Shared Value and Compassionate Capitalism
Good evening ladies and gentlemen. It is a huge pleasure and privilege to address this esteemed gathering on the topic of compassionate capitalism. It is a topic which - if the recent YPO breakout at Davos was anything to go by, you have been grappling with for some time. I'd like to start with a question:
Can Capitalism Survive?
...So asked Joseph Schumpeter in 1947. I'm not an economist and I don’t claim to have studied Schumpeter's works in any detail. But it’s a good place to start this talk on the higher call of business. Consider the fact that…5 years ago 300 of the world’s richest people had the same wealth as half the world’s population. Today just 8 people have the same wealth as half the world’s population. Capitalism has done some amazing things. It has created a Chinese middle-class numbering some 500m people. It is the force behind significantly better living standards, longer life expectancies, the eradication of some of our most dreaded diseases. But it has also created unconscionable INequality -
Look at South Africa: the World Bank has described our inequality as “strikingly persistent”. We have the highest GINI coefficient in the world. It is
15 basis points higher than Brazil
25 basis points higher than Russia and china
And close to double the GINI of India!
Perhaps Professor Klaus Schwab put it best when at Davos a few years back, he said “Has There has never been a time of greater promise or greater peril?” Indeed, has there ever?
“The capitalist system is under siege,” says Michael Porter of Harvard University. “In recent years business has increasingly been viewed as a major cause of social, environmental, and economic problems. Companies are widely perceived to be prospering at the expense of the broader community. The legitimacy of business has fallen to levels not seen since the start of the Industrial Revolution”
“In recent years business has increasingly been viewed as a major cause of social, environmental, and economic problems. Companies are widely perceived to be prospering at the expense of the broader community. The legitimacy of business has fallen to levels not seen since the start of the Industrial Revolution”
Interestingly, (Porter goes on to say that) - “the diminished trust in business has been the trigger for regulatory environments that undermine competitiveness and which sap economic growth. Business is caught in a vicious cycle.”
So much for the academic view - let’s see what the other 99% has to say - it’s essentially the same gripe. Many of you have seen the movie Fight Club in which Tyler Durden famously said that “We've all been raised on television to believe that one day we'd be millionaires, and movie gods, and rock stars. But we won't. And we're slowly learning that fact. And we're very, very pissed off”
All this is very bad news for the YPO whose members collectively oversee some 9 trillion dollars of annual turnover worldwide - who create and maintain some 22m jobs in over 135 countries. An so I repeat the question: Does capitalism have a future? Can capitalism redeem itself? Schumpeter didn’t think it could...
I think it can - we might look no further than this beautiful haven of prosperity and hope called iThemba. Sandwiched between the “Have’s” and, on the other, the “Have nots” - it’s a microcosm of almost every BIG business on the continent. Secondly, it shows what’s possible when you have the vision, the belief, and, of course, the resources to transform society. But in case we need more convincing, let’s travel back to the year 1999 in search of some more answers
The country is China and Starbucks has just opened its first store in Beijing. Winning China is a big ask by anyone’s standards - China is predominantly a tea-drinking society and the two countries have never been the best of friends. Undeterred, Starbucks is opening a new store every 15 hours
But there is a huge problem, Starbucks has really struggled; not just with poor sales but high staff turnover too. This was tough for CEO Howard Schultz since staff retention back home in the American market is not a problem. Why is it so hard to retain employees in China? And where are they all going? Schultz grappled with this question for 10 years before the lights came on...The problem lay in the fact that nearly 90% of Starbucks Baristas were college graduates. Their parents, especially given China's one-child rule, are deeply involved in their lives and aspirations. The feeling of most parents was that - "I sent my kid to college and they're working in serving coffee as opposed to working for Apple, or Google, or Alibaba, or Tencent. Why are they working at Starbucks?"
Schultz happened to be good friends with Jack Ma - founder of the e-commerce giant Alibaba and the richest person in China. On one occasion, Schultz was speaking at an Alibaba gathering. As he looked out over the crowd, he noticed two sub-audiences - the first was presumably employees of Alibaba, the second - a lot of older folk. Later he would find out that the older people were parents of Alibaba employees, and it was Jack Ma’s policy, in light of the involvement of Chinese parents in their children’s lives - to invite such people to the event.
The Penny dropped for Schultz - at the next annual conference, he not only invited partners (the term Starbucks uses for all employees) but their parents as well. People flew in from all over China at the company’s expense and, in a landmark moment, Schultz announced that health insurance (which the company was already providing its Baristas) would now be extended to their parents as well. They’ve been doing it the same way every year since 2009 - “It is more than a symbolic handshake” said Schultz, “It’s a celebration of family - a celebration of shared value and prosperity”
“It is more than a symbolic handshake It’s a celebration of family - a celebration of shared value and prosperity”
Needless to say, staff retention rocketed - service in stores improved - both of which became key to attracting and retaining paying customers too.
