'Shared Value, Collective Impact and the Art of Business Strategy.' A mini-masterclass with Professor Mark Kramer.
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👉 Why listen?
Can you really make money out of doing good?
Is it possible to make systems-level change on your own, or more effective to be part of a collective?
And is all the role of business, government or nonprofits anyway?
Questions like these take a big brain to work out and that big brain has a name: Mark Kramer.
For this special edition episode, we’ve teamed up with the Shared Value Project to bring you a 30 minute Mini-Masterclass with Mark where he explains them once and for all, along with the fundamentals of smart business strategy.
Here's a quick summary to get you in the mood:
🤨 What is Shared Value?
Shared Value recognises that the success a company depends on the sustainability of the environment in which it's operating: a healthy and educated workforce, consumers that have enough money to buy your product, the natural resources needed to make it. Therefore there is a business benefit and competitive advantage to be had in helping solve social and environmental problems.
🤨 What are three kinds of Shared Value?
1. Creating a profitable new product or market, such as sunglasses made out of what would have been waste plastic
2. Improving efficiency, such as reducing costs by going solar
3. Strengthening the supply chain, such as training farmers to improve their soil in a way that also improves yield
🤨 What is Collective Impact?
A framework for systems change that recognises most social and enviro challenges are too big for any one organisation to tackle alone, so companies, govt and nonprofits benefit from working together to do so.
🤨 What are the five fundamentals?
1. Common agenda - we all have the same goal
2. Shared measurement - we all measure impact the same way
3. Mutually reinforcing activities - everyone has a clear role
4. Continuous communication - everyone knows what everyone is doing
5. Backbone support - it’s someone’s job to lead the team effort
🤨 What makes a smart business strategy?
A smart business strategy recognises that if you do the same as your competitors, you will end up competing on price and sooner or later that will end in an unattractive business model. So you want to aim for superior profitability. To do that, you need a competitive position that is serving a specific type of customer and delivering them value in a way no competitor can by tailoring everything you do to deliver that. As Michael Porter says, ‘if you're not making some customers unhappy, you don't have a strategy.’
We gave AI a listen to the episode, and here’s what it had to say…
The biggest mistake we make about “doing good” is treating it like a side project. Mark Kramer joins us for a sharp, practical conversation on why social impact and corporate performance are already linked, whether leaders admit it or not. When the workforce is unhealthy, when communities are unstable, when climate risk hits supply chains, profitability takes the hit too. Mark explains shared value as a way to stop managing harm at the edges and start building business models that solve real problems while creating competitive advantage.
Listen to the full one hour episode
The mini-masterclass is cut from a longer, one hour episode where we cover more examples and expand the conversation to include conversations around the current state of sustainability and ESG and what it might take to get them back to the top of the business agenda.
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Full Episode Transcript
Ben 0:04
Um can you hear me? Okay, I can hear you great. Excellent news. Every so often an idea comes along that changes the world. Mark Kramer has penned not one but two of these ideas, and that's just the ones I know about. If you work in the corporate world, you'd have to have spent your career hiding in the stationary cupboard not to have heard the concept of shared value, an idea embraced by clever companies the world over. Meanwhile, the wonderfully named collective impact framework is used by change makers the world over to bring people together and organizations from all walks of life to solve the trickiest of tricky social and environmental problems. When he's not coming up with world-changing ideas, Mark is impact investing, walking the halls of Harvard, or chairing FSG, the world famous consultancy he co-founded. It's an absolute coup that we have him here with us today, and I thank him dearly for it. And it's my pleasure, Ben. Well, welcome, Mark. Thank you. So let's start with you. At face value, you're very much a man of business. You've been a senior lecturer at Harvard Business School and have a jurisdoctorate in law, and I've never seen you out of a suit. How on earth does help solving the world's social and environmental problems fit into all this?
Mark Kramer 1:09
Well, uh, first of all, I didn't really need to wear a suit today, but I didn't want to disappoint you. So I thought I better put it on. You know, I grew up in Cleveland, Ohio. My family had a controlling interest in a public company that my grandfather had started, and we had a family foundation. And so we gave away money. And so I was involved in the foundation. Uh, my mother ran it and reviewing grants, talking to nonprofits, going on some nonprofit boards. So I was very involved in the sort of philanthropic and nonprofit community for many years. And over time, it became clear to me that for all the money we were giving away, we weren't really changing anything. We were certainly helping people, but there wasn't any sort of fundamental change. And so I became very interested in understanding more deeply why philanthropy works the way it does and what might make it more effective. And along the way, I had become friends with this Harvard Business School professor, Michael Porter, and um began to talk with him around strategy and what does strategy really mean in philanthropy and giving away money because you're not competing with anybody else. So, what is a competitive advantage and so on. And that led us to write an article back in 1999 on um philanthropy's new agenda, creating value. And that led us then to, I'd always enjoyed starting things. So that led us to start both the consulting firm FSG and the Center for Effective Philanthropy. And um then we were off and running. And then it's been a wonderful learning curve because you publish an idea, and there are lots of ideas that didn't become world-changing out there. And then people hire you as a consultant to try and implement it, and then you learn what it actually requires to make it work and where the shortcomings are and how to take it further, and then you publish that, and then that leads to more work. So there's a wonderful sort of cycle of doing the work and then stepping back and reflecting on it and publishing it, and then that leading to more work that really created a wonderful opportunity for me to learn over about a 20-year period. Learn by doing.
Ben 3:09
Learn by doing, yeah. Start with theories, put it in practice, see what happens. Yeah. So could you give me a bit more about shared value? The probably the seminal moment, as you said, you've penned many world-changing ideas, but this one particularly took off, right? This concept of shared value. Could you break it down into its simplest form for me?
