Shared Value and Human Rights

[*]

by Björn Fasterling
Professor of Law and Business Ethics
EDHEC Business School, LegalEDHEC Research Center, Lille-Nice
bjorn.fasterling@edhec.edu
Overview

Background

Harvard Business School professor Michael Porter and business consultant and senior fellow at Harvard’s Kennedy School of Government Mark Kramer developed the “shared value” concept in a 2011 Harvard Business Review (HBR) article titled “Creating Shared Value – Rethinking Capitalism.” (“Shared Value”)[1] In that article, shared value is defined as “policies and operating practices that enhance the competitiveness of a company while simultaneously advancing the economic and social conditions in the communities in which it operates.”[2] The concept emerged from a series of previous HBR articles written by the same authors starting in 1999, initially focusing on strategic philanthropy[3] and subsequently expanding to a more general discussion of responsive and strategic corporate social responsibility (CSR).[4]

Shared Value

Porter and Kramer diagnose a “contraction of strategic thinking” in the business community as the root cause of issues such as capitalism’s weaknesses and loss of legitimacy. Companies have focused too much on short-term results and too narrowly identified business opportunities, underestimating the negative effects of social harm on value chains and the importance of the business environment surrounding a company’s major operations.[5] To remedy this situation, Shared Value recommends that companies not deal with societal problems as peripheral matters, but strategically, from a “value perspective,” whereby “value” means “benefits relative to costs.” Serving social needs and preventing social harm should become integrated into a business’s core strategies so that companies focus on identifying business opportunities that simultaneously achieve socially desirable results. The authors are optimistic that a reorientation of corporate strategy could “increase the total pool of economic and social value.”[6]

Porter and Kramer outline three ways to create shared value:[7] The first is by reconceiving products and markets. Here, emphasis is placed on “bottom of the pyramid”[8] markets. Redesigning products and services, and rethinking distribution models is required to satisfy vast social needs in yet underdeveloped markets. The second way to create shared value is to redefine productivity in the value chain. In this context, externalities such as environmental harm, health and safety problems often represent internal costs to the company and negatively affect its value chain. Enabling local cluster development is the third way to create shared value. The focus here is on the local environment surrounding a business’s operations, upon which a company should proactively exert influence so that a company and some of its important stakeholders can share the benefits of working together in geographical proximity.

Role of Law and Government

Shared Value largely attributes a Nachtwächter (“night watchman”) role to law and government, in which law is confined to limiting “the pursuit of exploitative, unfair, or deceptive practices.” However, some elements of what could be qualified as meta-regulation[9] are added in order to stimulate shared value creation. Porter and Kramer suggest that “government regulations”[10] should (1) set clear and measurable social goals, (2) set performance standards without prescribing the methods to achieve them, (3) define phase-in periods for meeting standards that reflect the investment or new-product cycle in the industry, (4) put in place universal measurement and performance-reporting systems with government investing in infrastructure for collecting reliable benchmarking data, and (5) require efficient, timely and audited reporting of results.[11]

Impact of Shared Value

The shared value approach has influenced various sectors, including for-profit and non-profit organizations, as well as academic writing. It has been a discussion topic of roundtables at the World Economic Forum in Davos,[12] and plays a central role in the activities of the Foundation Strategy Group (FSG), the non-profit consulting firm that Porter and Kramer co-founded in 2000.[13] The approach has influenced a number of companies’ corporate social responsibility activities, most prominently those of the Swiss firm Nestlé.[14] Shared Value has been broadly cited in the management literature, though it is yet unclear whether the concept is in fact useful for academic research.[15]

