Governance Reform and Shared Value
Michael Porter on the new business agenda
How can business help mend the broken U.S. political system—and even step up to fulfill the social needs government fails to meet? Lawrence University Professor Michael Porter, perhaps the best-known scholar of corporate strategy, turned his attention to these problems a decade ago. Harvard Magazine devoted much of its September-October 2012 issue to this pioneering and important work, and has continued to cover its evolution, most recently in this current article on election reform. Harvard Magazine spoke with Porter to discuss his new overview paper on the continuing political problems that are holding back socioeconomic progress in America, and how they’ve given businesses an opportunity to get involved. ~Juliet Isselbacher
Harvard Magazine: You’ve characterized the U.S. political system as a duopoly—one in which “Republicans and Democrats compete against one another to divide voters into mutually exclusive camps.” Now you take that argument further, pointing out that business reinforces this duopoly and perpetuates political gridlock. How does that work?
Michael Porter: It turns out that business is by far the dominant funder of the political system. Most people maybe don’t understand that—they think that wealthy donors are the ones that fund most of the political system. But it’s actually businesses. [They do this via] six practices [that] really are the evolved, historical approach that business has been using to interact with and try to affect the political system.
- The first one is probably the biggest, which is lobbying. Lobbyists are people that have some [political] expertise—they may be former government officials—and they are dispatched to talk to government actors and institutions about what the company wants. They are often focused on the company’s special interests—that is, what would make the company better off, rather than focusing on what would make society better off.
- Business and lobbying firms are also hiring a lot of former government officials to actually work in lobbying. Government officials pay attention very carefully to the companies that are supporting the lobbying because they know that if they’re not in good favor with companies, they’ll never get one of those jobs that are very attractive. Government has relatively low wages, but these lobbyists can get paid very, very well.
- Companies support the election of candidates that are sympathetic to what the company and the industry needs.
- We have a system where citizens can gather together and support so-called ballot initiatives. So they can pass legislation independent of the legislators. But all the businesses and the other special interests don’t like to have to deal with proposals that were not written by them. What happens is a lot of the citizens’ initiatives get slaughtered by massive spending on the business side.
- Businesses not only use their corporate affairs group to do political activity but they often ask their employees to participate. So, they ask their employees to call members of Congress and make a pitch for the company, or give money to the company’s pool for political donations.
- And then the final point—which has become a really big issue lately—is that companies have not been very transparent [about disclosing] what they’re doing in the political environment.
HM: You write that political dysfunction is responsible for a “deteriorating U.S. business environment.” What does this deterioration look like? How does it harm corporate interests—and the wider society?
Michael Porter: What we’re finding is that America is a country that used to be a leader in most areas of social policy: in education, health care, water quality and sanitation, safety, access to knowledge and good communication technology, health and wellness—things like that.
The U.S. now is way down the list of countries in the world on these basic human and social needs, and we have deteriorated because we are not passing the kind of policies we need to sustain our historical position. That’s tended to erode our business environment, and that has come at a pretty steep price to many companies.
[For example,] if people don’t get a good education, that means that business is at a disadvantage, because [employers] can’t hire people who are educated. High-cost healthcare in the U.S. is affecting business because [employers] have to deal with that, and so forth and so on.
HM: Your paper argues that business should feel incentivized to improve political functioning and promote sound social policies. How have they begun to do this?
Michael Porter: Businesses are weighing in to any effort to threaten democracy. Recently, we had Microsoft, Walmart, Coca Cola, and Delta [Airlines]—huge companies—[see] Georgia trying to create a biased and restrictive voting rule, and they took away all support and stood up for changing the election rules so they were fair and appropriate and democratic. We’ve seen lots of companies in this last election put a lot of resources and attention behind voting rights. And, in fact, companies are playing a greater role in facilitating voting—giving people a day off, making sure everybody can get to the polls. Another thing is to avoid giving money to participants in the political system that are actually undermining the system.
Now the other big change in business is [an understanding] that the existing political system is not advancing our social policies. That means that business has to weigh in and put a lot of its support and energy behind very badly needed improvements in our social policy. So businesses are spending more and more time on issues like racial equity, they’re spending more and more time on education, on their lower-income workers; they’re trying to make sure that there’s a living wage in their industry. There’s a lot of effort by business to deal with the deficits that have been created by the failure of how we’ve organized our political system. That is the kind of shift that’s going on right now.
