at MTP we have always been keen enthusiasts of his work, particularly his views on competitive advantage and the famous ‘five forces’ framework. After reading the article for the first time, I asked MTP’s strategy specialist Chris Goodwin for his views because I found little that was new and was reluctant to be critical without some reassurance.

I found that Chris had already read the article and had similar reservations. The basic premise of Porter and Kramer’s argument is that there is a need to ‘reinvent capitalism’ by adopting the concept of ‘shared value’; directors of companies should no longer make decisions based on maximising company value, they should look at the combined impact on society as well as their own shareholders. By taking this line, the authors are challenging the view of economists through the ages - including Adam Smith, Milton Friedman and more recently David Henderson - that businesses benefit the economy and society most by furthering their own interests. As Adam Smith put it ‘I have never known much good done by those who affected to trade for the public good.’

There are two ways in which an article of this kind can be challenged. One is whether its arguments are valid; the other is whether there is anything new. After discussion with Chris we would jointly suggest that there could be challenges on both counts. The challenge to his basic premise revolves around the definition of shareholder value and the distinction between short and long term creation. If Porter is saying that it can be in the long term interests of the company and its shareholders to take the impact on society into account, we would strongly agree. BP’s shareholders might wish with hindsight that their management had taken this view when deciding on their risk strategy for instance. But if he is saying that directors should go beyond that and use shareholders’ money to fund their definition of benefit to the wider society, we would have to disagree.

And if the article is arguing for a longer term approach to value creation, we see nothing new in this. We see the CEO of our biggest client, Unilever, rejecting the temptations of short term profit and focussing on a strategy of long term sustainability, because that is where the company sees the longer term benefit to both shareholders and society. The idea of balancing profitability with Corporate Social Responsibility (CSR) has been around for some time and in some ways it seems that Porter is just giving it a new label. To suggest that this is ‘fixing capitalism’ is to say the least an exaggeration and in any case the argument that capitalism has been broken down by the financial crisis is highly questionable. It is the banks that are the problem rather than industry as a whole and most economies are looking for existing capitalism to solve their deficit problems by providing growth and creating wealth.

So we agree that some boards of directors can and should take account of their responsibilities to society but we would argue that this because they judge - rightly or wrongly - that this is in the interests of their companies’ sustainability and long term shareholder value. But they should go no further than this and Porter’s attempt to provide a framework for them to share their value with society as a whole is neither realistic nor necessary. It might of course be in the interests of Porter and Kramer’s new consultancy to provide ‘social impact services’ but that’s another story ...

Click here to read the article in full;
http://hbr.org/2011/01/the-big-idea-creating-shared-value/ar/1