The value behind the measurement : a study into the Shared Value reporting practices by Dutch enterprises

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1 The value behind the measurement

A study into the Shared Value reporting practices by Dutch enterprises

M.E. Spinka March 2015

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Thesis Strategy & Organization Master Business Studies University of Amsterdam

Author M.E. Spinka

Student number 0472484

Supervisor Drs. L. Moratis

Second Supervisor Dr. M. van der Veen

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List of Tables

Table 1: Example CSV scorecard ...42

Table 2: Selected case study respondents ...44

Table 3: Concept: Stakeholder engagement ...49

Table 4: Concept: sustainable Innovation ...50

Table 5: Concept: Market sensing ...52

Table 6: Concept: Sustainable energy and resource use ...55

Table 7: Concept: Usage reduction. ...56

Table 8: Concept: Sustainable transportation and distribution management ...56

Table 9: Concept: Sustainable procurement ...57

Table 10: Concept: Sustainable employee productivity ...58

Table 11: Concept: Local Factor conditions ...61

Table 12: Concept: Demand conditions ...62

Table 13: Concept: Related and supporting industries. ...63

Table 14: Concept: Firm strategy and rivalry ...64

Table 15: Three pillars contributing to Creating Shared Value (Porter & Kramer, 2011) ...65

Table 16: CSV scorecard Heijmans ...67

Table 17: CSV scorecard Dura Vermeer ...69

Table 18: CSV scorecard Van Lanschot ...72

Table 19: CSV scorecard De Nederlandsche Bank ...74

Table 20: CSV scorecard Heineken ...76

Table 21: CSV scorecard VanDrie Group ...78

Table 22: Operationalization of the CSV scorecard including average scores of all companies in the sample ...86

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List of Figures

Figure 1: Research design ...15

Figure 2: CSR from both academic, society and business perspective (Kakabadse et al., 2005) ...18

Figure 3: Continuum towards social responsibility ...21

Figure 4: Continuum towards social responsibility, including the Shared Value perspective (Porter & Kramer, 2011) ...24

Figure 5: Porter’s value system (Porter, 1985) ...28

Figure 6: The value chain (Porter & Kramer, 1985) ...29

Figure 7: Concept specification for Creating Shared Value ...41

Figure 8: A company's CSV related measurement ...45

Figure 9: Ansoff’s matrix for existing markets and new and existing products ...47

Figure 10: Draft of a simple value chain, derived from Hervani et al., 2005 ...53

Figure 11: The Diamond Framework, sources of locational competitive advantage (Porter, 1990, 2000) ...59

Figure 12: CSV scores Heijmans plotted on the CSV baseline. ...68

Figure 13: CSV scores Dura Vermeer plotted on the CSV baseline. ...70

Figure 14 CSV scores Heijmans and Dura Vermeer plotted on the CSV baseline ...71

Figure 15: CSV scores Van Lanschot plotted on the CSV baseline. ...73

Figure 16: CSV scores DNB plotted on the CSV baseline ...75

Figure 17: CSV scores Van Lanschot and DNB plotted on the CSV baseline ...75

Figure 18: CSV scores Heineken plotted on the CSV baseline ...77

Figure 19: CSV scores Heineken plotted on the CSV baseline ...79

Figure 20: CSV scores Heineken and VanDrie Group plotted on the CSV baseline ...80

Figure 21: CSV scores all companies plotted on the CSV baseline ...81

Figure 22: Average score in the CSV scorecard of the assessed sample of 6 Dutch companies ...89

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Abstract

A paradigm change has taken place in recent years: shifting the academicdebate on CSR fromwhether or not toengage in CSR related activities tohow toengage.Companies do not have sole responsibility towards their shareholders anymore. Instead the responsibility extends to the society as a whole, where a company needs to engage with allparties, groups or individuals affected by the company’s actions, pursuing value for the shareholder as well as the other stakeholders. However, observations are that the business case on CSR has failed. Some authors state that companies focus on being less bad instead of being good, by using responsive CSR instead of proactive CSR. Most theories related to CSR are either instrumental, political, integrative or ethical theories; related to profits, political performance, social demands and ethical values. A new theory on the relationship between business and society is necessary, integrating all dimensions. The concept of Creating Shared Value (CSV), as introduced by Porter and Kramer, aims to achieve this integration focusing on three pillars; enabling local cluster development, redefining the business’ value chain and reconceiving products and markets; addressing societal issues at the core of the company’s business, not at the periphery. Although the concept of Shared Value is popular among scholars and practitioners, tools to implement the concept are still in their infancy. To become integrated in a company’s core strategy a systematic and planned approach is needed, constructed upon an extensive theoretical elaboration. Measurement is a key driver of Shared Value adoption. To become a strategic activity values have to be assessed and measured to monitor and evaluate business processes. The focus of this study is to contribute to the measurement of the concept of Shared Value. Firstly an extensive literature review is performed to investigate the scientific basis for Shared Value. Accordingly a CSV scorecard is composed aimed at Shared Value operationalization detailing the three pillars by choosing applicable criteria for non-financial measures.Finally an explorative empirical research is performed on 6 Dutch companies, divided over 3 sectors to explore to which extent current non-financial performance measures already incorporate the Shared Value concept. On average, 70 percent of the operationalized CSV criteria are covered in current non-financial performance measures. Primarily redefining productivity in the value chain is well covered through mapping CSV. Sustainable innovation, market sensing and enabling local cluster development, score relatively low. This study presents useful insights in measurement of Shared Value, current presence of Shared Value in reporting practices and presented the first tool for Shared Value measurement. Future research could amend the CSV scorecard from one-dimensional scoring on non-financial performance measures to a multiple impact measurement framework.

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Chapter 1: Introduction

‘The firm is meant for society; society is not for the firm’ (Takala, 1999, p 748).

1.1 The business case for CSR

The business of business is not business anymore; having only a responsibility towards its shareholders (Friedman, 1970). In advanced economies demand for products and services that meet societal needs is rapidly growing. Companies are held more and more responsible for their actions. The power of the corporate world should not be underestimated; they are among the world’s most powerful and dominant institutions. Companies have know-how, vast resources, are able to purchase goods, provide jobs and invest capital, thereby contributing to an economy and having an extensive impact on society (Porter & Kramer, 2006). Though there are different definitions of corporate social responsibility (CSR), it implies particular attention to the ethical, social and environmental implications of business. Formulated broadly; companies can be viewed as having economic responsibilities as well as legal, ethical, environmental and social responsibilities (Kolk, Hang & Van Dolen, 2010). Governments, activists, media and an increasing number of organizations rank companies according to their CSR performance, which made CSR a priority on many corporate agenda’s (Knox & Maklan, 2006). Although the interest in CSR is accelerating rapidly and the field of CSR has evolved, the CSR literature remains highly fragmented (Aguinis & Glaves, 2012).

