The latest issue of the Harvard Business Review announces it has figured out “How to Fix Capitalism” in an article by Michael Porter and Mark Kramer. They have re-discovered how productivity, and the potential for profit, have an essential connection to the communities in which business activity proceeds. They describe capitalism, which they use interchangeably with other terms connoting “business as usual,” as experiencing a crisis since the global recession started a couple of years ago. The crisis of poor signals from markets to financiers which resulted in various enterprise collapses and the housing bubble was due, in part, to a separation of corporations from their host communities.
Many corporations are able to operate with a focus on short-term gain because a) they can get away with it by surfing the globe for opportunities to dump externalities and b) their shareholders reward this casino-style of investment, continuously looking for a less-prepared client/host, rather than really competing on even playing fields. The precarious game of musical chairs hit a hiccup in 2008 and we continue to observe the repercussions.
A stronger potential for value creation in any firm can be achieved by looking at generating shared value, beyond profits for shareholders. Shared value can be created by re-conceiving products and markets, redefining productivity in the value chain and building economically supportive clusters wherever the firm operates.
From an environmental sustainability perspective, Porter and Kramer’s theory strongly supports ecological responsibility. They note that poor understanding of social costs of a firm’s operations often result in internal costs such as wasted energy, accidents, and remedial workforce training and health issues. A number of leading firms are cited for their re-designing of energy use and logistics, process resource consumption, procurement, distribution and employee productivity issues. Creating shared value bridges the falsely competing notions that incorporating externalities costs businesses profit and that social concerns are “someone else’s issue,” not business’. I note that some of the strongest community partners are private and small, local, businesses which inherently respond to their communities more significantly than larger, more distantly directed firms. And that some of the firms who experienced the worst of the global recession are larger firms which were out-of-touch with the conditions of the communities they preyed upon – like Countrywide (now in Bank of America).
The authors describe how shared value is going to transform business models – and capitalism – to meet societal needs at the same time as shareholder imperatives for profit. One can already see the growth of “bottom of the pyramid” projects like microfinance and consumer goods moving into rural India and China. They describe fair trade efforts as a dimension of CSV, but that businesses investing in capacity building and clusters of enterprises can increase small farmer and small entrepreneur incomes even more than the redistribution effect of fair trade.
I have come across a lot of ideas similar to their idea of a broader, more sensitive capitalism. Patient capital, slow money, social entrepreneurship all approach the faults of stingy capitalism. Well, stingy isn’t the best term, perhaps short-sighted capitalism is more appropriate. Progressive taxation, social finance, local currencies, even tithing and the Islamic finance zakat protocols all all means that communities have embraced to ensure the benefits of commerce. Business profits naturally accrue to fewer and fewer beneficiaries through trade frictions and the inevitability of imperfect information in markets. Communities thrive when profits move back into hard-to-market realms like education, infrastructure, legal norms and research & development.
Porter and Kramer have put together a great argument for businesses to embrace the broader concept of value which includes benefits to non-market participant community stakeholders. They believe that businesses supporting social goals, not merely as CSR window-dressing or eco-efficiency stunts, will improve relations with governments and reduce regulations, freeing up business resources for greater investment in innovation, creating a virtuous cycle of socially (and corporately) beneficial profit. I hope more businesses interested in long-term enterprise survival will look at how they can enlarge their concept of profit and value to incorporate more of the communities in which they operate. Indeed, I hope the principles of global sustainability will echo and harmonize with frontal firms and enable this “fix” for capitalism, fixing the all-too evident (across the globe) failings of capitalism as well.