Mark Kramer 3:26
Sure. Well, you know, we we start, and I started with an assumption that social issues need to be addressed through the social sector, through philanthropy, maybe through government, but that that has really nothing to do with business. And business is focused on making money, but really shouldn't be paying too much attention to the social impact or the social issues that surround the company, because these things are separate. And either you're making money and you don't think about impact, or you're trying to do good in the world and you don't want to think about making money. And what I've come to see is that that's fundamentally wrong, that companies have much more impact on social issues than foundations and nonprofits ever do. And that we've assumed that what we need companies to do is to hold themselves back, is to try and diminish the harm that they cause. And what we've missed is the fact that the success of companies depends on the sustainability of the environment in which it's operating. It depends on a healthy and educated workforce. It depends on consumers that have enough money to buy your product. It depends on a strong educational system. So all of these issues that we thought were just social issues are actually business issues as well. And correspondingly, we found that companies can be very powerful in creating social change when they set their minds to it because they have many more resources than the social sector has, but they also have this incentive to compete, to innovate, to drive efficiency, and that can lead to very powerful solutions around social problems. And so this idea of creating shared value is that companies can create value both for their shareholders and for society simultaneously, and that that actually can be a source of competitive advantage and differentiation from other companies. It's really a spur to innovation. And just one quick example: there's an Italian power company, Electric Power Company, Anel, a very large company, a hundred billion dollar company, and they have really moved to 100% renewable energy and are now a world leader at it. But what took them there in part was that they combined their research and development with their sustainability team. And they called it innovability, innovation and sustainability. And they took the sustainability challenge as a drive to innovate, and it led them in new directions than their competitors and led to all kinds of very profitable innovations for them. And so what we see is when companies stop looking at social issues as a cost and a burden and a constraint and start recognizing that they can become a more successful, more profitable company by actually trying to solve some of the social problems that affect their business and their employees and their customers, that it really can be a very powerful business strategy.
Ben 6:33
So much in what you just said. It all makes so much sense when you put it that way. But when I break it into the components, I guess from what I've seen in business, I sometimes wonder if we're almost having to push back on a few everybody knows in there, which are not necessarily true, but everyone knows. I mean, one of the fundamental problems with the environment, whether you're talking about a company or an individual, is it's everyone's problem. So somehow everyone thinks it's not their problem. One of the fundamental problems with sustainability ESG and companies is it's become about compliance, and compliance is a cost to be minimized. So it's seen not as a business opportunity. And then fundamentally, you know, someone once said to me a startup is a company looking for a sustainable business model, and an established company is one that now has one, and its job is just to keep doing it over and over again and make it a little bit better every year. So fundamentally, innovation sits very poorly in that business model when your job is just to hold what you've got and keep being a little bit more effective every year. So, yes, environment is everyone's problem, but that means it is your problem. You have to break down the idea that you can't make money out of saving the planet, and you have to break down the idea that innovation is not important to our company because we're set up to literally do the same thing over and over again. How do you break down those things?
Mark Kramer 7:43
Yeah. And you know, there's another dimension too, which is the short-term nature of financial performance, that companies are so focused on meeting the quarterly earnings and so on. And, you know, social and environmental issues are not solved in a quarter. So if your focus is really just next quarter's earnings, you're not going to pay attention to these things. When you ask a CEO, almost any CEO, about what they see three or five years out in the future, you hear about sustainability issues. But when you ask them about next quarter, you don't. And it's true what you've said about a mature company having a business model and simply trying to replicate it. But most companies have business models that were developed decades ago, in some cases centuries ago. Banking, life insurance are a couple hundred years old or more. And what has changed in the intervening time is that we now know about climate change. We now know that smoking causes cancer. We now that social behavior determines your health outcomes to a significant degree. We know all kinds of things about human behavior, about the environment, and so on, that we didn't know when the business model was first developed. And so the question is: do you keep with your outdated business model, or do you find that the changing state of knowledge gives you an opportunity to innovate in new ways? And I'll give you a quick example. So if you look at uh some of the soft drink and fast food companies, Coca-Cola, Pepsi, Co., and so on, they are struggling because they developed their business model at a time when we didn't think that sugar and fat and salt was bad for you. And of course, these things are attractive to consumers. And so they maximized those things. Now we know those things are bad. And most of the companies are trying to stick with their old business model and just hang on for a few more quarters till that CEO retires. But Nestle, which is, you know, a controversial company in many ways, really began to focus about 15 years ago on this idea that nutrition and health are related and created an entirely new division called Nestle Health Science, which does randomized control trials and clinical studies on nutritional supplements that actually have medical outcomes, that one product can be administered in the hospital before and after surgery and reduces the risk of post-surgical infection by 50%. So it's taken them to innovate in whole new areas. And this is now about a six or seven billion dollar business for Nestle that is their fastest-growing business. And so, as opposed to Coca-Cola saying, well, we'll just keep selling sugar water as long as we can. Nestle's doing some of that too, to be sure. But they also realize that what we know about health today is very different than what we knew when Nestle was started 100 years ago. And we can find new innovations and new sources of profit by recognizing that and rethinking our business model.
Ben 10:37
This sounds existential for big businesses. I mean, it is. I get this stat wrong, but it was roughly something like if you look at what's in the top 100 of a share market 50 years apart, 80% of those companies will be gone. Yeah. So there's this kind of belief, I think we all look often look at the world in quite a short-term lens and go, well, the big companies are the big companies. But often they actually they come and go. Sure. And so it sounds to me like what you're saying fundamentally is that the 20% that make it are the ones that do focus on these longer-term issues, of which sustainability and innovation are inherent. Well, in innovation is looking at long-term issues, and sustainability is the key driver here. And those who do bother to invest in that space, therefore, in a way, act as an established business and a little bit of a startup at the same time. Absolutely. Are the ones that are going to make it and they're the ones that are focused on the shared value idea.
