Ideas ... Shared Value
FSG ... Michael Porter and Mark Kramer

Michael E. Porter , Mark R. Kramer ... Shared Value ... The Lesson Behind Fortune's 'Change the World' List ... 2016

Burgess COMMENTARY

Peter Burgess

The Lesson Behind Fortune's 'Change the World' List

Shareholders, customers and employees expect more from big companies.

As this year’s Change the World List demonstrates, more and more corporate leaders are embracing a new best practice with profound implications for their companies and the wider world. In increasing numbers, managers are integrating societal needs into their corporate strategy, aligning their companies’ business missions with their impact on their communities and the environment.

This approach, which we call Creating Shared Value, is moving into the mainstream and growing exponentially. Companies that adopt shared-value thinking remain committed (as they should) to philanthropy and corporate social responsibility. But they’re moving beyond often-fuzzy notions like sustainability and corporate citizenship, and instead making measurable social impact central to how they compete—a powerful counterpoint to the fierce criticisms leveled at business in this tumultuous election year.

Mark Kramer, left, and Michael Porter. Courtesy of FSG

This transition is manifesting itself in several ways. First, companies are shifting their focus in social impact from pilot projects and secondary markets to their core markets and strategies. There are a growing number of examples where shared-value thinking is driving fundamental strategic transformations and industry structural change. Nestle, for example, is creating a whole new fusion of food and medicine through disease-specific nutritional products developed using clinical research. In doing so, the company has distanced itself from competitors and found major new avenues for growth and profitability that others have missed.

Second, as the scale and business salience of social impact aspirations rises, many companies are re-inventing their corporate purpose. Companies are no longer seeing themselves primarily in terms of their products or services, but through the lens of the societal needs their products and services meet. While some corporate purpose commitments remain more PR than substance, a growing number reflect a new, deeper understanding of the relationship between business and society. Having a compelling social purpose attracts talent: Corporate recruiters report that job applicants are increasingly asking questions about shared value in their interviews. And it inspires the kinds of innovation that can revitalize a business and drive expansion. Schneider Electric’s dedication to environmentally safe energy, for example, has fueled its growth by spurring constant invention in proprietary products and services that reduce its customers’ energy use and carbon footprints.

As companies step up their game in social impact, we are seeing a refreshing new relationship between corporations and non-profits. As more NGOs have moved beyond the attack dog role to working with companies on shared missions, corporate practice is evolving to embrace the idea that NGOs can be business partners. For example, GlaxoSmithKline has partnered with Save the Children to jointly develop an inexpensive antiseptic chlorhexidine gel to prevent umbilical cord infections, a common cause of deaths in newborns among rural and low-income populations where the charity works. The Environmental Defense Fund has partnered with Walmart to identify ways to lower its conventional energy use and reduce costs. International agencies, such as the United Nations and the World Bank, along with leading charitable foundations such as the Bill & Melinda Gates, Rockefeller and Robert Wood Johnson foundations, are designing program strategies that go beyond their usual government and civil society partners, recognizing that a private sector animated by shared value can bring essential capabilities to solving global challenges.

The Rockefeller Foundation, for example, recently launched YieldWise, a $130 million commitment to reduce food loss and improve the lives of impoverished rural populations around the world by working with corporate partners along the entire food value chain like Coca-Cola, Cargill, and Nigeria’s Dangote Group, to promote innovation that can drive economic growth.

Finally, the investment community is beginning to catch on. For a long time, investors remained skeptical that social factors were a valid consideration when allocating capital resources, much less relevant to securities analysis. Now investors have begun to recognize that shared value strategies are entirely different from social responsibility programs or public relations. Companies that commit to a new corporate purpose can generate disproportionate shareholder returns. Since CVS Health shifted its purpose from convenience retail to improving health, its stock has outperformed that of its closest competitor, Walgreens, beating it by 50% over the last five years. New business opportunities and improved employee motivation more than compensated for the loss of $2 billion in revenue when, as a consequence of its new purpose, CVS stopped selling tobacco products. Investors have begun to notice money managers like Generation Investment Management, which has beaten the MSCI Index by an average of 500 basis points annually over the past 10 years by looking for shared value. And impact investing, or investments directed at achieving social as well as financial returns, has taken off since 2011, now surpassing $60 billion in assets.

These developments make it no surprise that concepts and tools for Creating Shared Value are becoming part of mainstream management thinking. Nearly 500 universities globally have incorporated shared value concepts in their curriculum. Harvard Business School, after several years of popular executive courses, offer its first dedicated MBA course on Creating Shared Value this fall. It is increasingly clear that integrating social impact into corporate strategy is integral to the next generation of thinking about achieving competitive advantage.

Fortune’s Change the World List is here to stay—and with it, a new trajectory of the positive role that business can play in society.