Unleashing the Power of Capitalism to Address Society’s Needs

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Business can play a powerful role when it recognizes the link between profitability and society’s well-being.

In a recent New York Times op-ed, economist Eduardo Porter suggests that the concept of creating shared value—that companies can increase profits and gain competitive advantage by helping to overcome society’s failings—is an appealing idea backed by good examples. He then goes on to discuss a recent survey in which Harvard Business School alumni acknowledge the urgent problem of inequality of wealth and, in many cases, plan to voluntarily raise pay for low-wage workers. Yet Mr. Porter ends pessimistically, citing a company that is trying to defend the low-wage status quo through a misleading billboard. He concludes that, for business, “addressing social problems will have to take a backseat to the bottom line.”

On the contrary, shared value is based on the idea that social problems determine the bottom line in ways that most businesses have historically overlooked. Rather than forcing a trade-off between making money and doing good, shared value encourages business innovations that increase profits by contributing to social progress. Just as the Harvard alumni realize that stagnant wages undercut economic growth, shared value companies have come to see that inadequate education, poor health, and persistent poverty hold back their own opportunities for profit.

Sure, there are many counter-examples of companies exploiting short-term profits at the expense of society and the environment, but that doesn’t eclipse the growing list of companies that are finding ways to succeed by reducing environmental impact, educating their workforce, or inventing new products and processes that improve millions of lives. With input from Professor Michael Porter and my colleagues from FSG and the Shared Value Initiative, the current issue of Fortune highlights fifty-one leading companies that are making money by changing the world for the better. These companies have increased incomes and access to medicines for millions of the world’s poor, reduced countless tons of carbon emissions, and pioneered new ways of doing business that overcome entrenched social problems, all for the sake of improving their bottom lines.

In the US, Starbucks is recruiting employees by offering to pay the full tuition for a four-year college degree to its 140,000 eligible employees that work more than 20 hours. CVS is providing convenient and economical access to healthcare through its 9,000 in-store clinics. IBM’s $10 billion consulting business is helping cities reduce crime, improve traffic and save energy. Jain Irrigation is bringing water-saving drip irrigation to drought-stricken California. Revolution Foods is making money by providing a million healthy school lunches every week. These companies have recognized that addressing social problems is essential to their success.

The problem is that Mr. Porter approaches shared value as a debate about whether business is fundamentally good or bad for society. But this is no more answerable than the question of whether human nature is good or evil. Either answer has plenty of support. Humans can be astonishingly evil, but they can also be astonishingly good. The same is true of the corporations they run.

Shared value does not assert that all companies create value for society. As we acknowledge in Fortune, even a company that creates social value in some ways may cause harm in other ways. Shared value is not an apologia for whatever businesses may choose to do. Instead, it is a competitive strategy that recognizes exactly what Mr. Porter does not—that solving social and environmental problems is a way to improve the bottom line. This is news to many companies that still relegate social issues to the philanthropy or CSR departments instead of factoring them into corporate strategy and operations. The challenge of overcoming such ingrained attitudes is one reason why Mr. Porter sees too few examples of shared value “win-wins.”

Shared value is not intended to insulate business from its critics, but to enlist the power of capitalism in addressing society’s needs. Companies have the access to capital and expertise to invent powerful new solutions to deeply entrenched social problems. And when they find a solution that contributes to their bottom lines, they command the resources to scale up their impact far more rapidly than organizations that depend on philanthropy or government support. Shared value will not solve every social problem, nor can companies replace the essential roles of government and civil society. But they can play a much more powerful role when they recognize the link between their profitability and the well-being of the communities in which they operate.

We cannot prevent the evil side of human nature from exacting its toll, but that is all the more reason to focus our energies on encouraging our better nature. Many companies will remain stuck in outdated business models that ignore the costs they impose on society, but that is all the more reason to deepen our understanding of shared value and teach companies how to improve their bottom lines by changing the world for the better.

Response from Eduardo Porter:

“My conclusion is not that addressing social problems must take a back seat to the bottom line, but that many businesses act as if that is so.

I pretty much I agree with everything you write here. I believe your work trying to persuade corporate leaders that their success is linked to the physical and social health of the communities in which they operate is very valuable. But I think a note of caution is necessary too. This is not because businesses are evil. It’s because businesses are businesses. Some values will be shared. Others will not. Even as shared value is encouraged, it is important—I believe—to keep sight of the limits of the proposition.”