Mark Kramer 11:24
But it's very hard for companies to do that. And that extent existential challenge is a risk that most CEOs don't want to take. So what we see, unfortunately, most companies doing is trying to sort of make changes around the margin, partly for ESG reporting purposes, partly for communications campaigns, partly really because they're trying to improve things, but they're afraid to touch the fundamental business model. And that is a huge problem because the change we need is not marginal change around the edge. It is really for every major company and industry to rethink their business model and reinvent it based on what we know today about social and environmental factors that we didn't know when they first set up that business model.
Ben 12:07
I've always, that makes so much sense. And I've always, but I've always thought there's possibly a really uncomfortable truth for a lot of boards and leadership teams where they're sitting on an amazing cash cow in their current business model that will go away at some point. But what they're going to find with the innovation may not be as good a cash cow. You know, a great example. I've been looking at um Bill McKibben's latest book and what he's been out talking about. And, you know, if you look at a fossil fuel company, what an incredible business model. You set up some mines, you dig this stuff up, and once your supply chain's in, you sell this stuff for a fortune over and over again. It's the concept that we see over and over again of the consumable. It's like the ink in the printer, you know, like once you give them the printer cheap, so you can sell them the ink over and over again. Whereas if let's say a big fossil fuel company going, right, we renewables of the future, you set up that infrastructure once, but then it's almost like the consumable's free because it comes from the sky. And therefore I can see that they're going, okay, we know it's the future, but we're better off just fighting to hold this current business model because we can't make as much money out of the new one. At least we haven't worked it out yet.
Mark Kramer 13:11
It's really true. One of the cases I wrote at Harvard was about uh ExxonMobil and this uh hedge fund called Engine Number One, which was uh mounting a proxy fight to get sustainability people on the board of ExxonMobil. And ExxonMobil fought it fiercely, but they managed to get three people on the board. And writing a teaching case for MBA students, you want an issue that can be debated where students can be on both sides of the issue. And so there's one group of students that is saying exactly as you're saying look, the profit potential for the next decade is immense. And we owe that to our shareholders. And there's another group saying, yes, but you're gonna be out of business at the end of that decade. And as directors, you have a responsibility for the future of the company. And unless you move to renewables, you're not gonna have a future. Well, those are incompatible, and there really isn't an easy answer there.
Ben 14:03
It's um it's interesting because it almost comes down to what people call the patience of the capital, doesn't it? I mean, when you look at we call them super funds in Australia, you call them pension funds in America, but they're investing on a 50-year horizon. Well, they should be. Well, they should be. That's right.
Mark Kramer 14:18
And and then what you really run into there, though, is the difference between the asset owner and the investment manager. Right. And the asset owner is indeed has a 50-year horizon. That's us. Uh, the asset manager knows they're going to get fired if their quarterly returns aren't as good as the market.
Ben 14:36
And that's what's going to get published in all the magazines and top-performing super funds. Yes. And so there really is a misalignment of incentive. The financial, a lot of it does come down to the financial incentives, doesn't it? It absolutely does. As you say, if you've got a CEO that's general tenure of CEO five years, let's say, um, and then you go, well, so they're looking at what can I improve in five years to get my stock options will be up, et cetera, et cetera. So there's a five-year horizon. You as a person owning superannuation, depending how old you are, you're looking anywhere from 10 to 50 years is your horizon. And then we as society, well, we should be thinking generationally. I mean, infinite generations, not even there shouldn't be a number on the years, right? Because that's the concept of sustainability. Is you can just keep doing it over and over again. So, in that sense, do you think the core of this problem is the alignment of how we see value and the time scale we put on it?
Mark Kramer 15:26
That is a huge piece of it. Whether that's the entire problem, I'm not sure. I, you know, I think there's an even more fundamental piece, which is that as members of a society, as members of the economy, as members of the world, we are tied to a common fate. And you can go for a period of time where my success isn't impacted by your failure, or vice versa. But ultimately, we all depend on each other for this to function. And we've kind of lost that recognition and begun to sort of focus on our own isolated circumstances, income, return, profit, whatever you name, and just lost the sense that we're accountable to others or that the welfare of others affects our own well-being.
Ben 16:17
And that's a big that's far bigger than business. You're talking about how we see each other and how we see the role of society in our own success.
Mark Kramer 16:24
Yeah, and of government. Fundamentally, I've while I started off focused on philanthropy, I've come to believe that the corporations and government are the ones that really determine the fairness and sustainability of society. The nonprofit sector is really quite small and quite powerless. There are wonderful things that happen and great examples of impact for a handful of people, typically. But it's very hard to make society level change unless you work through government and through companies.
Ben 16:56
So when we start to talk like this, we're talking about the greater good, the common good, actually. But shared value as a concept is actually really got quite a selfish motive, an individualistic motive for companies. Yes, it's about solving bigger world problems, but it's about doing so because there's a profit involved.
Mark Kramer 17:14
Yeah, and you know, when we talk about creating shared value, we talk about it at different levels. One part is around innovation, new products and markets, you know, Tesla, whatever Elon is doing now, but initially certainly was a fundamental innovation that changed the auto industry worldwide, and of course, very successful economically. We talk about changing the operations of the company in a way that can improve social and environmental impact, but also create greater profitability. When Walmart, the retail chain, decided to increase entry-level pay for its employees, it reduced turnover dramatically, increased productivity, and turned out to be a more profitable move for the company. And then the third thing we talk about when we think about shared value is improving the competitive context. And that's really where the vision has to go beyond the individual company. There is a benefit to the company, but it's about changing the circumstances in the regions where the company operates to improve the health and well-being of the workforce, or improve the health and well-being of customers, or change the regulatory environment, or improve the environmental impact in ways that make the company more sustainable. To do those kinds of things, the company typically needs partners and typically needs to be working with nonprofits, with government agencies, with other companies, sometimes even with competitors. I mentioned Nestle earlier. Another issue for them is sourcing cocoa. And most cocoa comes from Cote d'Ivoire in Ghana, where it's grown by very poor smallholder farmers, and it's not a very good livelihood. And as a result, their kids aren't going into it. And as a result, the average age of cocoa farmers is 55 years old. And unless we do something about it, there won't be cocoa in the future. So this is a critical business issue for Nestle. But to solve it, they have to work with all the other cocoa companies to change the conditions under which cocoa is grown and to help ensure that there is a reasonable livelihood for cocoa growers.
