In 2011, Harvard Business School professors Michael E. Porter and Mark R. Kramer published an influential article titled "Creating Shared Value: How to Reinvent Capitalism — and Unleash a Wave of Innovation and Growth".
The article argues that it's time for businesses to move beyond the conventional approach of maximizing shareholder value and embrace the idea of "shared value" or the Commons. This entails adopting policies and practices that boost a company's competitiveness and promote economic and social well-being in its communities.
According to Porter and Kramer, prioritizing immediate financial gain over the well-being of society has damaged public confidence in the business sector and resulted in an unsustainable version of capitalism. They propose that companies can foster innovation and boost productivity on a global scale by approaching social issues as potential avenues for profit.
To create shared value, Porter and Kramer suggest businesses should:
- Redefine productivity in the value chain: Companies can improve their efficiency and productivity by considering the societal impacts of their operations and reducing their negative footprints on society.
- Enable local cluster development: Businesses do not operate in isolation but are part of a broader network or ‘cluster’ involving suppliers, distributors, and other institutions. Companies can strengthen these clusters to boost productivity and innovation while benefiting the local community.
Porter and Kramer’s shared value concept says capitalism needs a broader societal perspective beyond businesses' short-term financial performance. By taking this approach, businesses can contribute to societal progress and drive sustainable economic growth and innovation.
Promoting Shared Value with Shared Profits
In his book "The Great Transformation," Karl Polanyi presented a different approach to the market economy. Porter and Kramer are proposing something similar.
Most modern societies recognise the need to share value and tax business profits to provide money for the common good. Ideas such as taxing pollution, taxing carbon emissions, and taxing smoking are similar attempts.
This article provides a way for businesses to share profits taking into account the shared values of society and of customers.
An alternative method for companies to distribute their profits is to share profits at the point of sale and before the taxes are due. Today sharing is used to retain customers and to maintain the social license to operate. Unfortunately, it continues to fight the prevailing ethos of shareholder primacy, where shareholders believe and are required by law to put their interests first and take as much profit as they can.
Unfortunately, Governments everywhere start the process by creating Capital by issuing debt and allowing the lender to keep all the profits (interest). The approach starts with Central Banks and becomes difficult for businesses wanting to share profits. They tend to get swallowed by businesses that operate without sharing profits. It is the reason why cooperatives and mutual societies lose out to companies and predatory Capital.
To change the system quickly, a Central Bank shares the interest with banks it lends to and suggests the Banks follow suit. If this is done, those Banks will have a competitive advantage over those who don’t. This happens because sharing interest produces more money more quickly than not sharing. The economic system becomes more productive by requiring less Capital to produce the same amount of investment. However, there is no need to wait for Central Banks; it can be started tomorrow with Community and Privately owned Banks as it is a book-keeping change to the Balance Sheet and Profit and Loss statements.
Sharing interest removes compound interest and prevents the accumulation of unnecessary wealth in society. A society that uses this approach will become more productive because the same principle applies to businesses. If a business shares its profits with customers, then its Capital becomes more productive and increases its productivity. However, the approach goes further and makes businesses more productive by reducing the cost of goods through less consumption of raw materials. Instead of businesses trying to make profits from more sales, the customer shareholders of businesses want the business to make more profits by reducing the cost of sales by consuming less to make a profit.
Making the Switch
When someone takes out a loan, they agree to pay it back in regular instalments. Each payment reduces the amount owed, and the interest is added to the remaining balance. To share the interest, only a portion of it is added to the balance. If we want to give the borrower 75% of the interest, 25% is added to the balance. This is the recommended approach for Reserve Bank loans, as it allows for flexible adjustments to interest sharing for different areas of the economy and leaves borrowers paying the same instalment amounts even if the interest rates increase.
If 100% of the interest is subtracted from a Loan Balance, then the time to repay a loan will be 2 divided by the interest rate. However, the Bank has costs, so rather than 100% of the interest going to the borrower, assume 50% goes to the borrower. In that case, the time to repay is 2/3 the original — alternatively, 1/3 extra can be borrowed for the same repayment cost.
With non-bank loans, the cost to the lender is higher, and the profit from interest is lower because the lender needs compensation for the opportunity cost of using the money themselves.
It might appear that changing the interest rate will have the same effect as sharing the interest. That is not correct because the amount of interest added need not have interest calculated. Sharing can stop the compounding of interest, which for longer repayment periods, is a significant cost.
The same principle applies to Company profits. Sharing profits removes some of the cost of profits on profits, reduces the cost, and moves money more rapidly. If the customers acquire shares in the Company instead of money or lower prices, provided the profits are invested in the Company, there is no loss to existing shareholders. Existing shareholders get funds incrementally from the company by selling shares instead of dividends. This makes the Company more profitable because more money is invested, and there are no dividend payments.
These ideas are explored further in Self-Regulating Capital and other articles on Medium.