The shared value concept has also been the subject of criticism. In 2011, The Economist argued that shared value bears “striking similarity” with pre-existing concepts such as Jed Emerson’s “blended value”[16] or Stuart Hart’s “capitalism at the crossroads”[17], and that it would not show any “tangible improvement on the current way of doing business”.[18] Academic writing elaborated on the criticism, noting that Porter and Kramer had artificially built up a distinction between corporate social responsibility (CSR) and “creating shared value” (CSV) (by confining CSR to activities that are unrelated to a company’s core business). The essential arguments raised against Shared Value are that it downplays tensions between business and society, assumes a “shallow conception” of the role of business in society, and naively assumes business compliance with laws and ethical standards.[19]

Shared Value and the Human Rights Responsibilities of Business

While shared value deals with business strategy that is geared towards generating positive effects for society, the corporate responsibility to respect human rights is determined by the risk that business enterprises may cause or contribute to adverse social impacts, which John Ruggie qualifies as the “second and less glamorous CSR strand”.[20] This “two strand” image is also reflected in Porter and Kramer’s initial distinction between “responsive CSR” (corporate citizenship and social harm mitigation) and “strategic CSR” (which is now formulated as Shared Value).[21] Gaston de los Reyes and others have put forward a similar conclusion that the Shared Value concept could be enhanced by having companies integrate ethical frameworks into their management processes, ensuring compliance with law and ethical norms and enabling companies to address tensions between business and society (the authors refer to their proposal as “CSV+”).[22] In the vein of a “two strand” or “CSV+” approach, human rights could be considered as an element of an ethical framework to be taken into account when creating Shared Value. Further, one could view the improvement of a human rights situation through corporate initiative as “societal value creation”. And so one could indeed suppose a certain complementary relationship between shared value and corporate human rights responsibilities, the former dealing with business and society’s “win-win” situations, and the latter working on its “win-lose” aspects.

Contradictions between Shared Value and Human Rights?

There are three principal potential contradictions between the conceptual foundations of shared value and the contemporary business and human rights (BHR) debate.

First, it is difficult to deal with human rights issues by assuming a value perspective — a core tenet of shared value. A value perspective presupposes the existence of a common yardstick that allows measuring cost-benefit relations. Suppose the unit of measure would be “human rights risk” so that management decisions are analyzed as to whether their “benefits” (mitigating human rights risks) outweigh their “costs” (ignoring or creating other human rights risks). In that case, however, it would become problematic to value human rights benefits in relation to other non-human rights benefits or costs. For a company, the unit of measure is more likely to be financial: The benefits of preventing or mitigating human rights risks would be expressed in terms of financial gains for the company, which then would be compared to expected financial losses for not preventing or mitigating human rights risk. For a company, assuming a value perspective would essentially boil down to equating corporate human rights responsibility with the business case for respecting human rights.[23] From a societal viewpoint, one could plausibly argue that the value perspective bears an implicit preference for a “welfarist” position over the defense of human rights as fundamental rights of individuals. Akin to shared value, the former focuses on economic and social development, recommending decision-making about trade-offs on the basis of predefined metrics. The latter emphasizes the individual rights perspective, the protection of vulnerable groups, and would base trade-offs, not on cost-benefit calculations, but on proportionality reasoning.[24]

Second, Porter and Kramer presume that companies comply with laws and ethical standards and that they mitigate any harm caused by business.[25] This passage is unclear. The “presumption” could arguably be interpreted as a precondition for engaging in shared value, meaning that companies can only create shared value, if they effectively comply with laws, behave ethically and “do no harm”. So understood, there would be little contradiction between corporate human rights respect and creating shared value: Respecting human rights would come first, and then perhaps companies could “walk the extra mile” and create shared value. However, under such an understanding, we could suppose that the pool of companies that are (legally and ethically) apt to create shared value would be diminishingly low. Alternatively, it could be that the concept simply does not adequately acknowledge the complexity and practical challenges for business enterprises to ensure legally compliant and ethically acceptable behavior, including the proper respect of human rights. If this was the case, shared value would indeed downplay the difficulty and importance of harm prevention and business compliance, as has already been argued.[26]