Ben 19:20
So this will encourage the next generation to go into that field. So just breaking that down, you gave me three examples there. One was Tesla, where they essentially use innovation to create an entire new market where they went, okay, there's actually a market for EVs and nobody's doing it well. The second one was efficiency, while Mart went, okay, if we pay people a bit better. Thank you, Henry Ford, too. Yes, right. Um, if we pay people better, that's actually going to improve their ability to just work here, maybe not have to have a night job, whatever. And therefore, we will have a more effective workforce. But the third one is really interesting because it's if actually we can, uh in the case of Nestle, solve an entire supply chain issue, then actually the whole industry will benefit. Yes. But we will also benefit. Correct. And so in that point, they do have clearly a selfish motive, an individualistic, I don't want to put it selfish, an individualistic motive, but they need to work collectively to reach that goal.
Mark Kramer 20:12
You have just said that so much better than I did.
Ben 20:14
Thank you. I doubt it's true. And if it is, it's the first time for everything. So that's interesting because this collective, the the working together, there are what we what you're identifying there, is there are some problems that are just too big. Doesn't matter how big your company is, it's still too big for you to solve it. And I believe that starts to move into your second one or your second great theorem, the one of um collective impact, which I've always been a great fan of. And we've actually applied it a few times, extremely successfully. So that's wonderful. It does.
Mark Kramer 20:44
It's not always successful. So that's great credit to you that it actually worked. Um tell me about it. Yeah, well, you know, this starts from the philanthropy side and the recognition that the way philanthropy seems to work is very much around an isolated impact. We pick an issue, and then we pick a single nonprofit organization or a handful of them that have a particular approach and say, gee, we hope if we fund this one organization, they'll be able to innovate, find the solution to this very difficult entrenched problem, and then scale it up to society-wide scale. But that really almost never happens. And we get stuck with this model of isolated impact where we're trying to fund one small intervention in the hope that that is going to change a really large, complex social problem. I mean, if you think about education, well, you know, we can have work with a company that's uh a nonprofit that's trying to improve the curriculum. We could work with one that's trying to train teachers, we could work with one that's doing after school programs, we could work. No single thing here is the solution to the problem we have with education. But all of these dimensions are important. The second thing is that philanthropy tends to work. Just through the social sector. We want to make grants to nonprofits. We don't want to work with companies. Those are, you know, greedy corporate people. And we don't want to work with government, which is too messy and complicated. We just want to make grants to nonprofits. But any social problem is impacted by the behavior of government, the behavior of corporations, the behavior of nonprofits, and the behavior of individuals. And it turns out if you actually want to solve one of these problems, you have to bring together all of these different players. And in many ways, collective impact is a version of systems change because it's about bringing everybody who's part of the system together. And it enables people to begin to see how the system operates. And then that enables them to make changes that turn out to be sometimes very simple, but quite profound in their impact, because they're beginning to actually work together and see what's working and align their efforts. And so when we talk about collective impact, it's a model for collaboration across sectors, such as government, business, social sector, to focus on a specific problem in a specific region, to bring together everyone who actually touches and affects that problem, to help them begin to see how their individual efforts affect the broader picture and to learn from each other how to collaborate in developing solutions. And we've sort of said there are five key components to making collective impact work. The first one is a common agenda. You know, it's easy to say we all want to improve education, but when we begin to really talk about it, it turns out that your idea of better education is different than my idea of better education, and then there's the teachers' union, and then there's the student, and then there's, you know, all these other considerations. And so we don't actually have a common agenda for solving the problem. And it so you need to bring people together and forge that common agenda. The second thing you need is a shared measurement system. Right now, every organization working on an issue addresses the issue in their own way and measures their success in their own way. And so you can't actually compare and see which approach works better. And so what we found is when you again bring the system together, you can come up with a fairly simple set of metrics that enable you, that everybody is collecting and defining the same way and looking at together, and then begins to see where you're getting traction, what's working, what isn't working, and put more resources behind the things that create traction. I think the third component of collective impact is this idea of mutually reinforcing activities. Again, right now, every nonprofit, every government agency, every corporation that's working on an issue is doing it independently on their own. And their efforts don't add up because they're not aligned with the efforts of other organizations. And so begin to focus on how one's efforts support the work of others that are part of this coalition. The last two things are continuous communication. This isn't a one-time conference or gathering where we've seen collective impact work. We've had leaders of organizations meeting together every few weeks for several years. It takes time. And of course, social change does take time. And then the last piece is what we call having a backbone organization. There needs to be somebody who's managing this process, who's facilitating it, who's gathering the data and the impact performance, ensuring that this group continues to function, that people are held accountable for doing what they say they're going to do, and just making the whole thing work. And so what we found is that when you begin to think about problems, not like here's the isolated solution I want to fund, but here's a process for change that we can create and support. It's a very different model, but it turns out to be much more effective.
Ben 25:56
I love everything you say there. One of the things I always always like about it, particularly, is the idea of mutually reinforcing activities because it stops people competing. And I think that's, I mean, if I said you don't compete to save the world, right? You collaborate. But you see it in companies. No, we're going to be the one who saves the world. No, we're going to be the one. And when you do that, you say, no, everyone's got their own goal. So you get to be the hero on your own of your bit, but together we're the hero of the whole thing. Do you think that's a particularly important bit?