The academic and public debate on CSR has shifted from ‘whether or not’ to engage in CSR towards the question ‘how’ to engage in CSR. Despite this development a trend is visible in the academic world, among authors and scholars whom increasingly view CSR as a PR campaign or marketing tool (Branco & Rodrigues, 2007; Lindgreen, & Swaen, 2010; Pirsch, Gupta & Grau, 2007; Porter & Kramer, 2011). According to Porter and Kramer (2006, 2011) most CSR efforts are counterproductive. They consider CSR approaches to be fragmented and business and society pitted against each other while they are in fact interdependent. Society is in need of business for its economic development and business is in need of society to create demand and provide critical public assets (Porter & Kramer, 2011). This implies that firms are socially created and licensed, which makes a capitalistic system that is solely thriving on financial incentives outdated (Knox & Maklan, 2006). Some authors state that companies focus on being less bad instead of being good (Branco & Rodrigues, 2007; Porter & Kramer, 2011; Visser, 2010). Responsive CSR instead of proactive CSR (Aguinis & Glavas, 2012; Junge, 2011). Peloza (2009) determines that the business case for CSR is

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10 somewhat unclear. The relationship is relatively weak; questions of causality are unanswered and the measures used to examine the business case are inconsistent. Maignan and Ferrell (2004) and Vogel (2005) asses that the current business case of CSR is predominantly approached from an instrumental perspective, undertaken for economic reasons. In mapping the territory of CSR Garriga & Melé (2004) classify most theories related to CSR either as instrumental, political, integrative or ethical theories; related to profits, political performance, social demands and ethical values. They suggest a new theory on the business and society relationship is necessary, integrating the four dimensions. Based on a literature review of 588 journals and 120 books on CSR, Aguinis and Glavas (2012) also find that firms engage in CSR due to normative reasons that lie in the firm’s values, doing the right thing. However, they discovered firms primarily engage in CSR due to instrumental reasons; financial outcomes (Aguinis & Glavas, 2012). For a company a purely normative or purely instrumental approach to CSR is far from the intention of CSR; companies should address both elements and strive for a productive balance (Asif, Searvy, Zutshi & Fisscher, 2013; Branco & Rodrigues, 2007; Dees & Elias, 1998). Visser (2010) states that, in this light, a new approach to CSR or a new concept altogether is needed.

1.1.1 Creating Shared Value

Based on the observations above and from the perspective of regaining trust in business and capitalism, Porter and Kramer (2011) introduced the concept of Creating Shared Value (CSV). They urge that business activities need to be more embedded with social purposes. Companies need to take their responsibility and contribute to society’s comprehensive needs. Through the innovative and entrepreneurial power companies possess and by matching their business expertise and capabilities with the needs of their stakeholders, companies could be able to address social weaknesses (Porter & Kramer, 2011). Porter and Kramer (2011) introduced a three way approach to creating Shared Value; re-conceiving products and markets by seeking out social problems where serving consumers and simultaneously contributing to the common good might; redefining productivity in the value chain by enhancing the social, environmental, and economic capabilities in the company’s value chain and enabling local cluster development so that various developmental goals can be achieved in cooperation with suppliers and local institutions.

Following the HBR article “Creating Shared Value” by Porter and Kramer (2011) an online debate on the subject of CSV erupted. Multiple concerns towards the concept were raised by authors and scholars (Junge, 2011). Those concerns are collected and outlined by Crane, Palazzo, Spence and Matten (2014). They consider a series of weaknesses to the concept of

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11 Shared Value and firstly argue that CSV is unoriginal because it supposedly overlaps with other established streams of literature. Basic ideas of CSV have already been introduced in CSR, e.g. with corporate citizenship, sustainability, doing business at the bottom of the pyramid, or community relations (Crane et al., 2014; Junge, 2011). Secondly, Crane et al. (2014) consider CSV to ignore the tensions between social and economic goals. Porter and Kramer (2011), however, state that multiple value creation has to become part of a company’s corporate strategy, long-term vision and its growth model. Therefore companies need to be more socially aware and create social as well as financial value, having social responsibility at the core of the company’s strategy, not the periphery. Yet, Crane et al. (2014) consider that many corporate decisions related to social and environmental problems do not present themselves as potential win-wins, but rather manifest themselves in terms of dilemmas. Still, Porter and Kramer (2011) consider it necessary to combine social and financial value and thereby go beyond what is required by laws and regulations. They point out that this does not have to be profit sacrificing, which is commonly thought in Neoclassical thinking (Carroll, 1999). This is, however, where the third weakness in CSV lies according to Crane et al. (2014); CSV is naive about the challenges of business compliance. CSV is built on the assumption that compliance with legal and moral standards is a given. As research across the social sciences continues to demonstrate, the absence of compliance with legal and moral standards is a key problem of multinational corporations (Crane et al., 2014). Porter & Kramer (2014) counter that legal compliance and a narrow sense of social responsibility are prerequisites to creating Shared Value, but the concept of Shared Value takes company behavior further. Ethics and legal compliance cannot be the sole justification of Shared Value; societal issues have to be integral to profit maximization instead of rated outside the profit model (Porter & Kramer, 2011). According to Crane et al. (2014) this notion shows that CSV is based on a shallow conception of the corporation’s role in society. It seeks to restore business legitimacy without considering either adherence to the rules of the game, compliance, or the role of financial markets.

Ultimately, even Crane et al (2014) admit CSV has added value to the debate on business and society in garnering attention and this attention might lead to the emergence of socially beneficial business practices. It aligns social progress with corporate self-interest in a concrete and highly tangible way (Porter & Kramer, 2011, 2014). Porter and Kramer (2014) themselves admit that not all businesses are good for society nor would the pursuit of Shared Value eliminate all injustice; business cannot cure all of society’s ills. However, they argue that, using the profit motive and the tools of corporate strategy to address societal problems, the Shared Value concept can contribute to social purposes and economic results (Porter & Kramer, 2011, 2014). Junge (2011) considers CSR as the justification and underlying

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12 assumption, while CSV is a management approach that can be applied to address CSR. Porter and Kramer (2011, 2014), on the other, argue that CSV elevates social goals to a strategic level. Shared Value thinking needs to be integrated in the company’s strategy and for CSV to become integrated in the corporation’s core business a company’s performance has to be measurement and monitored (Asif et al., 2013; Maas & Boons, 2010; Porter & Kramer, 2011).

