THE BLOG

CSR 2.0: Unlocking Corporate Wealth to Solve Social Issues

28/01/2014 10:54 GMT | Updated 29/03/2014 09:59 GMT

As you walk around the corridors of the World Economic Forum at Davos and as you listen to the many corporate leaders present at the world economic forum in Davos it is possible to segment them into two distinct groups.

Firstly there are the leaders, who to paraphrase Milton Friedman, believe that "the business of business is business". They embrace the opportunities that growth and technology present. They recognise the growing challenges that high levels of joblessness, rising inequality and diminishing social mobility present but they believe it is fundamentally the job of government to address those.

Secondly there are those leaders who take a somewhat broader view of the role of the corporation in the modern economy. They believe that addressing key societal challenges in a modern global and technology driven world requires innovation, that driving innovation requires a combination of financial and human capital, access to advanced technologies and broad and sophisticated global networks. They look at government and they see none of these things.

They see an opportunity to engage and as they look at their businesses they see a real business need. That business need is driven by better informed consumers who want to buy from companies whose values they respect, by a workforce particularly in the knowledge based industries, professional and financial services who want to feel proud of who they work for and by governments, particularly in emerging economies, who are increasingly demanding companies actively engage in helping them solve key social issues as a prerequisite to providing access to their rapidly growing markets.

The challenge for the second type of CEO is how to execute. How do you bring your companies core financial, human, technological strengths and it's massive global networks to help address societal issues without deviating from the core mission of making profit?

For many companies social investment may provide at least a part of the solution. Why do I say that?

Firstly it sends a message about the companies culture. It says that corporates are not just about making money and managing and mitigating negative externalities. It demonstrates a willingness to employ capital to explicitly create positive externalities by investing in social entrepreneurs, driving social innovation and creating positive social value. It changes the companies mission in a very profound way.

Secondly it is an investment not a donation. A well managed social investment portfolio can preserve capital and also earn a return. It may be somewhat more risky than the typical treasury portfolio and can return somewhat less than normal commercial investments but it creates additional value by improving brands, motivating employees and often driving penetration of poorer consumers in emerging economies.

So if the CEO buys into the value of a social investment program how does he implement it

They need to work on three dimensions.

1. Organisation. Developing a social investment program is counter to the natural order at large profit centred companies. These companies have operating and incentive structures that focus on profit and cash flow maximisation. They have innovation structures that are deeply ingrained, centralised and technocratic. Social investment and innovation units need to be discrete and not buried in product lines where they are likely to wither and die. They are unlikely to justify themselves based on simple short term return on capital measures so they need a different level of support. This support needs to come from the top - from the CEO and from clearly identifiable board members. The group needs to be balanced by age and by gender and it needs to be led by fast track ambitious executives not staffed by plateauing middle management.

2. Measurement. The investments and initiatives that support them need to be data led. The world of social entrepreneurship is dominated by emotive words - poverty, need, sustainability, inequality. In corporate environment these words generate sympathy but rarely action. Far better to have a target of "making investments that increase yields and incomes of smallholders in our supply chain by 200% over 5 years" Stakeholders understand why that is a good thing. Aimless platitudes breed suspicion and skepticism.

3. Culture. Ultimately the idea of social value creation needs to be embedded into the fabric and DNA of the organisation. This starts with rethinking basic corporate purpose. Are we a food manufacturer or are we enabling good nutrition. Are we producing sportswear or are we helping to build a healthy society. Are we producing cars or enabling mobility.

According to Deloitte's research published this week our largest non financial global corporations have almost $3trillion in cash. Ultimately they will either return it to shareholders or use for acquisitions or for capital investment. In the meantime they can use some of it to pursue a slightly different agenda. One that can help build trust with multiple stakeholders, one that can help leverage more of the assets and resources of the company in a way that can be beneficial to the communities in which they work and not necessarily detrimental to the shareholders that drive them.

Centrica have set an important precedent in the UK by becoming the first non financial company to set up a dedicated social investment program. It invests in social enterprise and social purpose companies. It sits in a separate subsidiary but is intimately connected with the mother company. It focuses on creating jobs in the broad energy sector and helping to alleviate fuel poverty. There are opportunities for many more companies both in the UK and abroad to follow their example.