Mark Kramer 26:25
It is a particularly important bit. And then the one example that comes to mind is work we did around some early education reform. And what we found is, you know, there's all kinds of preschools and informal childcare and stuff before kids start kindergarten. There's actually no common definition of being kindergarten ready. What are the skill sets you need, and so on. Well, and the kindergarten teachers aren't particularly in touch with the daycare providers at all. And so what we found is we could actually get kindergarten teachers across the city together to define what are the requirements that would lead students to succeed when they start kindergarten and then begin to work with the preschool folks to help them build that into a curriculum. And we actually had, you know, kindergarten teachers volunteering to go to preschool to show them what to do and how to develop. And so, in the course of about a year, this particular city was able to put in place a citywide agenda, a definition of kindergarten readiness. And all of the early childhood childcare centers across the city adopted the same program for training for readiness for kindergarten. And so this is an example of the preschool program was there, the school was there, but there was no alignment or mutually reinforcing activity.
Ben 27:45
And I imagine as individuals, it helps them actually reach their individual KPIs out of the collective interest. Absolutely.
Mark Kramer 27:52
It makes the kindergarten teachers more successful and it makes the preschool folks have a much more interesting job because they now actually have a curriculum and something they're trying to accomplish.
Ben 28:00
When you talk about backbone support, if it's everyone's job, it's no one's job, right? It's um who do you find is best? Does it matter? Like you're talking about a bit of government, you're probably an education NGO there somewhere that there's obviously the preschool centers, which are for-profit in probably some parts and not for profit and other parts, depending who runs them. Who do you find is best to lead the charge on this stuff?
Mark Kramer 28:22
First, it's critically important. And really the personality of the person who is leading the backbone effort, who is facilitating this, is the single biggest factor we've found in whether the collective impact effort succeeds or fails. And we began to talk and did some writing about this idea of system leaders who are focused on not building their own organization, but on enabling other organizations to function together more effectively. And it takes a certain kind of person who is firm enough to make sure that things happen and people do what they say they're going to do, but also isn't imposing his or her own agenda, but is letting the group develop the common agenda, the approach, the learning, et cetera. And so it's a particular skill set that is not easy to find.
Ben 29:15
So it's interesting to find the right person rather than the right organization. Yes. And look back to shared value, because obviously things are entirely connected. So it is quite possible for an organization to have that person within them. Yes, absolutely. And do this. Absolutely. I mean, I've seen it examples. I mean, I find you basically not allowed to talk about any of these topics without mentioning Patagonia. And if you only mention it once, you probably, you know, let people down a little bit. I was in a conference the other day and we played Patagonia Bingo. And when it got to 10 mentions, the whole room yod bingo. And it worked. It was very funny, actually. But um, you see them almost being a backbone for activism and they train activists and they fund activists and then they make movies to spread the word about activism. So I wonder in that sense, you know, that whether it be a Nestlé who's solving it or a new sustainable social impact sort of a startup who has a mission and recognizes that the mission is bigger than anything they can ever do. Have you seen that work where these sort of small upstart companies or organizations go, right, we're gonna like be not just be a company solving this, we're gonna be center of this.
Mark Kramer 30:20
Well, you know, we had a conversation earlier about the carrot and the stick and the idea that it is very hard for large companies to change, and that the pressure from the startups that are much freer to innovate and to experiment and can be both a competitive threat and a new economic opportunity, a new business model for the large companies. So I think the role of the startups is tremendously important in stimulating this change. Whether they themselves get to scale is an interesting question. What surprised me so much about Patagonia is not that large a company. Their revenues are one and a half billion.
Ben 31:01
Yeah, it's amazing that one and a half billion is actually quite small in the scheme of things, isn't it?
Mark Kramer 31:05
Well, it is quite small. I mean, you look at Nestle, it's uh closer to 100 billion. And so the startups that are really purpose-driven rarely scale. And I've seen an interesting study that I think it was Bain uh and company did, that said these startups, about 80% of their customer base early on are people who care about the purpose. But if they're actual actually able to cross the chasm to mass market, that's only about 20% of their customers. And so if you really want to build a company at mass market scale, and most of the large corporations in the world are operating at mass market scale, you've got to deliver a value proposition to the customer that is rooted in price and value, the things that matter to them. And the purpose piece, again, can be a source of innovation and differentiation, but it's very hard to get to commercial mass market scale because of your social impact or the way in which you're communicating it.
Ben 32:07
Just because the market for that is only a small part of the market. Yeah, exactly.
Mark Kramer 32:11
The people who care about that and can, yeah.
Ben 32:13
So two interesting observations on Patagonia around that is first of all, it's clear that their impact is bigger than them because they have, if I from my watching of them, affected the market. You cannot be in the outdoor apparel market now without having a strong sustainability story because you cannot compete because of what they've done. So while they may only be a one and a half billion dollar company, there's bigger ones, they've forced the change onto those ones. Tesla 2. Tesla 2. That's right. You could see the car companies going, ah, this is not a market. This is not, then they're like, it we have to. Holy cow, yeah. Holy cow, we got to catch it.
Mark Kramer 32:47
Their stock is worth more than mine.
Ben 32:48
Yeah, combined. Combined, yeah.
Mark Kramer 32:50
That's right.
Ben 32:51
So yeah. Um, the other observation on Patagonia, though, is you can change your consumer. I actually worked on a brief for Patagonia, and it was the most interesting brief that ever came in. They said, Ben, we want to do a campaign. I said, why? And they said, because everyone's like when they sort of went fashionable, almost when they jumped that chasm from the purpose-led people to the kind of mass market. They said, We're in all these stores and all these people are wearing our logo everywhere. So explain me the problem. And they said, no, this is a huge problem. They're wearing it without understanding it. They're wearing the brown, but they're not engaged in the brand and enrolled in the brand. Every person who wears our brand without understanding that this is what we've done and what we're trying to create as an organization is a lost opportunity for us to change the world. So that was the brief. Help people understand that when they're wearing this, this is what they're wearing and this is who they are and who they can be. So they actually looked at it as they have the power to change their consumers. So they not only have the power to change the market they operate in, the bigger players, but they have the power to change their consumers. Then that strikes me as a very empowered position for a company. You know, Nestle, I remember someone from Nestle once getting up and saying, you all think we're big, scary companies, we're big, scared companies. You know, and it strikes me sometimes that just a little bit of courage from companies to go, no, we can do this. Yes. And we don't just have to read data of what people think and follow it. We can lead it.
