Many companies follow a tried-and-true approach to pursuing corporate social responsibility practices. They set aside a certain amount per year to fund a CSR office, which then tries to help clean up the environment or improve the quality of life of people in the areas they do business.
“Corporate responsibility programs are basically funded by an internal tax within the company,” says Robert Kaplan, Senior Fellow and Marvin Bower Professor of Leadership Development, Emeritus at Harvard Business School. “The good that such corporate efforts can do is limited by the size of its contribution. The programs reduce some pollution, or get rid of some waste, but they require a new allocation of money every year.” And when times get tight, that allocation is often first on the chopping block.
In short, “Those top-down point solutions have not been shown to be effective and sustainable,” Kaplan says.
The catalyst approach
Some companies are now exploring a different approach to CSR, partnering with local communities on businesses that can help them earn a profit and empower locals, while also becoming self-sustaining. Kaplan explores the idea in a recent working paper, Intelligent Design of Inclusive Growth Strategies, written with George Serafeim, Charles M. Williams Professor of Business Administration at Harvard Business School, and Eduardo Tugendhat, Director of Thought Leadership at the international social impact consultancy Palladium.
While companies often have tremendous potential to partner with local communities for the good of all, they often lack the connections, expertise, and financing to get those enterprises off the ground. For that reason, they need a “catalyst” to make such strategies possible.
Top-down point solutions have not been shown to be effective and sustainable.
The trio of thinkers proposed the idea in a 2018 Harvard Business Review article, in which they dubbed such a strategy “inclusive growth.” Kaplan, one of the cocreators of the Balanced Scorecard methodology, and Serafeim, an expert on social impact investing, partnered with Tugendhat, who has helped to implement such projects overseas.
In Uganda, for example, Palladium helped strengthen a local trading organization so that it could enable a large regional brewing company to replace imported agricultural products with products grown by extremely poor but previously inefficient local maize farmers. By providing purchasing commitment and quality standards, the catalyst was able to access seed financing to invest in post-harvest handling and processing equipment, as well as structure on-farm training and access to improve inputs for farmers. Within five years, the brewery, by purchasing the farmers’ products, had doubled or even tripled local farmers' income and increased the overall wealth of the community—leading to better nutrition and health.
“It’s a huge transformation,” says Kaplan. “The brewery is happy because it now has a local source of product, and doesn’t have to ship it from overseas. And through the magic of capitalism, once you set it up, it’s self-sustaining.” Beyond that one community, the grain aggregator was able to upgrade its infrastructure, allowing other communities to improve as well, creating a virtuous circle that expanded the benefits even wider.
What the process looks like
In their new paper, the writers expand upon the process necessary to put inclusive growth strategies into action.
Ideation. “Someone has to see the opportunity for creating an ecosystem that builds a network of relationships among multiple players,” Kaplan says. Since most businesses don’t have the bandwidth to see or understand what can be done, a catalyst is essential to kickstart that process.
“The catalyst comes in and says, we need a corporation to be the anchor for this, and say, if we can get high-quality product coming through, they’ll be happy to buy,” Kaplan says. They can then start assembling the other elements of the ecosystem—for example, farmers, feed and irrigation companies, local banks and insurance companies, nonprofits, and community leaders. In that process, it’s essential that the catalyst has local connections. “They have more trust and credibility than a giant agribusiness company coming in and saying we want to help you.”
Financing. That could come from the anchor corporation as part of its CSR budget, as well as from impact investors who seek social benefits along with a return on investment. Coming up with capital is often the sticking point in these kinds of projects, Kaplan says. Though there are plenty of investors looking to do good around the world, oftentimes they are focused on construction or training projects, not building mutually beneficial networks. Also, financing is needed for the upgrading and modernization of the ecosystem, not just one enterprise. This often requires structuring a special purpose vehicle that can manage shared risks and returns.
Buy-in. The company must obtain buy-in of regional managers by adjusting performance goals to account for potential short-term dips in productivity while the sustainable supply chain network is being set up.
Measurement. The last step is setting up a performance measurement system, such as the Balanced Scorecard, to track progress and keep all of the players accountable.
Other areas fertile for inclusive growth
While agriculture is the most obvious sector for such an ecosystem, it is not the only area in which an inclusive growth strategy can work, Kaplan says. Palladium helped set up a service supply network for retail and hospitality companies in El Salvador. That country is currently facing an epidemic of young people who are undereducated and underemployed, leading many to turn to gangs and illegal activity to survive.
Meanwhile, companies such as Walmart and Hilton, which may want to enter the country, are thwarted by a lack of entry-level service workers. Tugendhat established a local nonprofit connecting companies, training providers, and financing to at-risk youth. The nonprofit created alignment among all the entities for shared measurable outcomes—youth successfully placed in jobs with the shortest time and lowest cost possible. Not only did 95 percent of the thousands of newly trained young people obtain jobs, they have less turnover and higher rates of promotions for their companies. The nonprofit has now extended its service platform to five companies in Central and South America. Creating a catalyst on the ground was key to jump-starting the program, which has benefitted both companies and communities.
“Setting up this ecosystem is better than a company trying to set up a point solution and directly train and hire people,” Kaplan says. “Without the intervention of a catalyst, the existing set of fragmented connections would have stayed the same for another 30 years. But once the inclusive growth ecosystem has been set up, it can be self-sustaining.”
While the examples in the paper are both based on Palladium’s work, the catalyst’s role could be performed by any middleman with a deep connection to a local community and skills in strategy and implementation. An NGO could fill that role if it were willing to work with corporations and respect their need to make a profit, and if it knew how to structure a financing vehicle for the project.
“The catalyst needs to be seen as an honest broker who makes sure everyone will come out ahead, and has skills with financing and measurement systems,” Kaplan says.
Implemented in the right way, such a sustainable ecosystem wouldn’t be a one-time handout to check the CSR box for the year, but a long-term solution to making companies a positive force in the communities in which they operate.
“It doesn’t require a tradeoff between business goals and societal goals,” Kaplan says. “You can do both at the same time.”
About the Author
Michael Blanding is a writer based in Boston.
[Background image by: Anatoliy Sizov ]
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