The Salzburg Global Seminar (SGS) session on ‘Value vs Profit: Recalculating Return on Investment in Social and Financial Terms’ saw the use of a great many terms – like ‘shared value’, ‘impact investing’ and ‘collective impact’ – that have caused some confusion for those new to the field of social impact investing and corporate philanthropy. To clear up some of the confusion, SGS Editor Louise Hallman spoke with Kyle Peterson, Managing Director of FSG (formerly the Foundation Strategy Group), authors of the concept of ‘shared value’.
SGS: For the uninitiated, what is shared value?
KP: Shared value is often confused with a lot of things. It’s not to be confused with ‘shared values’, which are the personal preferences of people within the company. Quite simply, shared value is the policy and practices that accompany and that are employed to bring about competitive advantage while addressing a social problem. So it’s basically finding an opportunity, and deriving profit or reducing costs by what we hope would be solving a social problem. We talk about three levels of shared value, because even that can be a bit abstract. Is it corporate responsibility? No it’s not corporate responsibility. This is not ethics. And this is not philanthropy, although philanthropy can be a tool to accelerate shared value. But shared value comes in three different forms.
The first form is reconceiving products and markets. A great example of this is Nestlé’s cube, which is sold in developing countries and fortified with nutrients. They are actually able to sell it for a higher price, so they derive more profit from this product which is improving the nutritional load for people with malnutrition in the developing world. Another example is GE Healthymagination. Their 500 EKG machine is portable and battery operated; you can bring it to India and a doctor can do a heart test for the price of a bottle of water, which was inconceivable ten years ago.
Second is redefining productivity in the value chain. This is basically about trying to improve the way companies maintain their value chain through all their operations and to be very sophisticated in what they buy and what they sell. Of the three, this is the idea that is most understood because it brings in the idea of sustainability: companies need to think about their footprint and they need to mitigate to make sure they’re not doing harm. We’ve always paid attention to that and it’s very important, but a lot of the time that conversation – or that impulse to mitigate harm – comes from some vague notion of responsibility. For some companies that’s a great driver, but for many and most it is not. So really the way to drive productivity in the value chain is to bring down the cost, and if you can reduce costs and companies can figure out ‘we’re spending this amount of money on energy’ or ‘our trucks are not fuel efficient so we need to change them because that’s going to reduce costs significantly and that’s a significant thing for us’. It would be a wonderful thing for society if you could make that connection, which I know seems so obvious! But guess what! The 20-30 year history on sustainability that exists here in Europe and that most companies get – I don’t care what anybody tells you – has not filtered into the American corporate scene at all. (There are little things here and there, but most of it is PR.) This is actually deriving real value for the company and at the same time getting societal benefit.
The third form is what we call ‘enabling local clusters’. This can be a bit hard to understand, but companies don’t thrive just within the four walls of their operations. Even if they’ve got the best and the brightest to make decisions, they depend on a lot of things in society: talent, good roads, you name it – and those things have to be strong. If companies don’t get involved in some cases, and have a weak enabling environment, it constrains their ability to thrive.
So this is investment, and we saw it in many cases. CISCO Systems, for example, saw a great constraining factor in the number of routers they wanted to sell in emerging markets and now by training hundreds of thousands of network administrators, they’re able to increase their sales.
SGS: What is FSG’s role in this?
KP: We have two roles. Michael Porter and Mark Kramer (co-founders of FSG) are the authors of shared value, so one way that we help is just by getting the ideas out. And we’re going deeper. We do research on these issues by industry, by cross-cutting issues like measurement of shared value and getting those ideas out. Secondly, we work with companies in a think-tank/consulting role. Companies hire us and say: ‘OK, that all sounds wonderful but what the heck should I do? If I’m at Nestlé in India, where should I go and how does it work? How can we actually get our products down to the base of the pyramid?’
SGS: You said that this isn’t corporate responsibility, and there has been criticism that creating shared value doesn’t address all the issues that a corporate responsibility approach would. How would you address those critics?
KP: I think they overlap and I gave you an example of sustainability, but I think your point probably is that there are some issues around ethics and compliance that shared value does not incorporate. We assume that those ideas already exist in a company and then build upon that base, and we always start from talk about that. If those things aren’t solid, then a company probably shouldn’t migrate to shared value.
Kyle Peterson is Managing Director of FSG. This is an edited version of the original interview first published on the SGS website.