Judith Maxwell is the former chairman of the Economic Council of Canada and former president of Canadian Policy Research Networks
Michael Porter has done it again. Over the past 30 years he has built a strategic model for superior business performance, inventing concepts like the value chain, economic clusters, and competitive advantage.
Now, he’s reinventing capitalism in the lead article to the January-February issue of the Harvard Business Review. The Big Idea is ‘shared value’, which stresses the synergies between economic and social development. The new ingredient to drive the next wave of innovation and productivity growth is collaboration.
“While some shared value opportunities are possible for a company to seize on its own,” he says on page 17, “others will benefit from insights, skills, and resources that cut across profit/nonprofit and private/public boundaries.”
All these sectors will need to overcome the deeply entrenched assumption that there are tradeoffs between economic efficiency and social progress or between economic efficiency and sustainable environmental practices.
Businesses must reconnect company success with social progress. Shared value is not about redistributing existing value but about expanding the total pool of economic and social value. Fair trade for cocoa farmers in Ivory Coast can increase farmers’ incomes by 10 to 20 per cent, while investments in the supporting cluster of services and infrastructure can raise their incomes by 300 per cent, the report suggests.
Another term used for this kind of investment is ‘impact investing’. Dr. Judith Rodin, President of the Rockefeller Foundation, says: “When I talk about impact investing, I’m talking about [a] double bottom line. You want a financial return but you also are looking for a social or environmental return as well.”
The Foundation has nurtured a network of organizations to develop the metrics needed to support this kind of investing. IRIS -- Impact Reporting and Investment Standards -- will soon release benchmarks for social impact measures. Meanwhile, the Global Impact Investment Rating System (GIIRS) could become the Moody’s rating service for these cross-sector investments with the double bottom line.
So markets are preparing for shared value initiatives. But government regulations can still get in the way.
The current ethos of regulators at the Department of Finance and the Canada Revenue Agency is to protect the tax base by preventing charities and nonprofits from generating earned revenues (which are not taxed) to achieve their social mission. This puts a lid on nonprofits’ capacity to generate much greater economic and social value that will be taxable in one way or another – if not through the corporate income tax, then through personal income tax or the GST.
Take the drastic shortage of affordable housing, for example. Governments today are up against the fiscal wall and private markets see no profit in building affordable housing. Yet, there are nonprofits able and willing to fill the vacuum, if only governments would break down the regulatory barriers. The menu for policy change in Canada has been set by the recent report of the Social Finance Task Force.
The catch-22 here is that markets move fast when they spot a new opportunity while governments move slowly. Michael Porter’s Big Idea should help to generate new thinking in both federal and provincial regulation.
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