Successful connections between competitive advantage and social issues

In October 2011 the European Commission published a new policy on corporate social responsibility. It states that to fully meet their social responsibility, to enhance positive impacts and to minimise and prevent negative impacts, enterprises

should have in place a process to integrate social, environmental, ethical and human rights concerns into their business operations and core strategy in close collaboration with their stakeholders”.

The concept of corporate social responsibility (CSR) essentially means that companies decide voluntarily to contribute to improving society and preserve a clean environment. Since the EU tried to identify common values by adopting a Charter of Fundamental Rights in 2001, more and more companies have begun to consider their responsibility more properly, beginning to consider it as a component of their identity. This responsibility is expressed in relation to all the subjects involved in the activity of the company and can influence its success. This is exactly the crux of the matter that I would like to focus on, trying to show towards whom organizations should primarily manifest their social commitment.

First of all, is good to clarify that corporate social responsibility extends beyond the boundaries of the enterprise, integrating the local community and involving, in addition to employees and shareholders, a wide range of stakeholders, business partners, suppliers, customers, public authorities, and NGOs[1] representing the local community and the environment. In a world of multinational investment and global supply chains, corporate social responsibility must also extend beyond the European borders. Moreover, the speed of globalization has fostered a debate on the role and development of a system of global governance, as well as the development of voluntary practices in the field of corporate social responsibility, that will certainly provide an important contribution.

Due to this fact, the purpose of this paper is to highlight that the key aspects that companies should firstly consider are the interaction with the local environment and the population involvement in the process of value creation. Since the protection of surrounding communities’ quality of life means often a tangible economic return for companies, I believe that these two aspects – the interaction with the local environment and the population involvement – may represent the most advantageous way for companies to be socially responsible.

Therefore, some of the arguments that I am going to consider are closely linked to social responsibility, such as: the successful integration of enterprises in the local environment and the contribution they make to the community, providing jobs, wages and benefits, and tax revenues; the importance of efficient interaction with the local physical environment; the importance of active engagement in the local community (e.g. through additional vocational training, supporting non-profit associations, etc.); the benefits of developing positive relationships with the local community and therefore the accumulation of social capital is particularly important for non-local companies; the image quality that comes from business relationships with small local companies in the quality of customers, suppliers, subcontractors or competitors.

In addition to these aspects, I am going to mention the concept of ‘shared value’ that  Michael Porter[2] and Mark Kramer[3] have developed in a dense article entitled Creating shared Value: how to reinvent capitalism and unleash a wave of innovation and growth, published in the first edition of 2011 of Harvard Business Review, after which I will give an exemplary case of what I mean with ‘caring for the direct stakeholders’.

First of all, it is worth noting that even if it is true that corporations give their contribution to the communities, particularly to the one in which they are, providing jobs, wages and benefits, and tax revenues, vice versa, companies depend on the health, stability and prosperity of the communities in which they operate. For example, they recruit the majority of employees in the local labour market and so they have direct interest to make available locally the skills they need. Moreover, SMEs find most of their customers in the surrounding area, thus the reputation of a company and its image can certainly affect its competitiveness, not only as an employer and producer but also as an actor in local life (Mazzoleni 2004).

Furthermore, companies interact with the local natural environment and some of them can also rely on a clean environment for their production or their range of services – free air, water or uncongested roads. Therefore, there should be a relationship between the local natural environment and the ability of the company to attract workers in the same region where it is rooted. On the other hand, companies can be the source of many polluting activities: noise, light, water pollution, air emissions, contamination of soil, and all the ecological problems associated with transport and waste disposal. Enterprises most sensitive to environmental protection should definitely intervene in the education of their community ecology.

Companies could become involved in community for example by proposing additional vocational training, supporting non-profit organizations committed in protecting the environment, recruitment of socially excluded people, providing childcare facilities for employees, taking local partnerships, sponsoring local sporting and cultural events or donating to charitable works (Peraro and Vecchiato 2007).

Indeed, the development of positive relationships with the local community and, therefore, the accumulation of social capital, are particularly important for non-local companies. Transnational corporations should make wider use of such relationships to support the integration of their subsidiaries in several markets where they are present. In the bargain, the familiarity of enterprises with local actors, traditions and strengths of the local environment is an asset that they could also capitalize (an accounting method used to delay the recognition of expenses by recording the expense as long-term assets).