1.1.2 Measurement

An old saying goes ‘If you can’t measure it, you can’t manage it’. Traditionally the main focus of a company’s measurement and reporting activities has been on the financial aspect. With the concept of CSR accelerating rapidly, the pressure on companies to measure and report on non-financial results increased. An increasing number of companies publish social reports next to or integrated in their financial report, using performance measures to assess non-financial data (Moneva, Archel & Carrea, 2006). In 2011, while not mandatory, over 92 percent of the largest listed Dutch companies presented their non-financial performance measures in an annual sustainability report (Conquaestor, 2011). These companies apply performance indicators to provide assurance that their commitments to sustainable development are being lived within the organization (Keeble, Topiol & Berkeley, 2003). An element Porter and Kramer (2011) reckon as being important, but do not elaborate on in their article on Shared Value. An article by FSG, Foundation Strategy Group, a ‘how-to–guide’ for new Corporate Revolution based on CSV discussed measurement as a necessary step in the Shared Value process (Bockstette & Stamp, 2011). As did Porter, Hills, Pfitzer, Patscheke and Hawkins (2012) in their article on unlocking value by linking social and business results. Although the article has a more in-depth approach to Shared Value measurement, it only provides understanding for the purpose of measurement and illustrates possible business and social results by Shared Value. It does not provide a real instrument to achieve a Shared Value measurement system. For Shared Value to be integrated into the core strategy of company, further insights into Shared Value performance measurement are needed.

1.2 Research goal

Although CSV has gained a substantial and positive practitioner audience and made great headway in the academic management literature, Shared Value performance measurement has not. The general objective of this research is to contribute to the development of the theory of Shared Value by first operationalizing the concept using existing literature on this

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13 topic and secondly, mapping the CSV concept with regard to current CSR measurement by performing case studies on several companies that report CSR measurements.

1.3 Relevance

In terms of academic relevance this research will contribute to the development of the concept of Shared Value. Porter and Kramer brought up CSV in their article ‘Strategy & Society’ in 2006 and elaborated further on the concept in their 2011 article ‘Creating Shared Value: how to reinvent capitalism and unleash a wave of innovation and growth’ (Porter & Kramer, 2011). The latter article actually manifested the concept of Shared Value and although being embraced by the academic world and practitioners, whether it be positively or negatively, the concept is still in its infancy years. The academic value of this research lays in the further elaboration and operationalization of Shared Value and mapping CSV on today’s non-financial reporting. This research is the first step towards an integrated model for CSV; developing a CSV scorecard showing which indicators are important for the integration of Shared Value into the core strategy of a company. Furthermore, the research will provide deeper insights on the role of stakeholders on business and CSR.

In addition to the academic relevance, the research is also practically significant. Governmental aid provides care for society, but the most recent economic crisis resulted in cut downs within governments and governmental allowances to non-governmental organizations (PWC, 2011). At the same time, non-governmental revenues are mainly derived from governmental allowances and gifts. CSV could be the missing link to fill this gap. Also, the Dutch government has no clear policy on corporate ambitions in the field of corporate responsibility. Much of the CSR literature has been written with little attention to the role of government (Crane et al., 2014). Therefore the business is mainly self-regulating. CSV articulates a clear role for state actors in constructing ‘regulations that enhance Shared Value, set goals, and stimulate innovation’ (Porter and Kramer (2011, p. 74). This research is relevant for organizations as well as governmental bodies, providing a better theoretical understanding of the concept of Shared Value and insights into Shared Value performance measurement

1.4 Research questions

Considering the lack of research into Shared Value performance measurement and the debate whether Shared Value can be considered a paradigm shift with respect to CSR, the following research question will be the focus of this study:

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To what extent do Dutch companies incorporate non-financial performance measures in accordance with the Shared Value concept, as operationalized in this study?

The aim of this study is to investigate the above mentioned research questions by means of an extensive literature study followed by case studies to explore the implementation of CSV principles in the Dutch corporate world. In order to develop a comprehensive answer to the above question, several sub questions are needed to gain proper insights in the theoretical material and structure the literature research.

First, considering the introduction of a new approach to responsibility of corporations towards society, it is imperative to analyze the current place of business to society. Therefore the coherent question asked to build on the main research question is: What is the present role

of business in society?

Whereas the traditional view on business proclaimed the first and foremost responsibility was towards the owners, creating shareholder value, it is interesting to see how the current role of business in society has influenced this relation. Therefore the second sub question focuses on: How do shareholders and other stakeholders take part in this discussion around CSV?

In response to the identified errors in dealing with CSR, Porter and Kramer (2011) introduced a new approach: Creating Shared Value (CSV). However, which errors do they reflect on? And with the new approach, has CSR failed? The third question will elaborate on: How does

Creating Shared Value relate to Corporate Social Responsibility?

In the face of the before mentioned development of CSV, what does this approach exactly encompass? The answer to this and other questions will be researched though the fourth sub question: What are the determinants of the Creating Shared Value theory?

For Shared Value to be integrated in the core business strategy, performance measures have to be measured and reported on (Maas & Boons, 2010). Therefore the final sub question will further elaborate on the question: How to implement Shared Value?

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15 1.5 Research design

As the purpose of this study is to investigate the current status of CSV reporting practices, first the three different ways underlying Shared Value, reconceiving products and market, redefining the value chain and enabling local cluster development, will be further operationalized. A framework for measuring current non-financial performance measurement based on CSV is constructed derived from the operationalization of CSV. In developing this CSV scorecard the three ways to achieve Shared Value, hereafter mentioned as pillars, will be further categorized in specific concepts supporting each pillar. These key concepts will accordingly be operationalized into specific criteria that constitute the creation of Shared Value. The CSV scorecard will indicate the level of CSV disclosure quantified through a scoring index. The measured criteria in the scorecard are no performance indicators on their own but cover topics that need to be covered in company’s non- financial indicators to be able to create Shared Value. The scorecard will both rate on quantitative and qualitative indicators, as in non-financial performance measurement not every aspect can be measured quantitatively. For example stakeholder relations are often not measurable in quantitative terms (Weber, 2008).

