Creating Shared Value (CSV) - New Business Concept and Challenge for Compliance
By
Ingo Bobel* and Olga Zubrilova*
Paper prepared for inCompliance Magazine 2014 An extended version was presented at THE III ANNUAL ICA CONFERENCE “COMPLIANCE IN RUSSIA: THE INTERNATIONAL CONTEXT”, MOSCOW, RUSSIA (March 20, 2014). Helpful comments by conference participants are gratefully acknowledged.
*International University of Monaco, 2 Av Prince Albert, MC98000 MONACO Email:
[email protected] /
[email protected] Tel.: +37797986986 © 2014 1
Creating Shared Value (CSV) - New Business Strategy Concept and Challenge for Compliance Introduction It is time to re-imagine Business Strategy. What is the rationale for such a request? It is driven by the insight that Business Strategy has to be more than just value creation in the old traditional corporate-centric way where companies maximize short-run shareholder value (Stout 2012; Böbel 2014). It requires that the capitalist business model puts governance and especially business compliance no longer in the periphery but rather in the focus of analysis (Newing 2013). This revised Business Strategy model (“Strategy 2.0”) differs from the traditional model (“Strategy 1.0”) as it ultimately creates a different kind of value or profit (that has to be understood as benefit relative to cost) that reflects an elevated level of value by reaching both economic and social goals while adhering to external norms (such as governmental laws and regulations). It requires the creation of a new higher-level wealthcreating company culture that supports fairness-based compliance. We believe that we navigate a business environment that increasingly has to emphasize the simultaneous creation of two types of value business value and social value. The dual analysis of business and society is what Creating Shared Value (CSV) embraces. Paradigm shifts of this kind do not happen overnight. It is rather a long-term process. Since its inception nearly one decade ago, CSV as a new business discipline (the process of development is documented in Porter and Kramer 2011) has gained a lot of attention in business and academic circles. By applying CSV, companies intrinsically place societal issues (next to the classical business goals of creating economic value) at the core of their value chain and long-term strategy. Over time it became 2
clear that CSV will have a long-lasting impact. However, this approach requires a holistic advance to better comprise a corporation’s overall business environment. We have to recognize that broader societal issues have relevance for corporate decision making (Barley 2007; Vaara and Durand 2012). As industries and companies (both public and especially global private ones) are subject to different degrees of regulations, they are under the constant pressure to adapt to national and international legislative and regulatory requirements 1 that force them to permanently re-think strategy, and with it the role of compliance (see exhibit 1). This necessitates a process of flexibility and transformation of the mindsets of all corporate stakeholders involved (shareholders, employees, customers, suppliers, communities, governments, regulators, and NGOs). The concept of CSV – as brilliant as it is – has been subject to criticism. Most recently, Crane et al. (2014) argue that the concept suffers from shortcomings. They accuse the concept of CSV, for example, of being naïve about business compliance. The Role of Compliance In order to gain legitimacy business must have a clear understanding of the strategic relevance of “Compliance”. It must understand the “rules of the game”. Compliance is a “conditio sine qua non” for creating shared value in a sustainable way. It is one of the strategic anchors in:
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In the US alone, more than 80.000 federal rules have been issued during the past 20 years (and regulatory challenges are growing, especially for global companies that have to comply with multiple jurisdictions) (HLS 2013)
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(re-)legitimizing business, protecting the brand and improving corporate reputation and thus creating value and competitive advantage.
In the light of the recent economic crisis (which - since 2007 – is linked specifically to the financial services industry) there is broad agreement that we need more robust supervision and improved regulatory initiatives to better protect consumers and investors. Compliance has to glue together three fundamental pillars as being documented in the “Compliance Triangle”: Integrity, Accountability and Financial/Economic Stability (and Transparency) (see exhibit 2)
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Compliance Triangle
Financial/Economic Stability (transparency)
Integrity
Accountability
- Financial & Economic Stability - Economic and societal benefits relative to cost - Accountability – To implement and enforce policies and procedures aimed at ensuring operations in compliance with laws & CSV-based Strategy 2.0 - Integrity – Consistent commitment to act according to the values and ethical principles that companies claim to hold. It is, therefore, inherently unacceptable to treat compliance as an externality to business conduct, or to treat fines and legal fees caused by non-compliance simply as part of the “cost of doing business” (Bonime-Blanc 2014). Rather, compliance should be seen as an “internality”. A fairer treatment and protection of consumers and investors must be linked to a strong corporate culture that supports such fairness-based compliance. “Compliance Governance” has to be part of the company’s internal Corporate Governance tools-package of risk management in order to meet the evolving corporate governance requirements that are linked to the growing regulatory burdens.