The Starbucks story gets us thinking...
Perhaps capitalism of greater shared prosperity is actually possible. No, not charity because the Starbucks story shows that its benefits program actually improved the commercial position of the company. By attracting and retaining great talent, if offered better service to customers. But as we saw, it doesn't just happen on its own. While I don’t think it's going to happen on its own...there's lots of work - hard work - to be done. So where is the playbook?
So let’s move on from China and go to Harvard University. In 2009 Michael Porter and Mark Kramer began applying their minds to the many questions that were surfacing...not just about capitalism but about the decline in business legitimacy as well. It was Milton Friedman who famously said that the purpose of business is profit. Porter and Kramer jumped in right there with one big precondition -
“The purpose might be profit...but not all profit is created equal”
Firstly, there is profit that is all about the short-term - profit that extracts from the economic cluster. Leaders under this paradigm not necessarily bad/corrupt or immoral. It's just that many have been taught that social/economic or environmental issues were externalities - peripheral to the business of making money. On top of that, many lack the strategic inspiration to harness these things as sources of growth. Thus, for the longest time, the default approach to the problems in the world was to apply the band-aid either of CSR, or corporate philanthropy, or both. Put another way, companies have managed their reputation through somewhat random cash injections into the prevailing social burden.
Then, there is profit that is future focussed, profit “gives back”...not just in the form of wages, taxes, but profit that results from products, services, or supply chain innovations that - in their own right - disproportionately accelerate and amplify the cycle of shared prosperity. Here, there was very different alchemy. When companies engaged the externalities not as philanthropists but as a force multiplier of people, resources, and ingenuity, magical things happened - not just for society but for those companies as well.
Thus emerged a new framework for strategic thinking which would become known as “Creating Shared Value”. A new way of integrating social, economic, or environmental realities into your business model...not just because it’s the right thing to do but because by doing this, you can become more competitive, you can enhance your bottom line, you can increase shareholder value.
So how do we do this? And is there really money on the table? These are the UN’s 17 Sustainable Development Goals created on 1 January 2016. According to the UN, they represent an estimated... $12 trillion... in market opportunities as well as some 380 million new jobs. I believe this framework of creating shared value is the most realistic and sensible way of pursuing this opportunity
According to Porter and Kramer, the creation of SV happens in 3 ways. Let's look at them individually by way of a few examples
By Re-imagining New Products and Markets...
When we open our eyes to what we once regarded as the externalities, we see product and market opportunities that we never thought of before.
Take food and agriculture for example. The scary truth is that no country has risen to economic or political significance without a strong agricultural sector. In spite of this food security is a major issue in Africa with World Bank statistics showing a consistent decline in agriculture’s contribution to GDP. It's not that surprising: only 8 countries in Africa are investing 10% or more of the national budget to the development of this sector. Some countries are only investing 3% or less!
Behind the numbers - to state the obvious...is the small farmer - many of whom glean a living off less than 2 hectares of land, many of whom are horrendously exposed to climate risk. ACRE Africa is a for-profit insurance company that offers parametric crop insurance against rain and drought. This is where it gets interesting in terms of the ingenuity of the product offered because satellites and weather stations monitor rainfall daily, and trigger automatic payouts through your cell phone in case of too much or too little rain. As of 2018, nearly 2 million East African farmers are covered to the tune of nearly $200 Million against a variety of growing risks. (weather being chief among them)
Lets consider electricity. According to the Gates Foundation, 860 million sub-Saharan Africans (excluding SA) share a power capacity of just 28 Gigawatts - that’s the same electrical capacity as the state of Arizona that is home to just 7 million people. Since 2011, MKopa Solar has served more than 300K East African households with solar ‘box kits’ that contain a solar panel, multi-device charger, lights, radio, and a pay-as-you-go SIM card. Payment for the kit is powered by mobile money transfers through strategic partners like Safaricom and M-Pesa, MTN Money, and Airtel. Without this ecosystem of partners, it’s unlikely the company would have achieved anything like the scale it has enjoyed.
So that's the first way of creating shared value: re-imagining products and markets. This brings us to the second way of Creating Shared Value.
By thinking differently about productivity in your value chain/supply chain...