To analyze current non-financial performance measurement, qualitative empirical research will be conducted by means of case studies. The empirical research is conducted to operationalize the concept of Shared Value to a further extent, by means of empirical findings. The outcome of the CSV scorecard will map the concept of Shared Value with regard to current CSR measurement and, thereby, provides an indication of the current strategic focus of companies towards CSV, see Figure 1.

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16 1.6 Structure

The first part of this research consists of a theoretical approach, addressing CSR and CSV more thoroughly and providing more insights in to the practice of reporting on corporate responsibility. Chapter 3 will present the research methodology that leads to the operationalization of CSV in chapter 4. A scorecard will be developed, based on CSV, to analyze to what extent the selected Dutch companies measure their non-financial performance measurements from a CSV perspective; rating CSR reports on the CSV scorecard. Chapter 5 presents the results of the case studies, what will lead to the conclusion in Chapter 6. This chapter finalizes the research with an overview of all the research steps undertaken and the results, with the aim of answering the main research question. In addition, Chapter 6 will pay attention to research limitations, recommendations and management implications.

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Chapter 2: Sustainable Value Creation

The aim of chapter 2 is to further develop the theoretical base of this study. In the first section the concept of CSR will be further elaborated on, with a visual explanation of different interpretations of CSR. In the following paragraph, 2.2, CSR is placed on a continuum build from a stakeholder theory perspective. This leads to the introduction of a new theory, Creating Shared Value, in paragraph 2.3, with an in-depth analysis of the three pillars constructing the concept in paragraph 2.4, 2.5 and 2.6. Paragraph 2.7 makes the step from theory to strategic activity which describes the importance of measurement and reporting The chapter finishes with feedback on the sub-questions mentioned in the introduction and several assumptions underlying the empirical research in this study.

2.1 Corporate Social Responsibility

Whereas in 1917 Henry Ford stood in court to defend his idea of business being a service to society and reinvesting profit to, amongst others, increase employment en product quality instead of issuing dividends, CSR is now an important dimension of contemporary business activities. In 1977 less than 50 percent of all Fortune 500 companies mentioned CSR in their annual report, a number that increased up to more than 90 percent by the beginning of 2000 (Lee, 2008).

In the 1950s the evolution of the CSR construct really set-off, expanding in the sixties and flourishing in scope during the 1970’s (Carroll, 1999). Until the end of the ’70s the investment and business community perceived CSR, however, as a ‘contradictio in terminis’; the only business of business was business (Friedman, 1970; Lee, 2008). This ‘classical view’ on CSR was derived from the neoclassical theory that defined the provision of employment and payment of taxes as the only social responsibility of a business. CSR would impose an unfair and costly burden on shareholders, taking resources away from the core business (Branco & Rodriques, 2007). Milton Friedman (1970), a key proponent of the classical view, published the famous 1970s’ article ‘The social responsibility of business is to increase its profits’ in The New York Times Magazine. From this shareholder perspective on CSR the interest of shareholders, the owners, was considered most import. Maximizing shareholder value, while pursuing profit and efficiency in an ethical and legal way, would eventually benefit the common good (Kakabadse, Rozuel & Lee-Davies, 2005). The business was primarily viewed from the perspective of ownership, not as a social contract with society. By the late 1990s the stakeholder theory on CSR became universally ratified, applied by governments, corporations, non-governmental organizations and individual consumers (Asif et al, 2013;

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18 Lee, 2008). In contrast to the shareholder perspective, the stakeholder perspective on CSR companies results in a social responsibility to consider the interests of all parties, groups or individuals affected by the company’s actions (Garriga & Melé, 2004; Branco & Rodriques, 2007). This paradigm change shifted the academic debate on CSR; from whether or not to engage in CSR related activities to how to engage (Lindgreen & Swaen, 2010).

2.1.1 Different perspectives on CSR

Despite many new developments in the field of CSR and abundant CSR research, predominantly conducted on the topic of identifying the concept of CSR, an unambiguous definition has yet to be found (Kakabadse et al., 2005; Louche, Idowu & Filho, 2010). Based on agreements among academic researchers and the contribution of business and society to the concept of CSR, Kakabadse, Rozuel and Lee-Davies (2005) were able to abstract several key drivers in the development of CSR’s meaning and scope, see Figure 2

According to academics the CSR concept encompasses a larger scope than legal requirements or economic and technical requirements. This notion of CSR ‘going beyond the law’ is viewed as a voluntary effort from a business and society perspective; a voluntary effort to meet ethical standards (Carroll, 1999; Kakabadse et al., 2005). Academics however regard that companies have a moral obligation to follow ‘moral or philosophical guidelines’ in their corporate decision making and behavior (Carroll, 1999; Donaldson & Preston, 1995, p 71; Porter & Kramer, 2006). This normative perspective stems from the ethical legitimacy of the stakeholders’ claims on the organizational purpose, reflected in the social contract between businesses in society (Kakabadse et al., 2005). According to academics legitimacy

Process _Economic _Social _{Environmental}

Legitimacy _Power

Beyond the law Voluntary

Sustainability Social contract

Contextual Academic

contribution

Business and society contribution

CSR

Multi- stakeholders

Figure 2: CSR from both academic, society and business perspective (Kakabadse et al., 2005)

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19 forms a business incentive to engage in social responsibility; without legitimacy society will not grant companies a ‘license to operate’. Companies have to use their power in a way society considers to be responsible, called the ‘Iron Law of Responsibility’ (Kakabadse et al., 2005; Porter & Kramer, 2006). CSR is based on the principle that organizations need to behave in a socially responsible manner to prevent corporate scandals, which occurred for example with Enron, Ahold and Goldman Sachs (Asif et al., 2013). Therefore companies are bound to a social contract, stating society’s expectations of business as well as business’s expectations of society (Porter & Kramer, 2006). If these conditions are not met, they risk losing the expressed or implied approval of governments, communities and other stakeholders.