Third, despite its call to re-orientate business strategy towards opportunities that mutually benefit society and business, shared value remains firmly rooted in the prevalent paradigm of business studies that maximizing value would be a company’s foremost objective.[27] Shared value could be viewed as a variant of the “enlightened self-interest” standpoint,[28] or be associated with broader value maximization perspectives as they have been expressed through instrumental stakeholder theory.[29] Now, value maximization’s benefits to society predicate upon the government’s effective rule-setting function to resolve externality and monopoly problems as well as setting conditions for the smooth operation of markets.[30] Porter and Kramer may criticize existing law as “barriers” to creating shared value, but they largely assume that law does represent an effective means to influence corporate behavior.[31] Yet, the lack of effective state made law and enforcement of human rights protections is precisely the reason why business responsibilities with regard to human rights become practically relevant.[32] It could be said that business-related adverse human rights impacts are externality problems because states and their governments are not able or not willing to set rules or enforce them. Rather than closing governance gaps that may result in an adverse human rights impact, shared value tends to ignore their existence.

Can BHR learn from Shared Value?

In spite of the concerns raised in the previous section, shared value’s strategic integration of societal issues may nevertheless provide important impetus for the implementation of corporate human rights responsibilities. This would be true if pursuing financial success occurs under the necessary side-constraint of adequate human rights respect (instead of respecting human rights in order to be financially successful), or, in other words, if human rights respect would be of intrinsic and not only instrumental significance to corporate strategy. Such a situation could arise, for example, because the UN Guiding Principles (UNGP)[33]’s framework over time leads to an evolution of managerial fiduciary duties being owed to foreseeable potential victims of business-related human rights infringements which would, as Peter Muchlinski has put it, “constitutionalize” concern over human rights in the “corporate psyche and culture”.[34] Independently of the UNGP’s potential influence on corporate law, I have recently argued that companies need to elevate human rights respect to a strategic concern if they seek to effectively implement human rights due diligence according to the UNGPs.[35]

Teaching Approaches

Shared value is a welcome teaching subject, not only because it has had an impact on business practice, but also because it offers a peg on which to hang a number of very general issues open for debate, ranging from the role of business in society, to adequate regulatory responses, to business-related social harm. More particularly, in a BHR context, shared value can be referred to when discussing justifications for corporate responsibilities to respect human rights and business motivations to carry them out. The subject also provides an entry point for transdisciplinary teaching, because shared value, despite emanating from business strategy, raises numerous law, ethics and public policy questions.

A concrete way to teach shared value is to have students research examples of efforts to create shared value and then ask students to identify how these cases affect human rights issues. For example, students can consider “Cocoa Action”, highlighted as an example of shared value creation.[36] The initiative, launched in 2014 by the World Cocoa Foundation, convenes cocoa producers and chocolate companies (including Mars, Hershey, Mondelez International and Nestlé) so that they adhere to commonly agreed upon performance indicators with the objective of building a sustainable cocoa industry in West Africa.[37] Human trafficking and child labor are notorious problems in this industry, and progress on these human rights issues has been slow, despite business initiatives such as Cocoa Action.[38] The case provides an occasion to discuss priority-setting in the industry. Students can be placed into groups to present, respectively, the advantages and disadvantages of Cocoa Action’s key performance indicator (KPI) system that addresses the elimination of child labour among other, more productivity-related targets. By discussing challenges to set priorities, the debate can easily be linked to the more general issues concerning the role and responsibility of chocolate companies with regard to preventing and mitigating human rights violations in the West African cocoa industry.

Law courses can explore possible legal implications of shared value projects. For example, the above mentioned “Cocoa Action” – since it enjoins major chocolate producers – may have anti-trust law repercussions, or an overly optimistic reporting of its successes could be relevant for false advertisement law.

Shared value highlights the interplay between government, civil society, law, and business. Law and policy students can enquire into the ideological foundations of the proposed coordination of actors and their respective roles, or simply identify related concepts and theories in the policy literature and debate.

