Efficiently handling externalities has been a subject of debate in law and economics for hundreds of years. From written deontological codes to Pigovian taxes, many scholars have formalized the way they think about these remedies.
Creating Shared Value (CSV) suggests that companies can internalize inefficiencies creating social welfare and increase company market value at the same time. This theory particularly impacts property rights and specifically the notion that externalities are a tradeoff between profit and social good.
Besides property rights, CSV has implications for other fields of law like torts, where it can be applied to justify action before accidents happen. For example, if a company develops cleaner ways of emitting its waste, it can reduce its tax burden (private welfare), its carbon footprint (public welfare), and potential future emission accidents (tort reduction).
Creating Shared Value can be defined by three actions companies can take. According to the seminal 2011 paper “Creating Shared Value,” Porter and Kramer define shared value as the “policies and operating practices that enhance the competitiveness of a company while simultaneously advancing the economic and social conditions in the communities in which it operates” (Porter and Kramer 6).
Specifically, they suggest that shared value can be created by: rethinking products and markets, redefining the value chain, and building clusters of companies, associations, and regulators (Porter and Kramer 7).
Practically, these methods often call for increased investment that results in long-term economic gain, new market entry, reorganized production lines, or budding partnerships. Porter and Kramer mention areas where CSV can be particularly helpful including energy use, employee skills, worker safety, and water use (Porter and Kramer 8). They conclude by stating that profit can have “social purpose” (Porter and Kramer 15) in addition to financial value, and suggest that CSV is the first step to a new type of capitalism. Because of the challenges they received questioning the actual implementation of CSV, Porter and Kramer followed with another article titled “Measuring Shared Value”.
In this piece, they argue that CSV can be measured through intra-company efficiency, compliance, and social welfare targets. They use a variety of case studies of international companies implementing CSV to show its effectiveness. They conclude by tempering their earlier remarks and offering possible flaws of CSV (Porter and Kramer 16). Since that article, others including authors at Forbes, The Economist, and MIT Sloan Management Review have approached the subject, but Porter and Kramer have yet to release another paper.
At a fundamental level, creating shared value impacts property rights by making us reconsider the extension of rights that come with property, regulation of externalities and property, and the need for exclusivity in defining property rights. After we consider these three changes, we can generalize to how CSV makes us rethink the definition of externalities and the most efficient way to get rid of them.
For the purpose of this article , we can break down our analysis in three sections: 1. CSV’s impact to property rights 2. Damages through the lens of CSV 3. Limitations of CSV and its effect on law Creating Shared Value offers a new way of thinking about welfare and externalities, and consequently affects our economic interpretation of the law.
PART I: CREATING SHARED VALUE’S IMPACT ON PROPERTY RIGHTS
In agreement with Miceli’s notion that the “primary economic function” of property rights is to internalize externalities, we believe that CSV can change the idea that internalizing externalities comes at a profit loss for companies. We can analyze CSV’s effects on property rights through three case studies, each of which demonstrates a different way CSV is actually implemented. In the first case study on Nestle, Nestle redesigned its product to increase profits and reduce waste, and forces us to reconsider the responsibilities that come with property rights.
In the second case study on Intel, a new energy-efficient headquarters saves Intel energy costs and helps the environment, leading us to believe that companies should value internal regulation as a way of increasing profits. In the third case study on Yara, Yara’s initiative to work with local governments and organizations led to increased profits and job creation, prompting us to think about ways in which we can incentivize collaboration and economic growth through shared property rights.
The nature of property rights is an extension of rights and expectations according to Miceli and Posner. This idea is affected by CSV. With property rights comes the expectation that individuals attempt to limit the externalities they create on neighbors. In a corporate sense, this could regard waste, pollution, or nuisance.
According to Miceli, the right of owning property also comes with the right not to pollute. But that right is not economically incentivized without damages or penalties. But CSV offers another economic incentive: increasing profits and not polluting by developing new technology or processes internally.
In this sense, should we be incentivizing damages control or internal assessments to minimize externalities? CSV allows us to think in this vein. • Nestle’s Nescafe Plan results in decreased costs for Nestle and an eliminated externality of pulp waste.
