The Genesis of Social Value - A Perfect Storm

 By Melissa Carrier

Last year, I asked our Smith School Faculty Committee a simple question, “What does social value creation look like in your field of study?” They looked at each other, intrigued by the question. So, the challenge was born to define social value creation across business disciplines. Each faculty member took the next 6 months to craft a story around social value creation in their field: finance, marketing, strategy, supply chain, entrepreneurship and economics. At the same time, I reflected on the genesis of our name and the Center’s mission to create a better world through business principles. Why did we create the Center for Social Value Creation in 2009 and not the Center for Social Responsibility, or the Center for Sustainable Business or the Center for Social Entrepreneurship? We chose the name because we wanted to redefine value creation in a new 21st century way. We believe the perfect storm is brewing for a fundamental shift in the role of business in society that will enable a more inclusive form of value creation ‒ one that embraces shareholders, employees, customers, communities, and our environment.

Under the 20th century model of industrialization, the prevailing notion is that governments have the responsibility to create and protect social value, and the nonprofit sector exists to fill any remaining gaps. Government sets the rules and regulations that define the business landscape, and companies assumingly play by these rules, operating under ethical standards, to maximize profits. This framework makes it possible also for business to externalize many types of risk and cost; though of course, this was not always the intent. In the late 1700s, the privilege of incorporation was granted by states for specific purposes that benefited the public ‒ such as construction of bridges, roads, schools, and canals. Corporate charters had limited lifespan and the company was restricted to activities that directly fulfilled their purpose. The ability to profit was widely seen as an effective way to organize capital, and achieve public goals. In the late 1800s, another critical shift occurred when corporations were granted “personhood” through the court system. According to historian Brian Murphy, the intent of free incorporation was actually “to limit the power of corporations by democratizing the corporate form through dilution.” The intention was to level the playing field over the practice of choosing among rival charter-seekers. What resulted is the free marketplace of the 20th century, with its genius and imperfections alike, and the unremitting emphasis on shareholder wealth creation.

The early 21st century is proving to be another pivotal time for business.  Anecdotally, CEOs consistently agree that long-term value creation (for whom?) is the primary purpose of a company, and that an orientation towards long-term decision making and investing is required. Studies show that short-termism prevents firms from doing what they do best – creating value in the products and services they produce, investing in new opportunities, and developing human potential. The belief is that companies with a long-term perspective will ultimately achieve better business results and make a greater contribution to the public good. Yet why are so many of us under pressure of intense short-term performance metrics and misaligned long-term incentives? A number of important internal and external factors are driving a subtle - yet significant - shift in redefining business in the 21st century. Let’s take a look at the factors playing into this perfect storm of change and value creation:

Technology – The proliferation of technology has fundamentally changed the human experience. Now, subsistence farmers in Ethiopia, small shop owners in Thailand, and Wall Street bankers in NYC are connected in the global marketplace. The growth of worldwide transportation had led to an increase in invasive plant/animal species and pandemic health issues among others. And our lives are linked by social media where we can experience the good and the bad around the world via instant communication.

Investors – Risks once considered externalities are now seeping into the capital markets. There is a growing industry that measures, values and ranks environmental and social impacts of corporations. At the same time, environmental and social disruptions degrade returns at an arguably faster pace. And impact investors are growing, expected to pour $9 billion into impact investing in 2013.

Standards – There is a growing set of global standards taking hold in transparency, reporting and governance. More than 1,800 companies use the Global Reporting Initiative and many more have voluntarily signed the UN Global Compact. Additionally, there are hundreds of standards used from LEED building certification to Fair Trade to ISO.

Internal Stakeholders – The rise of millennials in corporate America is indeed having an impact on companies from within the organization. According to the 2012 survey by the Society for Human Resource Management, HR professionals say that the biggest challenge in the next 10 years is retaining and rewarding the best employees. These employees are seeking work that matches their value system. The implication is that employee expectations will continue to rise around a company’s sustainable action to the community, the environment, its employees, its customers and society at large.

Policy – Although regulatory uncertainty exists in some areas of environmental policy, current and potential legislation has an influence on corporate behavior.  Thirteen states have proactively passed legislation that creates the Benefit LLC/Benefit Corporation legal entity; thus enacting a statutory corporate purpose to have a material positive impact on society and the environment for those firms who choose this structure. Another 15 states have introduced such legislation and this represents the most subversive effort yet to shift the role of business in society.

Consumers – Of course in this “age of consumerism”, one of the most persuasive factors is the shift in buying preferences.  With the rise of technology and social media influences, we have become more acutely aware of the impacts of our actions as a collective species. Consumers expect the companies from which they buy to act ethically. They want to know more about where their food comes from, and how they can protect the environment through their purchase.  And, they don’t think they should have to pay more for it! While much is still unknown to the consumer about a product’s supply chain and life cycle, what is clear is that in many segments, consumers are starting to vote with their wallets… and companies are following suit.

These factors collectively support the development of the conditions needed to redefine the role of business in society. Corporate competitive advantage will only be sustained if companies have the ability to manage the dynamic process of rapidly changing expectations among stakeholders that reflect new views about the co-creation of economic, social, environmental value. The integration of opportunities across these dimensions will give rise to a new type of business leader with skills to manage complexity across sectors.

So, what then is social value creation? A definition of social value often cited is offered by James A. Phills Jr., Kriss Deiglmeier, and Dale T. Miller: “The creation of benefits or reductions of costs for society – through efforts to address societal needs and problems – in ways that go beyond the private gains and benefits of market activity.” This definition is a good start. However, I would like to expand on this with support from Phil Auerswald’s thought leadership on Creating Social Value.

Not all of the benefits of entrepreneurship work through markets; in some cases, entrepreneurs may act directly to enhance human capabilities, increase freedom, or build levels of trust. The Aravind Eye Care System provides a striking example. The gift of sight is an end in itself.”

This definition also goes beyond dollar-dominated metrics of traditional value creation to one that is anchored in human capability. Thus, social value creation not only encompasses regular market activity but also extends to accounting for externalities and solving market failures created by incomplete markets. I believe this definition can serve as an effective road map for organizations of all types working to make the world a better place.

Melissa Carrier is Assistant Dean, Office of Global Initiatives and Center for Social Value Creation at the Smith School of Business