To the extent that shared value is not presented as a panacea for resolving business-related negative social impacts, business students are offered an opportunity to call into question dominant business theories that are based on a business’s enlightened self-interest. Shared value can also, as mentioned, become an “entry-point” for the BHR debate, if the management curriculum does not otherwise provide for the study of BHR issues.

Learning objectives for students may include:

  • Critically assessing the strengths and weaknesses of the shared value approach.
  • Comparing shared value with other approaches dealing with the social responsibility of business enterprises
  • Understanding possible links and contradictions between shared value and corporate human rights responsibilities.
  • Understanding and comparing the objectives of shared value and the UNGP “Protect, Respect, Remedy” framework.
  • Assessing specific cases that feature both opportunities to create shared value and important human rights aspects, which may or may not be taken into account by the shared value approach.
Key Questions

General

  • What is the definition and objective of creating “shared value,” according to Porter and Kramer?
  • What are the theoretical foundations of the shared value concept?
  • How, if at all, is shared value related to the human rights responsibilities of business?
  • How can human rights initiatives create shared value?
  • Can creating shared value replace or fulfill a business’s human rights responsibilities?
  • What is meant, when Porter and Kramer argue that shared value “goes beyond” compliance with laws, ethical standards and mitigating harm?
  • How could human rights respect be measured as an element of value creation?

For business students

  • Compare the tenets of Shared Value with Michael Porter’s prior writing, in particular his model of the “Five Forces”, in which stakeholders such as customers and suppliers are not regarded not as participants in a shared value project but in “competition for profits” with companies.
  • Does shared value offer a viable framework for businesses to strategically take into account human rights risk (meaning: risks for potential human rights victims)?
  • How can a company pursue a shared value strategy and at the same time implement human rights due diligence as a risk management issue? What operational difficulties could occur?
  • Can corporate human rights initiatives deliver “large and distinctive” social and business benefits?

For law students

  • To what extent is a value perspective (solving problems by identifying benefits in relation to costs) compatible with granting enforceable fundamental rights to individuals?
  • Can a company fulfill mandatory human rights reporting obligations by referring to its efforts to create shared value?
  • When could shared value projects raise legal issues, such as anti-trust or false-advertising concerns?
  • Are there other examples in which laws and regulations are limited to setting performance targets and requiring disclosure? Does human rights law already make use of such techniques?

For policy students

  • Is a value perspective appropriate for addressing societal challenges? In which contexts could value perspectives be helpful for solving public policy problems and in which contexts would a value perspective be less helpful?
  • (Under which conditions) have legal performance targets and disclosure obligations proven to be effective means of regulating behavior?
Teaching Resources
Notes

[*] This Teaching Note may be cited as:

Björn Fasterling, “Teaching Note: Shared Value and Human Rights,” in Teaching Business and Human Rights Handbook (Teaching Business and Human Rights Forum, 2016), https://teachbhr.org/resources/teaching-bhr-handbook/teaching-notes/shared-value-and-human-rights/(opens in a new tab).

[1] Michael E. Porter and Mark R. Kramer, “Creating Shared Value – Rethinking Capitalism,” Harvard Business Review (Vol. 89, 2011), 62-77.

[2] Ibid., 66.

[3] Michael E. Porter and Mark R. Kramer, “Philanthropy’s New Agenda: Creating Value,” Harvard Business Review (Vol. 77, 1999), 121-131; Michael E. Porter and Mark R. Kramer, “The Competitive Advantage of Corporate Philanthropy,” Harvard Business Review (Vol. 80, 2002), 56-68.

[4] Michael E. Porter and Mark R. Kramer, “Strategy & Society – The Link Between Competitive Advantage and Corporate Social Responsibility,” Harvard Business Review (Vol. 84, 2006), 78–92.

[5] Porter and Kramer, “Creating Shared Value” (2011), supra n. 1, 64 et seq.