- Nestle’s Nescafe Plan streamlined the coffee process by redesigning its product chain (Nescafe 1). By working with farmers to redesign the pulping process–the stripping of coffee bean pulp–Nestle was able to reuse parts of the pulp and reduce water consumption. Farmers were able to work more efficiently and Nestle spent less for its raw materials and labor. Nestle also redesigned its related products to make use of the leftover pulp. Nestle further plans to expand technical assistance to farmers to increase their productivity. Relating back to the CSV theory, Nestle redefined its product, which allowed it to generate greater returns and help the local farmers. CSV then prompts us to reconsider regulation, in a property sense and more generally. Many argue that internal transaction costs are lower than external regulation (cost of information). If our goal is to seek the most efficient outcomes, perhaps laws should incentivize internal assessments of business processes, products, and externalities. Current laws do this in many cases, but CSV can be extended beyond simple cases of pollution. According to the theory, businesses should reconsider profit as including a social element. Some companies have even changed their financial statements to show their reduction of externalities in dollar amounts. Should companies be taxed more heavily if they pollute, considering it is an externality that they can efficiently avoid? Such questions lead us to consider the case for fewer, more targeted laws that allow for companies to reach efficiency.
- Through an analysis of its value chain, or key stakeholders and product pipeline, Intel has decreased its environmental footprint while also lowering its energy bill. Since 2008, it has reduced carbon dioxide emissions and reduced its energy expenditures by $111 million. Intel ‘s $1 billion plant in downtown Ho Chi Minh City includes a water-reclamation system that reduces water consumption by as much as 68%, reducing its environmental footprint and the cost of operating the plant. The plant also contains Vietnam’s largest solar array (Ives 1). Instead of giving praise to Intel, should we instead expect Intel to take these measures because it can increase Intel’s profits and help the environment? Finally, CSV challenges the notion of private property and the need for one of Posner’s three elements: exclusivity. In their initial article “Creating Shared Value,” Porter and Kramer suggest that shared value blurs the lines between for-profit and non-profit companies because of the redefinition of profit and externalities. In the same way, if property rights include the rights to the land and its use, perhaps a group ownership model may incentivize shared value and negate the need for exclusivity. Many companies focus on the short-term profits, and a redefinition of private ownership may help to elongate company time horizons. Companies that jointly own land will be economically incentivized to work together. Instead of maximizing land for a 20 or 30-year lease, these companies will jointly own land on larger contracts, forcing them to think long-term. Perhaps there is a way to apply eminent domain to corporations that are not applying obvious CSV practices for the sake of short-term profit.
- Yara, the world’s largest mineral fertilizer company, has worked with governments, farmers, and African companies to improve farmers’ access to fertilizers and other agricultural inputs. With a $60 million dollar investment, Yara has collaborated with the African Union Commission, Grow Africa partnership, and New Alliance for Food Security and Nutrition to develop Africa-specific strategies for fertilizer distribution. Working with the Norwegian and local governments, Yara is supporting the development of roads and ports to give African farmers better access to materials; in Mozambique, this initiative is projected to create 350,000 jobs. Yara’s CEO Ole Haslestad states that these collaborative clusters of organizations have allowed for 40% deployment of the investment in one year (“Concrete Actions for a Real Transformation of Africa’s Agriculture” 1). In light of CSV, Yara has taken the initiative to create this cluster. Perhaps future laws can be refined to incentivize companies to create these clusters through funding or regulation. After considering the three changes above, we must reexamine how property is assigned and how it is defined (privately, regulated, with amendments). By changing the way companies view profit, CSV allows us to question the ways of aligning economic incentive with social welfare.
PART II: DAMAGES THROUGH THE LENS OF CSV
Because CSV implies economic incentive for precaution, liabilities become opportunities. Since all damages cannot be calculated and assigned before they occur, compensation may sometimes be more efficient after the fact due to transaction costs. Especially in the case of an oil spill or other externalities that companies unintentionally create, viewing damages through the lens of CSV can change our analysis of punitive damages and the nature of damages itself.