Mark Kramer 34:10
Yes. And it's up to the CEO. I've had MBA students at Harvard say, give me some career advice. I always, around shared value, I always say, look, if the CEO isn't committed to it, you're not going to be able to do it. So you've got to find a company where the CEO believes in this because it is about the courage and commitment of the CEO to do this because they don't have to, right? They can survive another quarter. They can survive their five-year term without dealing with all this stuff. They make a commitment to be, you know, carbon neutral by 2050 or 2,900, whatever. And then it's off their desk. So you really need someone who sees the commercial value, right? They're not doing this to be a saint. They're doing this to be successful for their shareholders, but they're doing something more than the typical company is doing because they actually do care and have the courage to recognize the importance of the impact this company has.
Ben 35:08
And no doubt they have to fight some people for that, because there's going to be haters who go, why are we doing this? This is wrong. La. Have you ever walked into a boardroom and managed to turn, like essentially a bunch of leaders around who are, look, we want to do it, but we think we we can't if we just don't want to take it on.
Mark Kramer 35:25
Yeah, well, the first thing is again, uh, people in business, as we said early on, tend to assume that anything having to do with sustainability is a cost, is a burden, is a constraint, is something to be avoided or complied with if necessary. They don't see it typically as an opportunity for innovation, differentiation, and greater profitability. So the first thing is when you come in, and if you can actually make the business case to them effectively, that does change their position. What's fascinating to me, and this is a bit of a detour, is one of the strengths of creating shared value is that it really is pragmatic in delivering greater shareholder value. But what's happening in the United States now is ideological. Companies are doing things that are destroying value because it's not okay anymore to be doing things championing ESG or championing racial equity and diversity. And so we actually see, you know, the state of Texas said, we're not going to do business with any investment firm that has, you know, sustainable investing, green stuff, of which most major firms do. You can actually document that the state of Texas is getting a lower return on their investments because of this policy. And so, and we're seeing, you know, particularly with this administration, Trump, companies doing things that are against their economic interests to try and appease the administration or go with the flow.
Ben 36:50
How important, I mean, it's an overused word, so I don't love it, but the idea of purpose or mission, one of the companies I often bring up when we talk about these things is Nike, because obviously diversity inclusion has been one of the hot rods, the lightning rods for what you speak of. And when you go to their website, you notice they have removed their targets. They haven't removed anything else. So they've stepped back slightly in order to obviously not provoke the bear. Right. But at the same time, I can't see how they can back out of diversity and inclusion, because fundamentally their whole brand is built on empowerment. They are the ones that went out with women run the night. And it doesn't matter if you're overweight or have one leg or whoever you are, you can be your best. And we are the company, the brand that will help you do that. So for them to back out of diversity and inclusion would be them to back out of their entire reason for being as an organization, fundamentally. So, how important do you think it is for companies that do want to enter these spaces to set that absolute flag on the hill of here's what we're for?
Mark Kramer 37:51
Yeah, and it's interesting because, of course, the consulting firm that uh Professor Porter and I started, FSG, does a lot of work with companies. And what we're finding is that most of the companies, certainly the ones we're working with, are not actually changing what they're doing. They are changing how they talk about it, they're changing what's on their website and so on. But underneath, they recognize that these issues around diversity in the workforce or serving a diverse customer base and so on, are fundamental business issues that aren't going away just because Trump is president. And so they're not talking about it, but they're still doing it in most cases. You know, there is another set that is of companies and corporate leaders who are saying, Oh, thank God I don't have to do that anymore. Never wanted to do it to start with. But that's not the majority of the large companies at all.
Ben 38:39
Well, that's good news. And no doubt it is probably somewhat putting a handbrake on them doing more. Yes, absolutely. Which is disappointing. But it's it's good to hear that it it causes somewhat of a slowdown versus a complete ending of it. I mean, I always look at this and people say, someone asked me actually, oh, look, do you think this is the end of sustainability? I said, no. And they said, why? I said, because the problems are not going away. Right. And as simple as that. We're gonna have to solve them at some point. Yeah, yeah. Yeah. Just as a little aside, strategy is one of those things that if I ask 10 people, they'll give me 10 answers. Yes. And I've heard you describe strategy once in the most beautiful terms. Could you give us your inner nutshell version of what is strategy?
Mark Kramer 39:19
Yes, well, I'm racking my brain to figure out what I said back then that so impressed you. But and this really all is uh what I learned from Michael Porter, who is the founder of the idea of competitive strategy. And he said, look, if you're doing the same thing as your competitors, your product's gonna be the same. And the only way you can compete is on price. And sooner or later, you're gonna drive each other's prices down to the point that it's not a very attractive business anymore. What you really want is not to worry about market share or the share price in the stock market. You want to superior profitability. That's your goal as a company. And the only way to do that is either to have lower cost or to have people pay more. And to do that, you have to be doing things that are different than your competitors because you won't have lower cost if you're doing the same thing, and people won't pay more if it's the same product. So instead of thinking about what's the best automobile, there is no best automobile. Some people can afford a Rolls-Royce and they want it, and that's great. Some people want the least expensive possible car, some people need a van or a truck, or some want an electric vehicle. So there are all these different customer needs. And strategy is about identifying a particular customer segment and then tailoring every aspect of your operation to meet the needs of that customer better than anyone else. And so IKEA is a great example, the cheap furniture store. They, their customer base is typically young people who don't have a big budget but are style conscious. And they operate completely differently than any other furniture store. First of all, they sell the furniture knocked down in boxes, and they're in these big stores, and there's no one to help you. You have to serve yourself and all of these things, which are fine for their customer base. I wouldn't want to go and do an IKEA myself. And one of Porter's famous quotes is uh if you're not making some customers unhappy, you don't have a strategy. And so what IKEA has done is tailor every aspect of what they do, from the design of the furniture to the what it's made of and the sourcing and how it's delivered to the customer, to be the least expensive high design solution for this particular customer base. And Crate and Barrel can't compete because Crate and Barrel is selling pre-assembled furniture and they need to be in different locations. They can't have as big a store as IKEA. They need to be on the high street. And if they wanted to try and compete with IKEA, they would lose their existing customer base. And so it's about trade-offs and having a competitive position that is serving, delivering a particular type of value to a particular customer base and tailoring everything you do to deliver that. Now, I have no idea if that's what you thought I said before, that was such a good definition of strategy.