[6] Ibid., 66.

[7] Ibid., 67 et seq.

[8] See Stuart L. Hart and C.K. Prahalad, “The Fortune at the Bottom of the Pyramid,” Strategy+Business (Vol. 26, 2002), 54-67.

[9] On the term “meta regulation,” cf. Christine Parker, The Open Corporation: Effective Self-Regulation and Democracy (Port Melbourne: Cambridge University Press, 2002).

[10] Porter and Kramer do not speak of “law”, but rather of “government regulations”. It is unclear whether their proposals only refer to the implementation of parliamentary law or whether “government regulations” indistinctly covers both, the regulatory and legislative sphere.

[11] Porter and Kramer, “Creating Shared Value” (2011), supra n. 1, 74.

[12] See, e.g., the Forum’s website announcements, available at: https://www.weforum.org/agenda/2012/01/creating-shared-value; https://www.weforum.org/reports/global-agenda-council-role-business-2012-2014 (retrieved on 31 October 2016); or the report by Meghan Ennes, “Everything You Need to Know About Shared Value at Davos” (2014)  (retrieved on 31 October 2016), available at: http://www.triplepundit.com/special/shared-value-initiative/everything-need-know-shared-value-davos/.

[13] Cf. The shared value projects on the project page of the FSG, available at: http://www.fsg.org/projects. For an example of an FSG case study, see Mark R. Kramer, Marc W. Pfitzer, Nina Reichert, and Lund Flynn, “Skandia Group—Case Study: Creating Shared Value in Sweden’s Financial Sector” (2016), available at: http://fsg.org/skandia-group-case-study (last viewed 31 October 2016).

[14] See, e.g., Nestlé, “Nestlé in society Creating Shared Value and meeting our commitments 2015” (2015), available at: http://www.nestle.com/csv (last viewed 31 October 2016). Other multinational companies have drawn on the concept. See e.g. NovoNordisk, “Creating shared value through socially responsible initiatives in the United States,” (2012) available at: http://www.novonordisk.com/sustainability/performance/Creating-Shared-Value/creating-shared-value-in-the-united-states.html (accessed on 31 October 2016).

[15] For an overview over academic literature on “shared value,” see Krzysztof Dembek, Prakash Singh, and Vikram Bhakoo, “Literature Review of Shared Value: A Theoretical Concept or a Management Buzzword?” Journal of Business Ethics (Vol. 137(2), 2016), 231-267.

[16] Cf. Sheila Bonini and Jed Emerson, “Maximizing Blended Value–Building Beyond the Blended Value Map to Sustainable Investing, Philanthropy and Organizations” (2005), available at http://www.blendedvalue.org/wp-content/uploads/2004/02/pdf-max-blendedvalue.pdf (accessed on 31 October 2016).

[17] Stuart Hart, Capitalism at the Crossroads: The Unlimited Business Opportunities in Solving the World’s Most Difficult Problems (Prentice Hall: New Jersey, 2005).

[18] The Economist (10 March 2011), available at: http://www.economist.com/node/18330445 (accessed on 31 October 2016).

[19] Thomas Beschorner, “Creating Shared Value: The One-Trick Pony Approach”, Business Ethics Journal Review (Vol. 1(17), 2013), 106–112; Andrew Crane, Guido Palazzo, Laura J. Spence, and Dirk Matten, “Contesting the Value of the Shared Value Concept,” California Management Review, (Vol. 56(2), 2014), 130-153; Mark Aakhus and Michael Bzdak, “Revisiting the role of “shared value” in the business-society relationship,” Business and Professional Ethics Journal, (Vol. 31 (2), 2012), 231-246.

[20] John G. Ruggie, Just Business – Multinational Corporations and Human Rights (W.W. Norton & Company: New York, London, 2013), 69.

[21] Porter and Kramer (2006), supra n. 4, 87 et seq.