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Effectiveness of Compliance Thus, compliance must be an integral part of the company’s general CSV-based business strategy (Strategy 2.0) where responsible culture, moral leadership, contributing to long-term economic sustainability, and creating an engaging workplace dominate. The effectiveness of compliance regarding human resources, safety, health, environment and business integrity has to be regularly audited and assessed. Compliance is not a voluntary exercise, it rather must be enforced and actively integrated into the model of CSV. This marks an important addition to Porter and Kramer’s presumption that business’ actions must be simply in “…compliance with the law and ethical standards” (Porter and Kramer 2011, p. 75). First of all, compliance enforcement requires that companies create a “Compliance Culture” that is reinforced and implemented throughout the organization (HLS 2013). Important practical steps are necessary to find an answer to the following questions: Where does compliance reside inside a company? Does the company have a formal compliance infrastructure that contains the necessary core elements (such as a CCO, a Compliance Committee, a Chief Governance Officer or a Chief Ethics Officer) 2? To whom does a CCO report? Does compliance get enough attention in the agendas of the Board meetings? The US - SEC and Justice Department have set an example to improve compliance effectiveness by providing “general compliance-guidance” when setting up the “Foreign Corrupt Practices Act” in 2013 (HLS 2013). 2
For an extended list of these elements see http://www.oecd.org/investment/anti-bribery/antibriberyconvention/44176910.pdf
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This helps senior executives and the Board to set the right tone when responsibilities inside the companies and among the different business lines are transmitted. Furthermore, implementing Strategy 2.0 requires strong leadership qualities from top-down. The CEO, for example, has to take the leading role of the Chief Strategist who communicates the strategy in an understandable, comprehensible and honest way. Good strategists are good teachers – and, they are ultimately responsible that everyone in the company embraces the idea that compliance is strategically linked to personal success, that it is part of the core values of the firm and that ethical reality matches the rhetoric. However, it is not enough to just install a CCO or a Chief Ethics Officer. To be truly effective we believe that the Compliance Function has to be equipped with “higher-level functions” that enables Compliance to act as a strategic differentiator and enabler of CSV-effectiveness. Such higher–level functions’ performance requires to better understand (and possibly restructure) its relationship to the globally stretched value chain activities corporate governance infrastructure (incl. risk management, internal control, internal audit, performance management) governance and resources, and Technology and Social Media.
Effective compliance can lead to multiple competitive advantages, especially cost reductions (and thus to higher profits), higher credibility 7
with customers (thus higher profits due to higher revenues), increased trust when dealing with related and supporting industry partners (thus higher demand), increased trust by employees (thus higher productivity), less risk in capital markets (higher valuations and lower cost of capital), lower risk premiums for company insurers (thus cost savings), and it can reduce penalties (as, for ex., under the Federal Sentencing Guidelines in the US). These advantages have to be matched to the costs of compliance as “…managers around the world are struggling with an increased cost of compliance including capital investments, time spent on compliance and outsourcing requirements which, in turn, is creating significant barriers to entry for new players and growth for existing players.” (KPMG 2013). Compliance: A Reality Check It seems that in real business life the role of compliance as an independent functional area inside companies is weak and rather poorly defined. The Deloitte Compliance Trends Study (2013) speaks a clear language. The study concludes that compliance functions are under-staffed and lack financial support – more than 50% of the 200 companies surveyed report that their full-time compliance staff consists of only five or fewer people. 31% of the companies do not measure compliance at all!
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Exhibit 1 Strategy 1.0
Time for New Business value Strategy Maximizing shareholder Existing Strategy requires: compliance with external & internal norms (governmental laws, regulations, corporate rules & policies)
Strategy 2.0 “Finding business opportunities in social problems” New strategy requires: fairness-based compliance: - Compliance with economic & social goals established by Company, while adhering - External & internal norms new higher level wealthcreating company culture to support all upgrading business-processes and governance infrastructure
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Exhibit 2
Shared Value-based Strategy 2.0 shifts the frontier between Conventional Markets, Market Failures and Government. In order to gain legitimacy business must have a better understanding of the strategic relevance of “Compliance” (new “rules of game”). Compliance is a “conditio sine qua non“ for creating value in a sustainable way. The new principles of “Compliance Strategy” are represented in the “Compliance Triangle”.
COMPLIANCE TRIANGLE
Financial / Economic Stability
The Shared Value Frontier
New principles of Compliance Strategy
Integrity
Accountability
“Compliance Strategy” is one of the key anchors in: (1) re-legitimizing business, (2) protecting the brand, (3) improving the corporate reputation and thus (4) creating shared value and competitive advantage.
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References Barley, S. R. (2007), Corporations, Democracy, and the Public Good, Journal of Management Inquiry 16,pp. 201-215 Böbel, I. (2014), Business Strategy Reimagined – A Paradigm-Shift based on “Creating Shared Value”, International University of Monaco, Discussion Paper Bouime-Blanc, A. (2014), Do Banks Care About Reputation Risk?, Ethical Corporation (March) Crane, A., Palazzo, G., Spence, L.J., and Matten, D. (2014), Contesting the Value of the Shared Value Concept, California Management Review 56 (2), pp. 130-153 Davies, H. (2013), Banks need to question their ‘three lines of defence’, Financial Times (July 9) Deloitte (2013), Compliance Trends Survey 2013, Compliance Week (August) HLS (2013), Harvard Law School Forum on Corporate Governance and Financial Regulation, Top 10-Topics for Directors 2014 (December) (available at: https://blogs.law.harvard.edu/corpgov/2013/12/31/top-10topics-for-directors-in-2014/) (accessed: March 13, 2014) KPMG (2013), The Cost of Compliance (available at: http://www.kpmg.no/arch/_img/9838658.pdf) 11
Newing, R. (2013), Governance: It matters what you do when no one is watching, Financial Times (June 11) Porter, M. E. and Kramer, M. R. (2011), “Creating Shared Value,” Harvard Business Review, 89/1-2 (January/February): 62-77 Stout, L.A. (2012), The Shareholder Value Myth, San Francisco (Berrett-Koehler Publ.) Vaara, E. and Durand, R. (2012), How to Connect Strategy Research with Broader Issues that Matter, Strategic Organization 10 (3), pp. 248-255 Washington Post (2013), New regulations cost $216B and 87 million hours of paperwork. What do they reap? (January 14) (available at: http://www.washingtonpost.com/blogs/wonkblog/wp/2013/01/1 4/report-new-regulations-cost-216-billion-and-87-million-hoursof-paperwork/)
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