Proponents of CSV would argue that restitution damages for externalities should be higher than they are today. Punitive damages are those extra, often uncalculated damages that go to set an example for future companies. It is often given to the breached party to compensate losses, and is usually a heftier fine with respect to the other types of damages.
In CSV cases, proponents would argue that companies have a contract with society to keep the environment clean, roads less noisy, and other such activities. In addition, companies have an economic incentive, and therefore should really never breach a contract unless they act irrationally.
Therefore, a breach of contract with society is does not contribute to economic or social welfare. Because of that, punitive damages should be harsher and more frequent in some cases. Beyond affecting specific types of damages, we must explore why breaches of contact would occur in the first place. According to Porter and Kramer’s theory, companies have both an economic and social duty to internalize externalities, and therefore, in an ideal world, there would be few externalities.
Most companies would act rationally and internalize externalities to improve their own efficiency and profits, and help society at the same time. But the very fact that law for damages exist and companies are creating externalities either means that companies are unaware of CSV opportunities or there are limitations to the theory in practicality. Overall, it is probably a mix of these two factors that contributes to the “tradeoff” many companies face between profit and social good.
PART III: LIMITATIONS OF CSV AND ITS EFFECT ON LAW
Although CSV offers us new ways of thinking about property rights and damages, as well as other areas of law like torts, a critical look at the theory can reveal its limitations. Specifically, the motivations behind CSV, differentiating types of shared value, and limited scope present challenges to creating generalized forms of new property rights and damages.
First, CSV pioneers may have been thinking about financial incentives and stumbled upon the societal benefit, marketing it instead as a thoughtful dual-purpose effort (Elkington 1). In this vein, some criticize CSV as repackaged Corporate Social Responsibility (CSR), and go as far as to say that both are marketing efforts to increase revenue, and are not really concerned with social welfare (Sadowski 1).
Second, as noted by Porter, differentiating the drivers of social good in multi-partner value chains may be difficult, and therefore it is harder to determine how economic and social good relate.
Another complication of CSV is the differentiation of timelines between economic and social value creation.6 Firms may propose long-term social benefits for short-term economic benefit, and such differing timelines can make it difficult to correlate the two. Others argue that Porter is urging firms to take a long-term view of economic benefit through CSV, which is not realistic considering typical investor time horizons.
In our observations, shared value examples have been applied in specific cost-cutting or long-term economic value creation, but the CSV theory claims that a reevaluation of any business can result in reducing internalities and increasing value. In the same way, critics have argued that CSV focuses on industry leaders in its adaption, but loses momentum as it is applied to smaller or different types of businesses (Beschorner 5).
Further, CSV initiatives focus on a few opportunity areas that increase both social and economic value, but some believe that companies are often burdened with political agendas that necessitate a broader focus, making CSV unrealistic.7 The Economist builds on this idea by suggesting that CSV ignores many of difficult tradeoffs companies have to make in everyday business (Schumpeter 1).
Beschorner suggests that if a business decision is acceptable to major stakeholders, ethical, and profitable but does not create social value, CSV implicitly allows for it. This in turn could make certain harmful business actions acceptable.
Overall, Porter and Kramer have created a valuable framework for rethinking the way business works in a broader social and economic sense. Their work has been the basis of several initiatives spearheaded by multinationals such as General Electric, and has caused some CEO’s to rethink their product pipelines and effect on others.
Still, CSV leaves much to be desired in the form of actual metrics that prove the theory in a variety of contexts and in everyday business. Unraveling the intentions of these corporate programs can be complex, but is necessary for us to understand if CSV actually produces financial and social returns through the same policies. In the context of property rights and damages, CSV contests the idea that externalities create tradeoffs for companies between social welfare and profit.
Instead, companies are economically incentivized to internalize inefficiencies, and our fundamental notions about exclusivity, rights, and expectations are questioned. In this new application of the theory beyond standard business practice, we see that CSV has implications beyond law to the core of business: decision-making.
Ultimately, determining corporation intentions, which are the result of people’s decisions, can lead us to insights that shape the way we incentivize through the law. CSV is one such attempt at uncovering that black box, and we hope to see many more.