Ben 42:08
But it is exactly. Oh, all right. Congratulations. It's in there. Moving on, you've obviously been in business and helping business for a long time, but as well as that, you're an impact investor. Yes. So you now invest in business. So tell me about that because for many of us, it's a bit of a confusing space. You know, if you say impact investor, it could mean do you invest for impact or do you invest return with some impact? You know, you've got the idea of the ESG lens versus the truly sustainable super fund or whatever. There's ethical investing in there, is another set of terminology. Can you untangle this mess of words for me so I can understand what's what? So how do smart investors think about this so that they do get the return, but also get a planet to live on?
Mark Kramer 42:51
Yes. So there, I mean, there are several different concepts that are muddled together typically when people talk about this. The first is the idea of socially responsible investing or ethical investing, which is really saying I only want to own companies that are consistent with my values. Now, that's not saying I'm gonna have a better financial return or a worse financial return. It's not saying I'm changing the behavior of companies. It's just aligning my portfolio with my values. And that's a fine thing to do. I don't see much social impact to it, but it's an admirable thing to do. The second thing you mention is ESG screening. And, you know, do I invest in companies that have a better ESG ranking? Well, that's very problematic because ESG rankings are so inconsistent, unreliable, and so much of what they're reporting on is really not material, either to the company's operations or to the impact of the company on the world. And so I don't think ESG focused investing is a very reliable vehicle, again, either for impact or for financial return. When I talk about impact. Imact investing. I think about investing both for financial return and measurable social impact. This has grown tremendously as a field in the last 10 or 15 years. It's more than a trillion and a half dollars now in impact investing. It's actually larger than the nonprofit sector in the U.S. at this point.
Ben 44:18
How does that relate? How much is invested total in the world? Oh gosh. It's a tiny. So it's like 1% still? Yeah, cool. So keep going. Plenty of room to grow.
Mark Kramer 44:29
Plenty of room to grow. But almost all of it is in venture capital or private equity or things like that, where you can say the money went into the company to enable them to produce this product that is some sort of solution to a social or environmental problem. The challenge is that most money is in the public equities. And we haven't As in the stock market. The stock market, yeah. And we haven't really found good ways to combine financial return and impact in the stock market. And that's what I've been focused on for the last few years. And so I've actually helped start an impact investing hedge fund that invests in uh small and mid-cap industrial companies, publicly traded companies on the stock market. But then with each company, we develop a sustainability improvement plan for them. And we talk with management and we talk with them consistently, whether it's monthly or quarterly, as we hold the company, about ways they can improve their both social and environmental impact in ways that, you know, are consistent with a better bottom line as well. And so we've found that we're getting good financial returns because the guy doing the investing is very good at investing. And the choice of company is not about screening, it's about finding a company where there's a good value opportunity, just in purely financial terms. But then, particularly because these are smaller or mid-cap companies, they're way behind the curve on what they could be doing around sustainability. And so we're actually able to help them improve their sustainability performance. So there's financial return and there's measurable impact, but it's very hard to find ways to do that in the stock market.
Ben 46:07
I think you could be on your big, great third theorem here. We've got shared value, collective impact. And because really, if I break that down, you're saying that most money being invested is VCs going, oh, if I invest it to grow this company, it's a startup that is essentially a startup with impact. Therefore, I'll get both. What you're saying is forget what they're currently doing. Look for value, look for a good value company, invest in them, then help teach them basically some fundamentals they can do in sustainability, but then move that to shared value and help show them the way. So you're actually investing and guiding in that company, which is a whole new way of looking at this. I think most people, you know, people talk of passive and active investing, but they speak about it as do I just dump my money in a fund and walk away, or do I keep changing where it is? This is truly active investing. Yes. This is I'm actually going to change the company I invest in.
Mark Kramer 46:57
Yes. And it's not being done in an activist, hostile way.
Ben 47:00
Right.
Mark Kramer 47:00
There are a lot of hedge funds out there that are really nasty in the way they go after companies and force change. And that I don't think works for a sustainability agenda.
Ben 47:10
Well, credit's a fight too, because then you've got two different shareholders. One's like, I want, I want this, and you're forcing me to divest from this or get out of this game, which is bad for my returns. So suddenly you've got this, I'm for impact, you're for investment almost. Whereas what you've said is no, no, no, if we do this, we'll all win. Yes, exactly. It's kind of shared value for investing, really.
Mark Kramer 47:30
It is, exactly. And companies do listen to investors. So it is actually quite a strong leverage point for change within companies.
Ben 47:38
And of course, one of the great parts of your success will in that will be to bring other investors along. Are you finding that there all is for this?
Mark Kramer 47:44
Well, you know, I mean, the fund itself has grown remarkably. We we started two years ago with 50 million. Uh we've just crossed 300 million, and there's just a lot of momentum for it. And the name of the fund is Congruence Capital, because we're trying to demonstrate to the investment industry the congruence of sustainability performance with financial return.