[22] Gaston de los Reyes, Markus Scholz, and Craig N. Smith, “Beyond the ‘Win-Win’: Creating Shared Value Requires Ethical Frameworks,” California Management Review (Forthcoming, 2016) (INSEAD Working Paper No. 2016/67/ATL/Social Innovation Centre. Available at SSRN: https://ssrn.com/abstract=2848192) (accessed 31 October 2016).

[23] The conceptual weaknesses of “business case” thinking with regard to the human rights responsibilities of business enterprises have been discussed by Florian Wettstein, “Human Rights as a Critique of Instrumental CSR: Corporate Responsibility Beyond the Business Case”, notizie di Politeia (Vol. XXVIII , 106, 2012), 18-33.

[24] For a “welfarist” versus human rights debate see Eric A. Posner, “Human Welfare, Not Human Rights”, Columbia Law Review (Vol. 108, 2008), 1758-1801 and Seth Korman, “The Welfarist Approach to Human Rights Treaties,” UCLA Law Review (Vol. 58, 2008), 95-111.

[25] Porter and Kramer (2011), supra n. 1, 75.

[26] Crane et al., supra n. 19, 139 et seq.

[27] This becomes clear in a more recent contribution by Mark R. Kramer and Marc W. Pfitzer, “The Ecosystem of Shared Value,” Harvard Business Review (Vol. 94, Issue 10, 2016), 80-89.

[28] As defended for example by Michael Jensen, “Value Maximization, Stakeholder Theory, and the Corporate Objective Function,” Journal of Applied Corporate Finance (Vol. 14, no. 3, 2001), 8-21.

[29] Cf. Robert Phillips, R. Edward Freeman and Andrew C. Wicks, “What Stakeholder Theory is not,” Business Ethics Quarterly (Vol. 13(4), 2003), 479-502, 486 et seq. For the notion of instrumental stakeholder theory, see Thomas M. Jones, “Instrumental Stakeholder Theory: A Synthesis of Ethics and Economics,” Academy of Management Review (Vol. 20(2), 1995), 404-37.

[30] See, e.g., Jensen (2001), supra n. 28; Anant K. Sundaram and Andrew C. Inkpen, “The Corporate Objective Revisited,” Organization Science (Vol. 15(3), 2004), 350 – 363, 355.

[31] Cf. Porter and Kramer (2011), supra n. 1, 74.

[32] cf. Ruggie (2013), supra n. 20, 19 et seq.

[33] “Guiding Principles on Business and Human Rights: Implementing the United Nations ‘Protect, Respect and Remedy’ Framework,” Report of the Special Representative of the Secretary-General on the issue of human rights and transnational corporations and other business enterprises,” UN doc. A/HRC/17/31 (21 March 2011), available at http://www.ohchr.org/Documents/Publications/GuidingPrinciplesBusinessHR_EN.pdf. See Teaching Note: Introducing the UN Guiding Principles on Business and Human Rights.

[34] Peter Muchlinski, “Implementing the New UN Corporate Human Rights Framework: Implications for Corporate Law, Governance, and Regulation,” Business Ethics Quarterly (Vol. 22(1), 2012), 145-177, 157 et seq.

[35] Björn Fasterling, “Human Rights Due Diligence as Risk Management: Social Risk Versus Human Rights Risk”, Business and Human Rights Journal (forthcoming, 2016), avalable at: http://dx.doi.org/10.1017/bhj.2016.26.

[36] Kramer and Pfitzer (2016), supra n. 27, 86.

[37] The World Cocoa Foundation presents its initiative CocoaAction at http://www.worldcocoafoundation.org/about-wcf/cocoaaction/ (retrieved on 31 October 2016).

[38] See, e.g., the report by Brian O’Keefe, “Bitter Sweets”, Fortune (March 1, 2016). Available at: http://fortune.com/big-chocolate-child-labor/ (retrieved on 31 October 2016).