As I have prefaced in the introduction, in the first edition of 2011 of Harvard Business Review, Michael Porter and Mark Kramer, considered two of the leading contemporary thinkers on business and management, claim that the world of business has been invested by an avalanche of criticism, because of which, both enterprises guilty of deviant behaviour, both innocent, have suffered and are still suffering.

In fact, public opinion does not make much distinction and equates all types of businesses, regardless from the size or service offering.

A substantial part of the responsibility of the situation depends, according to the authors, strictly on companies, “trapped in an obsolete approach to creation”, which has prevailed in recent decades. This approach is focused on the short-term and does not care the real needs of customers and the broader factors that can ensure a successful long-term. An example would be the over-exploitation of natural resources, the environment negligence and the indifference to the discomfort of the host communities. And that is why, as Porter and Marker argue, it is necessary to “reinvent capitalism by creating shared value.” The concept of “shared value” can be 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 operates.

Firms should, therefore, take action to bring together business and society by creating economic value in order to create value for the company but also for the society, meeting at the same time companies’ and society’s needs.

In this sense, this is not an exhortation to corporate social responsibility, since that principle would be a transformation of the companies’ way of doing that is becoming more essential every day and that also involves the external world, that is civil society. According to the theory of shared values, society’s needs define markets, and economic needs belong to the old conventional way of framing the economy. Damage and social problems that a company creates outside are overturned inexorably inside: physical and social environment deterioration outside the company makes it less able to compete and create value; on the contrary, striving to achieve the goals of the company in line with the outside world produces better and more sustainable results.

It is not a redistribution issue because the company should not distribute more value outside, for example eroding the profits or compromising investments, since this is a route that leads to failure. Instead, create shared value means, for instance, not accept higher prices from suppliers weak and inefficient, but help them to invest and become more competitive and profitable, creating greater value for everyone together (Porter and Kramer 2011).

A good example of this is certainly the case of Johnson & Johnson, an American multinational pharmaceutical, medical devices and consumer packaged goods manufacturer (Johnson & Johnson, Healthy People Program, 2008). Many companies traditionally sought to minimize the cost of “expensive” employees health care coverage or even eliminate health coverage together. J&J, by helping employees stop smoking (a two-thirds reduction in the past 15 years) and implementing numerous other wellness programs (e.g. diet and nutrition, physical activity, screening and early detection, and access to quality treatment and clinical trials), has saved $250 million on health care costs: a return of $2.71 for every dollar spent on wellness from 2002 to 2008. Moreover, Johnson & Johnson has benefited from a more present and productive workforce.

To conclude, I would summarize my position by saying that a firm’s competitiveness and surrounding communities’ are closely connected. As the company needs a healthy community to take advantage of a talented staff, an environment able to invest, and innovate and an effective demand for its products, in the same way the community needs successful companies to make available to its members jobs and opportunities to create wealth and success.

The result could be a positive cycle of company and community prosperity, which lead to profits that endure, whereas creating shared value presumes also compliance with the law and the ethical standards, as well as mitigating any harm caused by business, but it goes far beyond that. The opportunity to create economic value through creating societal value could be one of the most powerful forces driving growth. This thinking could represent a new way to understanding customers and productivity and, as Michael Porter says,

“Not all profits are equal. Profits involving a social purpose represent a higher form of capitalism, one that creates a positive cycle of company and community prosperity” (Porter and Kramer 2011, pag. 15).

Therefore, even only in relation to a small community, behaving responsibly can be an opportunity for development and a new factor of competitiveness for institutional, social, and economic operators, but also for those who really care their local community and want to commit to make it on a human scale and careful of environment and future generations.

[1] Non Governative Organizations.

[2]Michael Porter is a professor at Harvard Business School where he directs the Institute for Strategy and Competitiveness.

[3] Mark Kramer is co-founder and Managing Director of FSG (Foundation Strategy Group) that is a nonprofit consulting firm specializing in strategy, evaluation, and research, and the author of influential publications on CSR, catalytic philanthropy, strategic evaluation, impact investing, and adaptive leadership.

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