Ben 48:04
Which funny enough, I've seen quite a lot of um papers on over the years. And it was interesting because the one that I that really I remembered was they said it's not necessarily what the company does, it's the fact that they bother to spend the time to understand the big longer-term issues. It was actually the materiality piece. Have they bothered to talk to their stakeholders and have a chat with their stakeholders, figure out what's important? It was the fundamental act of listening that made them more successful as much as the action on it. Yeah. Which I thought was interesting. That is interesting. We talked about this briefly, but I just want to cover it very quickly. Obviously, we are in somewhat of a sustainability uh ebb or a trough, to put it mildly. But the problems are not going away. Do you see can be depressingly disappointing when companies go to the edge and we all think we're there and suddenly this wave will continue and then the wave backs off. What's it going to take to provoke this next wave? And and your crystal, when you're a Mark Chrome crystal ball, when's it gonna happen?
Mark Kramer 49:03
Well, I do think at some point reality interferes. You know, so much of what is happening now, particularly in the US, but it's, you know, being adopted around the world, is ideological, as we were saying earlier. It's not actually things that increase financial return, it's things that reduce it. The problems, as you say, whether it is poverty and inequality, whether it is the environment, these things are not going away. And they do have consequences for society and for companies. And so sooner or later, I have to believe that reality will reassert itself and people will begin to have to respond to actually solve the problems and do things in a way that is consistent with the interest of their shareholders for companies or the interest of society for nonprofits and others. But it is really, really discouraging. And I don't know how or when that return to reality is likely to happen.
Ben 50:04
I think a lot of us are feeling that. How do you keep up hope personally and go, it's okay, it'll work out, or don't you?
Mark Kramer 50:14
I I admit I'm I'm struggling with that now. And it's great to be able to work with a nonprofit or do a consulting project for a company and be able to make a change. And those changes feel good and they're real and they have some impact, but it's not creating system-wide change. And, you know, societies sort of have values that are society-wide. And social media and the internet has been deeply destructive to any sort of common set of values, I think, as well as a common fact base. I don't think there has ever been a society that doesn't agree on a common set of assumptions or facts. Often the facts are wrong, but they agree on them, you know. But we've lost that now, as everyone has their own source of news and information, particularly fed to them because it's what they're interested in, what they believe, and so on. And so, as a society, we've lost a common base of fact on which to operate and make decisions. And I don't know how society can function without that.
Ben 51:19
One of the things I've seen over the years is it seems almost like it's not until we get a slap in the face that we go back to common agenda. You know, we had in Australia really intense bushfires maybe five years ago, and suddenly everyone's talking climate. And then people slowly stop. Is it fundamentally unfortunately the truth of humans that we're a break fix kind of a race? And it's when we start really, really getting this stuff affecting our lives on a day-to-day that suddenly we will gather around that undisputable common fact that our like our city is burning or our crops are not working, you know?
Mark Kramer 51:55
Yeah, I think that's right. I do think that as we get clearer about concepts like creating shared value and approaches like collective impact, that I think are more effective than the way we have been working using philanthropy before or using ESG ratings for companies or so on, we can actually make progress in solving social problems because we've got some new and better tools. But the desire, the incentive, the willingness to do it and to, you know, go out and limb and do something different, that's rare. Courage is what we need in many ways, I think.
Ben 52:30
Okay, a couple of quick questions to finish off. If you had a single use, goodness knows why we'd have a single use magic wand. So you get one wish of what you would change in the world to make all this happen, what would it be?
Mark Kramer 52:42
I think it would go back to this idea of being reality-based, because we sort of assume that we just don't know how to solve social problems. We don't know how to fix the educational system, we don't know how to reduce poverty. So we do know how to do these things. We just aren't trying. And we aren't trying because there are these sort of social narratives we've accepted that say, you know, at least in the US, people are poor, it's their fault. Whatever it is. These narratives are wrong, but they're deeply embedded. We can't really fix the problems until we change the narratives. And the fact is the narratives are not reflective of reality, right? If you look at the difference in wealth between black and white citizens in the US, it's vast. The main reason for it is that after World War I, the U.S. government created a housing policy that subsidized housing for people, but believed firmly at that time that races should not mix and that black neighborhoods were not investable and shouldn't be lent to. And so they actually drew maps. And what's fascinating is you can go to any major city to the U.S. today and look at the depressed, underresourced area, and it is exactly the dimensions of the redlining map from the 1920s. So the common assumption in the U.S. is that, well, you know, people of color just aren't motivated or aren't as competent, or, you know, it's nobody's fault that they're poor except their own. The reality is they are poor because of an intentional U.S. government policy that was designed a hundred years ago, but has had a lasting impact on intergenerational wealth and has prevented of color from building wealth through home ownership, which has been the primary asset that has built wealth for white families. And so, again, until you let go of the social narrative that these are lazy people who don't want to work and get to reality, you're not going to actually solve the problem. And so my one wish would be that we actually make decisions based on reality.
Ben 54:56
Great wish. And one very quick last question because I know we're out of time. One piece of advice for someone who wants to follow in your footsteps.
Mark Kramer 55:04
Oh, God, don't. I don't know why I don't want to. Um, my career has kind of been a random walk, you know. Look, I think the first thing is to know that you don't have to make a trade-off, that you can have a successful and economically rewarding career and also work to make the world a better place. And that's a much better career. And then secondly, I think you do have to find the right colleagues, whether it's the CEO who has a commitment to shared value, whether it is others you're working with at a nonprofit, whatever it might be. I think the most important thing in career is what you're able to learn from the people you're working with. And so finding an organization with a strong good culture that does care about sustainability, does care about reality, has the courage to do things differently than others, is gonna put you in a place where you can grow and learn and develop that I think is much better than you could other elsewhere.
Ben 56:02
That's great advice, Mark. You've been crystal clear in making these things make sense and super inspiring as always. I thank you very much.
Mark Kramer 56:10
Ben, thank you. It's been a pleasure to talk to you.