From a business and societal perspective these drivers are nevertheless interpreted differently. Legitimacy is perceived as the price of power business is granted and whereas academics assess CSR in terms of social contract, practitioners approach CSR in terms of sustainability. The latter is probably caused by the fact that the concept of sustainability is more easily translated in to managerial and operational goals. However, it also indicates a difference between CSR and sustainability (Kakabadse et al., 2005). The sustainability paradigm promotes the actions for a fairer world and a more humane future whereas CSR traditionally performed a binding function between a company and its stakeholders (Kleine & Von Hauff, 2009). CSR benefited from the close association with the sustainability paradigm and has become the concept which frames the business contribution to sustainable development (Kleine & Von Hauff, 2009; Maas & Boons, 2010; Visser, 2010). Sustainability encompasses a guiding model at the level of society, generally interpreted from a triple bottom line perspective; profit, people and planet, whereas CSR is a management approach for organizational contribution to sustainable development (Asif et al., 2013; Elkington, 1997). Both concepts are related through their voluntary character, through addressing the triple bottom line of sustainable development and through their focus on stakeholder relation management and integrating stakeholder considerations into business processes (Kleine & Von Hauff, 2009).

2.1.2 The stakeholder theory

Though both contributors, business and society as well as academics, approach most concepts differently, some key drivers to the concept of CSR they agree on. Both from business and societal as from academic perspective CSR is not considered as a static concept (Caroll, 1999). It is placed in a contextual process, sensitive to its dynamic environment and under ‘continual review, emerging from cycles of dialogue between the firm

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20 and its stakeholders’ (Kakabadse et al., 2005, p. 285). Likewise both sources acknowledge the stakeholders’ claim on a company, which is translated into the stakeholder theory. Different ideas contribute to this theory, yet why a company should be responsive to stakeholders can be considered from an instrumental and a normative perspective; the two main dimensions identifiable at the core of the stakeholder theory (Donaldson & Preston, 1995; Kakabadse et al., 2005). Both the normative and instrumental perspectives represent considerably different motivations for engaging in CSR activities. Garriga and Melé (2004) also identify two other theories related to CSR: political theories, regarding the responsible use of powers organizations have, and integrative theories, with organizations focusing on social demand. From a normative stakeholder perspective underlying moral principles function as the basis of the CSR theory. In whether or not to engage in certain activities the primary question for corporations is to consider if their activities are beneficial or harmful to society (Branco & Rodriques, 2007; Donaldson & Preston, 1995). The instrumental stakeholder perspective on the other hand stems from an economic incentive; the financial performance and growth of an organization could be improved as a result of a positive relationship with stakeholders (Branco & Rodriques, 2007; Lee, 2008). Although the shareholder perspective is hidden in the instrumental approach, the instrumental perspective is opposed to a shareholder view on CSR considering shareholders are only one of the multiple stakeholders groups (Margolis & Welsh, 2003). Since employees are attracted to working for companies that are accountable for their responsibility towards society and the environment, the instrumental approach to CSR can be a deal breaker in attracting and retaining high quality employees and motivate current employees. This way a company is able to generate a positive corporate image and become a significant source of competitive advantage (Ayuso, Rodríguez, García-Castro & Ariño, 2011; Branco & Rodriques, 2007; Lee, 2007). From the instrumental view on CSR the connection to stakeholder management is based on the achievement of traditional objectives and justifies socially responsible behavior solely based on economic grounds (Donaldson & Preston, 1995).

2.2 The continuum

Evidently the described normative and instrumental perspectives on CSR do not perfectly align; there is a tension in both perspectives on CSR (Margolis & Welsh, 2003). This tension between both ‘opposite’ perspectives can be conceptualized as a continuum, ranging from a normative to a purely instrumental interpretation of CSR. From this idea even Friedman (1970) was in favor of socially responsible behavior as a profit maximizing activity; finance comes first and social responsibility is at the periphery containing low or minimal social value. When approaching CSR merely as a risk aversion tactic, for preserving or enhancing the

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21 company’s bottom line, the less relies a company on intrinsic motivation to improve societal issues but on traditional economic goals, predominantly resided on the right side of the continuum (Branco & Rodrigues, 2007; Ellen, Webb & Mohr, 2006; Porritt, 2007). Companies that merely focus on societal issues with minimum relation to economic results are placed on the complete opposite side of the continuum (Austin, Stevenson & Wei-Skillern, 2006; Dees & Economy, 2001). Depending on a company’s strategic vision, prioritizing more societal or more economic goals, organizations can be located on the continuum, see Figure 3 (Dees & Elias, 1998).

Figure 3 Continuum towards social responsibility

However, the continuum is not a dichotomous scale. It is a dynamic model in which CSR is not perceived as a static concept, but is placed in a contextual process sensitive to its dynamic environment (Caroll, 1999). In the transition from one point on the continuum to another point a sequence of variations between the extreme ends of the axis pass. Organizations can be perceived as hybrids, displaying multiple at the same time (Austin et al, 2006). On the left side towards the middle of the continuum non-profit organizations and NGO’s are predominantly resided. Even from a solely altruistic standpoint, commencing a purely normative approach, the activities still reflect economic realities. As well as from a purely instrumental perspective, the activity still involves societal value (Austin et al, 2006). Even at the extreme ends of the continuum, elements of both sides are visible. In positioning towards CSR, organizations should strive for a productive balance (Austin et al, 2006; Dees & Economy, 2001). The optimal integrated strategy is in the middle of the continuum, approaching CSR from the instrumental as well as the normative approach. Unfortunately, in practice, CSR is often located within the external affairs, corporate affairs or community affairs within the corporate structure, thereby the value of CSR is located in the periphery of the company’s strategy (Porter & Kramer, 2011; Visser, 2010).

2.2.1 The weak business case of CSR

Today, there is a broad theoretical consensus that profit maximization is no longer the exclusive goal of companies in the context of the overall economy. However, the corporate sector does not have one clear defined, consistent perspective on the relationship between

Impact Only Finance Only

Normative perspective Instrumental perspective

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22 profits and social goals (Carroll, 1999; Kleine & Von Hauff, 2009). In the eyes of various researchers the current translation of CSR in practice has failed and they consider the business case of CSR to be weak (Asif et al.,2013; Ellen et al., 2006; Porritt, 2007; Porter & Kramer, 2006, 2011; Visser, 2010).