Consider Nandos in 2008. The company discovered that years of great growth, both at home and abroad, had begun to outstrip its ability to procure the African Bird’s Eye Chilli (ABECs). ABECs are part of the Holy Trinity that is the Nando’s experience - alongside obviously the chicken and the grilling expertise. When you can’t lay your hands on this chili, you are clearly compromising one aspect of your brand and quality proposition. The discovery led to a radical development in the Nandos supply chain. Nando’s “Peri-Farms” is a scheme that empowers more than 1500 smallholder farmers in 5 countries to grow ABEC alongside their other cash crops. Farmers not only receive a guaranteed price for their produce but receive agric advice, the added reassurance of post-harvest care, washing and sorting depots, bulk packaging, and route to market. It is a holistic approach
Consider Indian FMCG giant Hindustan Lever in 2000. Rural consumption rates of HLL products were significantly under-indexing relative to urban areas. The Outbound supply chain was failing to reach up to 50 000 villages nationwide. Some Half a billion Indians still lived in “media dark” areas. Rural wasn't just a black hole for manufacturers - it was a black hole for women as well - widely considered to be some of the most downtrodden and marginalised members of Indian society. So the company asked a big "What If?" question: WHAT IF the company could include rural women in its route to market in a way that also addressed the consumption, availability, and media challenges the company was facing? 17 years later, Unilever manages a network of nearly 100 000 women entrepreneurs. It reaches 162 000 villages and over 4 million rural households.
so that's the second key to creating shared value: Think differently about productivity in your value chain/supply chain. And when you do, you may find yourself solving social problems that the government has not stepped up to solve. This brings us to the third way of creating shared value
By Invigorating the economic cluster/community in which the company operates...
Let's consider India and a company called IFFCO, one of the world’s largest fertilizer companies and, in India, the world’s largest farming cooperative: 45% of India’s farmers are members, that's some 55 million growers. About a decade ago, the company awoke to the long-term implications of India’s agricultural slowdown. Fewer farms and marginally productive operations would lead to a decline in the demand for fertilizer. The company embarked on a mission to “empower rural India through mobile technology." To do this, IFFCO joined hands with mobile giant Airtel to become a mobile virtual network operator. By means of the IFFCO "Green SIM", some 10 million farmers receive daily voice messages containing agricultural advice, pricing advisories, and more... The advice is tailored to their crop, their geographical location, their soil type, their microclimate, and even to the local dialect. What gives IFFCO’s mission such power is a network of some 14 partners and collaborators which includes government departments, state governing bodies, micro-loan institutions, crop specific federations, universities, meteorological centres, NGOs, and development organizations like the World Bank.
Here in Africa, IFFCOs approach has been replicated - and perhaps even improved, in the form of Digifarm - an innovation from Safaricom Kenya. Apart from the obvious benefits to Safaricom, Digifarm is a rallying point for multiple role-players to come together and pursue their development ambitions in the agric sector
So that's the third key to creating shared value: strengthening the economic cluster/community in which the company operates
Before I close, three cautions
Firstly, the discipline of CSV does not always respond well to preconceived ideas. The best practitioners we’ve seen always put the problem ahead of the solution, always fall in love with the problem they are trying to solve before they craft and introduce a solution. Thus, new disciplines like human-centered design, lean innovation, and constant experimentation must be embraced. These skills don’t always come that easily to legacy companies but they can be learned...
Secondly, Creating Shared Value is not a solo mission - the success stories to date demonstrate the power of partnerships and collaboration. In fact, as Mark Kramer pointed out at the ASVS in 2018, we must become “Tri-sector athletes”, prepared to collaborate, co-create and coordinate with government, other private sector players as well as non-profits. Again, this is a new skill we must come to grips with but when we do it well, we see the triumph of the system over the silo
Thirdly, while Creating Shared Value is not charity, there is still a place for CSR and corporate philanthropy - when it comes to sudden catastrophes - like the recent floods in Mozambique - there is no time to figure out a business model to fix the problem.
So that is a whistle-stop tour of the world of shared value: Business acting as a force multiplier of people, resources, and capability to solve some of our most pressing issues. It’s about balancing…
profit with purpose,
dynamism with decency,
competition with cooperation.
In the final analysis, I believe this new way of thinking has the power to restore work/industry to its original purpose when the Great Creator handed over the keys to Eden saying “go forth and multiply”. What is this purpose? Nothing less than creating order out of chaos, nothing less than stewarding o
ur precious resources, nothing less than making the earth fruitful so that ALL who live here... may flourish. No one left behind in the wake of our success...
Earlier this year, Pascal was reflecting on the discussions at Davos about creating impact beyond profits. Reflecting on the discussion, Pascal Tweeted
“The important question for us YPO’ers (and everyone) is how do we transform these words into actions? How do we walk the talk and scale it globally?”
I hope my answer is not too simplistic: We do it by Creating Shared Value