The government is starved. So they can’t build homeless shelters, and they can’t build enough affordable housing. But companies can—if they are using a business model, they can build as much affordable housing as they want, based on the market needs. And so I think we have an opportunity to unlock some barriers that have held us back.
HM: What’s an example of a further step you’d like to see companies take?
Michael Porter: We also want to see companies now supporting reform of the democratic system. For example, we believe that the most powerful reform of the democratic system we have now in most states would be to get rid of partisan primaries. (What happens is you get an ideological vote in those primaries, and you get very extreme politicians who are totally locked on to the Democratic side or the Republican side.)
HM: You write that we’re in the midst of the “greatest transformation in business thinking and practice in many decades.” Can you trace the path from the traditional focus on philanthropy to today’s emergence of “shared value strategy”?
Michael Porter: Corporate philanthropy used to be little bits of money to many different organizations. [But it was limited:] in the old days, the Milton Friedman [way of] thinking was that you shouldn’t give any company money to social causes: “That’s the shareholders’ money, and the shareholders should decide who to give their money to,” [he argued]. That idea that it’s all about shareholders, and they’re the most important stakeholders, has now been massively discredited.
We [then] moved to “corporate social responsibility”—we don’t just do philanthropy; we give money to a variety of social causes that are related to our business. And then, more recently, we’ve hit the idea of “corporate purpose”: we can’t just think about giving money in a narrow sense. We’ve got to think about what we as a company—us particularly—can do to make society better.
But now what we’ve learned is that improving social conditions is actually not giving; improving social conditions can often be profitable. If we can save energy in our company and reduce the need for fossil fuels, we don’t just improve [the environment]—we save money because we don’t need as much fuel. If you train your lower income workers more so that they can advance their careers, that actually turns out to be profitable—if they’re trained, if they have an incentive to stay longer in the company, they’ll get better, they’ll have better techniques, they’ll be better at doing their job, they’ll create better relationships with customers.
That’s what we call shared value: there’s value for society, but there’s also value for the company. If we can [improve] the quality of education in our region—that’s shared value because a) the education in the region is going to get better but b) all our employees that we hire are going to be better equipped for their jobs. If you can serve low-income customers really well, you will be able to get much more than your normal share of the market of those low-income customers, and that’ll help you grow the company.
There’s really quite a connection between competing and social benefit because most of the things that we need in society today are social improvements. And if we’re competing to be able to deliver those social improvements, then we can win in the marketplace.
HM: In your paper, you write, “Businesses acting as businesses, not as charitable givers, are the most powerful force for addressing many of society’s most pressing issues worldwide.” Can you explain why?
Michael Porter: The biggest problem we have in [solving] social issues is scalability. We have all these wonderful NGOs and social organizations. They’re about homelessness among kids, and they can help 25 kids—that’s all they can afford because they have to raise money. But if you’ve got somebody that can not only do it efficiently as a business—but they can also set their economic model in a way that they can sustain much more activity—[then] they can help 1,000 kids. You want to do something in a way that’s sustainable, self-supporting, [and] improves its own efficiency.
HM: Last month, JetBlue tweeted out in support of Pride after having donated to an anti-Trans Republican representative, according to this article. How can consumers make sure corporate actions actually align with their purported commitments?
Michael Porter: The root cause of some of these problems is that business is not disclosing what it’s doing—it’s not disclosing who’s getting the money, it’s not disclosing its policies, and therefore it [can do] something that directly contradicts what it said in the boardroom that it stands for. Business must be transparent: it must disclose what it’s giving to, it must disclose how it’s giving. That is luckily starting to happen in quite large numbers.
The other thing is that citizens have enormous power here. Companies who are fudging—[they’re] getting totally trashed. Companies that do that are going to shrink very rapidly because it’s going to put them in a terrible position [with consumers.]
HM: Concluding thoughts?
We’re in a very, very interesting time of change that I think is going to make business much more of a powerful force in benefiting society. It’s going to make our government work a lot better, it’s going to improve public policy, and it’s going to get citizens more involved in elections. This is a pretty substantial restructuring of many aspects of our economy and our society and our government. It’s exciting, and I’m very optimistic.
Read Porter’s paper, “The Changing Role of Business in Society,” here.