Visser (2010) identifies three fundamental failings of modern CSR. First, he determines that CSR has remained largely in the periphery of companies, confined to PR or other departments instead of being integrated across the corporation. CSR is increasingly being used as a key criterion in measuring corporate reputation, becoming an additional and removable business activity (Branco & Rodrigues, 2007; Ellen et al., 2006; Porritt, 2007; Porter & Kramer, 2006, 2011). In view of the growing pressure from governments, communities and other stakeholders to embrace emerging standards for social performance, companies fear for their reputation (Visser, 2010; Porritt, 2007). CSR is now widely used and became a popular element of corporate marketing strategies in view of customer loyalty and building reputation (Branco & Rodrigues, 2007; Pirsch et al., 2007). On the one hand this is to pursue the opportunity to differentiate themselves from the competition and bolster their reputation and on the other hand because companies manage their social risk by amending CSR as risk aversion tactic (Branco & Rodrigues, 2007; Ellen et al., 2006; Porritt, 2007). According to Branco and Rodrigues (2007) these external drivers have facilitated CSR to become a mere means to the end of profit. Leading up to the devaluation of CSR, with Lindgreen and Swaen (2010) even calling CSR a promotional tool; to earn a ‘license to operate’. Visser (2010) even calls CSR failed and advocates the development of a different CSR to reverse the current direction of CSR. CSR initiatives have to be compatible with other organizational strategic goals, for example growth and profit-making. Instead of a pure instrumental approach to CSR, the business case of CSR needs to be integrated in the company’s strategy (Maas & Boons, 2010). As long as CSR activities are ‘bolt-on’, companies engage in socially beneficial spot-initiatives and activities that are disconnected from their core business, CSR will mainly increase customer’s willingness to purchase products (Maas & Boon, 2009; Pirsch et al., 2007; Porter & Kramer, 2006). These tactics, financial or material donations, sponsoring or volunteering activities of employees, lead up to incremental improvements, but they do not match the scale and urgency of societal problems, which Visser (2010) calls the second failing of CSR. Without strategically managing CSR and relate CSR to a company’s core business, a company will not make a significant social impact and reap the greatest business benefits (Maas & Boons, 2010; Porter & Kramer, 2006). Therefore Visser (2010) calls CSR uneconomic, as its final fundamental failing. The business case of CSR has failed, as short-term markets still reward companies that externalize their costs to society (Visser, 2010). Contributing to the debate on

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23 CSR, Garriga and Melé (2014) determine that the four groups of theories related to CSR, instrumental, political, integrative and ethical (normative) should not be four different dimensions. They agree on the necessity to develop a new theory on the business and society relationship, which should integrate these four dimensions.

2.3 Creating Shared Value; multiple impact

When Porter and Kramer (2006) first introduced the concept of Creating Shared Value, CSV, in their article ‘Strategy & society. The link between competitive advantage and corporate social responsibility’ they defined CSV as an approach for an improved implication of CSR. They reckoned there were great deficits in companies’ perception and implication of CSR. The basic idea behind CSV is that the competitiveness of a company and the health of the communities around it are mutually dependent. Recognizing and capitalizing on the connections between societal and economic progress has the power to redefine capitalism (Pfitzer, Bockstette & Stamp, 2013; Porter & Kramer, 2011). Although Porter & Kramer considered Shared Value in their 2011 article ‘Creating Shared Value: how to reinvent capitalism and unleash a wave of innovation and growth’ to be different opposed to CSR, some authors still call it an interpretation of CSR (Crane et al., 2014). From this perspective CSV is not a new concept, but the perfect conceptualization of CSR. They consider it to be the transition and expansion from the concept of CSR, for example Visser (2010) interprets CSV as CSR 2.0. The idea of doing well by doing good is in fact not new, resonating in the concept of the Triple Bottom Line (TBL). The TBL refers to the focus of companies on things other that economic impact, based on the people, planet, profit principles (Elkington, 1997). All companies must account for not only their economic, but also their social and environmental operations (Gray, 2006). Yet, the Triple Bottom Line tends to optimize the trade-off between people, planet and profit towards a possibility to create profit. The business case of CSV however emphasizes profit-making not as a possibility but as a priority.The ability to address societal issues is integral to profit maximization, instead of treated outside the profit model and should be focused on three interdependent focal points to create Shared Value; reconceiving products and markets, redefining the value chain and enabling the development of local clusters. What Porter & Kramer (2011) consider to differentiate their approach from these failures is the call for a fundamental rethink of business strategy rather than activities for a limited part of business operations or public relations purposes. It is a companies’ duty to break itself out of the traditional CSR and restructure and pursue new market strategies that value both economic and societal development (Porter & Kramer, 2011).

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2.3.1 CSV on the continuum

The strategic approach to CSR adds another dimension to the continuum, in the middle. The relationship between social purposes and economic results is fundamental to companies in the center stage of the continuum. Companies amend their entrepreneurial power in the interest of societal and economic values (Kievit et al., 2008). This is where CSV is situated; companies have the most integrative view on social responsibility, creating social value for all stakeholders, see Figure 4.

To move from peripheral to a core activity and create Shared Value, efforts need to be focused in three, mutually reinforcing, key areas; reconceiving products and markets, redefining the value chain and enabling the development of local clusters, shown in Figure 4. All three areas, in this study called pillars, are intended to integrate Shared Value in the corporate strategy (Porter & Kramer, 2011). Where a company stands, its position on the continuum depends on the interpretation of their responsibility towards society and to what extent they have integrated this mission in their core strategy. In the middle of the continuum Shared Value is situated; creating financial value through social value and creating social value through financial value (Porter & Kramer, 2011). Based on these three pillars CSV could be seen in the category instrumental theories. Achieving competitive advantage through social investment in a competitive context, the natural resource-based view, which is focused on competitive advantage based upon the firm’s relationship to the natural environment and the firm and dynamic capabilities by targeting the bottom of the pyramid

Multiple Impact Finance Only Impact Only Im pact Only act Only Only Impact Only Impact First

Normative perspective Shared Value Instrumental perspective

Enabling local cluster development

Redefining the value chain

Reconceiving products and markets

CSV

Figure 4: Continuum towards social responsibility, including the Shared Value perspective (Porter & Kramer, 2011)

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25 (Garriga & Melé, 2014). Businesses are an integral and deeply embedded part of society; business and society are interdependent. The Shared Value perspective is a business approach that seeks to create long-term value by ‘policies and operating practices that enhance competitiveness of a company while simultaneously advancing the economic and social conditions in the communities in which it operates’ (Porter & Kramer, 2011, p. 6). The question remains to what extent this approach differs to strategic approaches to CSR. For instance, Galbreath and Kim (2010) created a similar framework to link strategy and CSR: the market-based approach, the operational based approach and regulatory based approach.The market based approach is comparable to reconceiving products and market, as they both are market driven by entering new markets or introducing new products. The operational based approach, in fact based on Porter’s (1985) notion of examining the value chain and capture or internalize the benefits of operational activities related to a social issue (Galbreath & Kim, 2010). However, the third approach of Galbreath and Kim (2010) differs to the third pillar by Porter & Kramer (2011). Although both approaches, regulatory based approach and enabling the local cluster, are aimed at achieving a competitive advantage, Porter & Kramer (2011) point out that is exactly an aspect where CSR and CSV differ from each other. Where CSR is focused on enacting to laws and regulatory framework, CSV focuses on the importance of developing the local cluster as opposed to CSR’s focus on globalization (Galbreath & Kim, 2010; Porter & Kramer, 2011).

