sharing in governance of extractive industries
This article featuring examples from the mining industry was originally featured on 5 October 2015 by the Shared Value Initiative
Shared value as a concept continues its dramatic rise in popularity across the worlds of business and international development. The Australian government recently released a new strategy for aid and development to create shared value by linking private sector activity with aid. For the past year, the OECD has been working on an operational framework for use by governments and extractive industry companies to create shared value from mineral and fossil fuel extraction activities.
In August, with much fanfare, Fortune Magazine released its inaugural “Change the World List” which ranks companies on their addressing of major social problems as part of their core business strategy. The concept of shared value was central to the methodology for the rankings and Michael Porter and Mark Kramer – who wrote the seminal piececonceptualizing shared value in 2011 – were involved in the process of collecting and vetting nominations.
The idea of “shared value” is an incredibly useful one. It posits that companies can create “economic value in a way that that also creates value for society by addressing its needs and challenges.”
When used correctly, it helps to steer companies away from ad-hoc and tack-on philanthropy programs that do little to improve society as a whole, towards more sustainable approaches that create meaningful societal good. It also helps in guiding aid agencies and other development practitioners in more effectively utilizing the core strengths of the private sector for economic and social development.
A useful idea, however, is most effectively acted upon by those who understand its limits. For all the good shared value can create, practitioners must realize it cannot be achieved in all situations. In these cases, the idea will be a distraction at best and an attempt to greenwash at worst.
Andrew Crane, Guido Pallazo, Laura J. Spence and Dirk Matten (2014) produced arguably the most effective critique of the concept of shared value, effectively pointing out a number of key issues with the idea. Most importantly for our current purposes, they argue that shared value creation ignores the many inevitable trade-offs between company interest and societal good that consistently occur.
Porter and Kramer argue we can move “beyond trade-offs” between business and society, but this is clearly not the case for all aspects of business. While many shared value advocates have politely acknowledged this weakness, most have then continued on acting as if it was not there. One will often find them doubling down on claims we can move entirely from corporate social responsibility to shared value or romanticizing the potential of entrepreneurs to create good to the point of parody.
However, as rapidly popularized ideas naturally attract the inevitable responses of those expressing reasonable skepticism, we need to be cautious to not throw the baby out with the bathwater.
If we conceive of shared value as dogma, a holistic approach redefining capitalism that works in all cases, then Crane and friends are right indeed. We risk looking silly as skeptics can point to cases of shared value involving companies who are in other cases engaging in deeply unethical behavior.
But, if we dismiss the concept of shared value outright because Porter and Kramer and its advocates have over-reached, we will lose out on huge opportunities.
In other words, Porter and Kramer, as well as Crane and colleagues, are both right at times, depending on the situation. The key for us is to determine when shared value is useful to use, and when we need to follow traditional ideas of ethical corporate behavior.
We work with the mining sector and the industry offers us a useful example to see where shared value applies, and where it does not.
In cases like mining companies buying more locally in developing countries, and training up suppliers to be competitive, clearly there is shared value to be made. In the long run, mining companies lower procurement costs by reducing shipping costs and delivery times, and by tapping into local labor markets with lower wages than exporting nations. Suppliers and the communities that host them benefit from increased revenue, jobs, skills, and technical upgrading.
A similar situation exists for hiring, as gradually having more and more local workers lowers costs by replacing expensive expatriate employees with local people, who benefit from increased salaries, skills and management abilities. Both sides really do win, and company programs to train up its workers in advanced management are therefore far better investments than tack-on philanthropy programs.
But, there is no shared value to be had when we are talking about tax evasion by mining companies. When companies engage in transfer mispricing and other methods of wrongfully lowering the amount of taxes they provide host governments, shareholders win, and the host country loses. Period. No matter what societal good the company is creating in other aspects of their business, none of that excuses or alleviates it of the responsibility to pay taxes.
The same goes for many forms of environmental malpractice. Mining companies spending less money on environmental monitoring, emissions, and wastewater treatment, all saves money, that which is essentially divided up amongst the company and its shareholders in some way. The host government and society, however, face the genuine losses through lost livelihoods for those whose water or land is damaged, increased healthcare costs, and paying for clean-up.
The idea of shared value cannot replace corporate social responsibility, ethical behavior, or compliance with legal and social norms. Arguing it can distract us at best, and at worst, lessens pressure on society to demand ethical corporate behavior.
The idea is still of immense use though, particularly for the intersection of corporate activity and economic and social development. Mining companies are not going to create real development in the countries where they operate if they simply tack on charity projects beside their mine sites. And, because companies have to make a profit to survive, using shared value as a lens allows them to recognize where their interests and those of society align in a sustainable and meaningful way.
Thus, the key is for society to recognize when shared value can work, and nail it. When it does not, we should not waste time trying to put a square peg in a round hole.
Jeff Geipel is the founder and venture leader for Mining Shared Value at Engineers Without Borders Canada. This venture works to improve the development impacts of mineral extraction in developing countries through encouraging an increase in local procurement by mining companies.
Follow Mining Shared Value on Twitter @ewb_msv - original tweets for this article at Shared Value Initiative and Mining Shared Value.
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