2.4 Pillar 1: Reconceiving products and markets

In 1948 Smith already mentioned the importance of structural critical analyses of corporates own products and operations (Smith, 1948). Companies have to be critical of their own products, services and the market they provide for. When consistently reassessing needs, benefits and harms that could be embodied a firm’s product or service and their effects on society a company is able to identify possibilities to redefine their products and restructure their practices and organization in order to meet societal needs in a responsible manner. The ultimate goal is to identify fundamental societal needs that a company’s product or service can satisfy hereby benefitting the costumer as well as the company itself (Porter & Kramer, 2011). Therefore this pillar applies a market-based approach to achieve Shared Value: reconceiving products as well as reconceiving markets (Galbreath & Kim, 2010; Porter & Kramer, 2011).

2.4.1 Reconceiving products- reposition in traditional markets

Does a company’s product or service still fit to costumers’ needs? According to Porter and Kramer (2011) the predominant problem in current society is that many companies have lost sight of the crucial question whether their products are good for their customers and their

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26 customers’ customers. Therefore companies have to design products and services to address needs in a societal manner (Porter & Kramer, 2011). The business potential would be based on satisfying social needs while opening new profit-opportunities for companies. The previous entrepreneurial focus has often been on trying to create ‘demand’ for goods and services a company produced, rather than focus on the unmet needs of society (Bathelt, Malmberg & Maskell, 2004). However, many of the so called seller markets are changing to buyer markets. This leads to an enhancement of customer-centered activities on production-oriented markets. The success in customer orientation will be granted in adaptation of customer’s needs to products and/or services (Day, 2011 Schee, & Loos, 2002).

In order for products or services to be successful, Cagan and Vogel (2002) identified three factors that must be present to guarantee the highest potential success. First is the ability to identify product opportunities. As cultures continue to change, chances emerge for new products. These products do not just solve existing problems; they also create possibilities for new experiences through product innovation. Ongoing research and development programs help to identify opportunities for new product development linked to innovation in materials, technologies or markets (Cagan & Vogel, 2002; Maas & Boons, 2010). The second is a heightened understanding of customer needs translated into actionable insights that define attributes. Both products and services are connected to understanding the experiences that the end customer wants and then translating that understanding into a products or service. All of the people involved are stakeholders in the product process, and the successes of the products depend on the coordinated involvement of all of them (Branco & Rodriques, 2007; Cagan & Vogel, 2002). Third is a true integration of engineering, industrial design and marketing. Teams must be supported and managed effectively in an atmosphere where each discipline respects and appreciates the perspective of the others (Cagan & Vogel, 2002). When considering these three factors, products and services eventually succeed as they achieve a role in creating optimal experiences for customers, enhancing human experience. A new perception of products might reveal yet unconsidered markets or revive the old, traditional ones.

2.4.2 Reconceiving markets

In 1996 Hamel stated that every company has an implicit notion of its served market; the types of individuals and institutions that are and are not their customer. In practice companies have been mainly choosing markets based on income and selected products and services appropriate for developed countries. Lower purchasing power and infrastructure were considered less attractive markets to enter, even though these markets, on a global

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27 scale embodying a much bigger audience compared to the targeted markets (Hamel, 1996; Ramani, Sadre Ghazi, Duysters & Karelplein, 2009). Excluding low-income markets, often referred to as the ‘Bottom of the Pyramid’ - the billions of people living on less than $2 per day, according to Prahalad and Hart (2002), excludes people with great needs but no possibility to express those needs in ways that matter to markets. Accordingly, to Porter and Kramer (2011) equal or greater opportunities could arise from serving underserved communities, less-developed countries or nontraditional communities in advanced markets. This latter underserved community, most often with a high percentage of low- income individuals and high percentages of ethnic minorities, is predominantly overlooked (Porter & Kramer, 2011; Weiser, Kahane, Rochlin & Landis, 2006). Companies should ‘not just focus on their served market, but on the total imaginable market’ (Hamel, 1996, p.72). Societal needs just as much define markets as conventional economic needs, yet the societal element in the market entry decision has been largely ignored (Porter & Kramer, 2011). Entering new markets using existing products or technology is a common growth strategy (Doyle, 2008). Repositioning occurs when relocating a product to different market than the traditionally served market. This does not mean that an exit from the traditional market is necessary; new and old markets can both be served. In the ‘Shakti’ project, by Hindustan Unilever, women f r o m Self- Help Groups sell HUL products in small sized packages fit for consumers in their villages. The project provides products previously unable to purchase, secures the livelihoods of Shakti women and generating an estimated 250 million USD in annual sales for HUL in an unlikely market made possible to enter by a new partnerships with SHG. The project allowed the company to consolidate their market position in South Asia and secure 50 per cent of their revenue in India (Dahan, Doh, Oetzel & Yaziji, 2010). Motives for a market-based approach to address low-income markets in developing countries range from poverty alleviation to pure profit driven attempts (Galbreath & Kim, 2010; Ramani et al., 2009).

Based on results from an extensive research in the United States Weiser, Kahane, Rochlin and Landis (2006) determine that the most important success factor in entering low-income markets is to create value for the community at the same time as creating value for the business. In achieving this goal partnerships and strategic alliances prove to be an important contributor, over two-third of the studied companies that successfully tapped underserved markets had formed a partnership with an organization that brought new knowledge, skills, resources or connections to their effort (Weiser et al., 2006). There are both opportunity and risk in underserved markets. Some authors have ethical concerns regarding the BoP concept, considering for instance the risk of economically exploiting the poor (Maas & Boons, 2010; Ramani et al., 2009). The question is how to seize the opportunities without

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28 succumbing to the risks (Weiser et al., 2006). The pitfall of this first pillar is that firms can pretend to rebrand their company and its products as promoting Shared Value, to capture the socially conscious consumer demographic. Hence, the only successful manner of creating Shared Value is when companies implement the Shared Value perspective into their value chain (Porter & Kramer, 2011).

2.5 Pillar 2: Redefining productivity in the value chain

The traditional focus of creating value in the supply chain was by increasing the benefits of the product for the customer, reducing the costs of the product, improving delivery service and reducing time of delivery (Sundarakani, De Souza, Goh, Wagner & Manikandan, 2010). However, realization came that the operations in the value chain of a company, the inside-out linkages of a company, impinge on society (Galbreath & Kim, 2010; Green & Ryan, 2005; Porter & Kramer, 2011). Research has shown that for a company to be successful, environmental management strategies must be integrated into the value chain (Handfield, Walton, Sroufe & Melnyk, 2002).

However, within the value chain concept, there is an increase in overlapping names and concepts defining the concept of the value chain. Global commodity chains, value chains, value systems, production networks and value streams; academics as well as practitioners use different terminologies to describe similar ideas (Kaplinsky, 2000). Yet, the value chain concept first described by Michael Porter in 1985 is the most well-know concept. He describes the value chain as a set of activities for a firm operating in a specific industry. When the value chain is applied to an entire industry, Porter (1985) calls this the value system. He places the value chain of a firm in a set of interlinked firms in which a firms’ value chain is embedded, known as a value system (Kothandaraman & Wilson, 2001; Porter, 1985). In the value system different chains all contributing to the end product or service form a system of linked value chains of companies, consisting of upstream suppliers and downstream channels of customers, see Figure 5.

Supplier Value Chain

Firm

Value Chain

Buyer Value Chains Channel Value Chain

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29 The ‘fit’ between a firms’ own value chain in the multi-linked value system is essential in achieving competitive advantage. However, linkages not only exist between value chains, intra linkages within the firms’ individual value chain exist as well (Handfield et al., 2002; Kothandaraman & Wilson, 2001; Porter, 1985; Roper, Du & Love., 2008).

2.5.1 Value chain; an analysis tool

From the firms’ value chain perspective, an organization can be analyzed by focusing on a certain ‘part’ in the chain of the company, instead of the complete firm. As an analytical structure tool the value chain by Porter (1998) has become a respected device for corporate analysis; exploring the value chain to understand the activities that a firm carries out in day-to-day business. It provides a systematic framework to divide a business enterprise into discrete activities (Galbreath & Kim, 2010; Kaplinsky, 2000). Porter (1985) desegregates a firm into strategically relevant activities performed in particular links in the chain, categorized in primary and supportive activities, see Figure 6.

The primary activities focus on the process of supply, inbound logistics, operations, outbound logistics, marketing and sales, and after sales service. This leads to the transformation of these inputs into outputs; production, logistics, quality and continuous improvement processes. Finally, the supportive activities accomplish these tasks; strategic planning, human resource management, technology development and procurement (Handfield et al., 2002; Kaplinsky, 2000; Louche et al., 2010; Porter, 1985). The value chain presents a framework to analyze how a company can build and sustain a competitive advantage over its

Services Procurement

Firm Infrastructure (e.g. finance, planning, IT) Human Resource Management

Technology Development (e.g. product design, testing, material research

S up po rt ac ti v it ies

Figure 6: The value chain (Porter & Kramer, 1985) Inbound Logistics Operations Outbound Logistics Marketing and Sales P ri ma ire ac ti vi ti es

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30 competitors while achieving long-term profitability and survival. It encloses a more operational based approach including actions that enable a firm to capture or internalize benefits of operational activities specifically related to a given social issue (Galbreath & Kim, 2010; Kaplinsky, 2000).

2.5.2 CSV in the firms value chain

According to Porter & Kramer (2006) virtually all value chain activities can be viewed in light of issues related to social responsibility. A company’s value chain inevitably affects, and is affected by, numerous societal issues, such as natural resource and water use, health and safety, working conditions, and equal treatment in the workplace. With a focus on the productivity of companies, opportunities arise because of the internal costs of societal issues. These costs originate from externalities simultaneously leading to internal costs (Porter & Kramer, 2011). Operational based actions include those that enable the firm to capture or internalize benefits of operational activities specifically related to a given social issue (Green & Ryan, 2005). The idea is to reduce externalities in the chain, through, for example, inter-generational equity, employee rights and work-life balance (Junge, 2011). Junge (2011), however, concludes that ‘redefining the value chain’ is not actually a new approach. Reduction of the value chain externalities has already been widely acknowledged in CSR literature (Jung, 2011; Lee, 2008). Porter and Kramer (2011), on the other hand, argue that the congruence between societal progress and productivity in the value chain is far greater than thought before and the synergy actually increases when companies approach these societal issues from a Shared Value perspective. They assess that, although CSR already introduced the concept, few companies have really reaped the full benefits in the value chain (Porter & Kramer, 2011). As operational excellence is necessary for a competitive strategy, every strategically important element in the value chain has to be frequently revised to grasp all opportunities possible (Handfield et al., 2002; Louche et al., 2010; Porter & Kramer, 2011).

The value chain draws a picture on how inside-out linkages, internal conditions, influence companies. However, the mutual dependence between business and society has two sides (Porter& Kramer, 2006). Companies are not autonomous; they are influenced by related businesses, rival businesses, suppliers, service providers, logistical infrastructures and many other elements in the local field they operate in (Porter, 2000). The other side is outside-in linkages. External social conditions also influence corporations. Every company operates within a competitive context, a context that affects its ability to carry out its strategy in the long-run. At the same time, with the accumulation of knowledge content of production, the

The value behind the measurement : a study into the Shared Value reporting practices by Dutch enterprises

Table of Contents

List of Tables ... 6

List of Figures ... 7

Abstract ... 8

Chapter 1: Introduction ... 9

Chapter 2: Sustainable Value Creation ... 17

Chapter 3: Research Design ... 39

Chapter 4: Operationalization ... 46

Chapter 5: Results ... 66

Chapter 6: Discussion and Conclusion ... 83

References ... 91

Appendix A ... 99