CREATING SHARED VALUE:

CREATING SHARED VALUE: CUTTING EDGE BUSINESS STRATEGY Olga Zubrilova, PhD, MBA, MICA, International University of Monaco Ingo Böbel, Dr. Dr. habil., Professor of Economics and Strategy, International University of Monaco, Affiliate of the MOC Teaching Network (ISC at Harvard Business School) and Member of Creating Shared Value Initiative International Moscow Compliance Conference, February, 2015

CREATING SHARED VALUE: CUTTING EDGE BUSINESS STRATEGY World Economic Forum, Davos The World Bank CSV UNCTAD Nestle, IBM, Anglo American, Google, Walmart, Mars, Rockefeller Foundation, Verizon, Intel, Lilly, BD, BP, Western Union, Novartis и др. PWC, EY, KPMG Global Reporting Initiative, Bureau Veritas Forbes, Bloomberg, Guardian etc. Other companies, governments, international authorities

ATTACHMENT 1: CSV KEY CONCEPTS CREATING SHARED VALUE (CSV) New business model, developed by M. Porter and M. Kramer in 2011 CSV is a framework for creating economic value while simultaneously addressing societal needs and challenges. When businesses act as business not as a charitable donors they can improve: Profitability while also improving environmental performance, Public health and nutrition, Affordable housing and financial security, and Other key measures of societal wellbeing. http://www.fsg.org/tabid/191/ ArticleId/594/Default.aspx? srpush=true (!) Only business can create economic prosperity by meeting needs and making a profit, creating infinitely scalable and self-sustaining solutions.

From CSR to CSV: MOVING TO SHARED VALUE (*) CSV concept helps to identify opportunities to address societal issues and deliver real business value. This requires that business accepts to rethink its business model. CORPORATE SOCIAL RESPONSABILITY (CSR) Values: doing good, good citizenship, philanthropy, and sustainability Discretionary Separate from profit maximisation Agenda externally determined Impact is limited by the corporate footprint and CSR budget CREATING SHARED VALUE (CSV)** Values: economic & societal benefits relative to cost Integral to competing Essential to profit maximisation Agenda is business specific Mobilizes the entire company budget Compliance Compliance * Professor Michael E. Porter Harvard Business School, presentation to Babson Enterpreneurship Forum Boston, Massachusets, November 13, 2011 ** See Attachment 1 for more detailed information

CREATING SHARED VALUE: CHALLENGES SHAREHOLDERS TOP MANAGEMENT CSV: NEW BUSINESS CONCEPT& CHALLENGE FOR BUSINESS PROCESSES & GOVERNANCE INFRASTRUCTURE (incl. RISK MANAGEMENT, COMPLIANCE, INTERNAL CONTROL,AUDIT) PERFORMANCE MANAGEMENT & MEASUREMENT PROCESS REPORTING HR STRATEGY (TALENT MANAGEMENT)

SOCIAL NEEDS & ECONOMIC VALUE CREATION (*) 1 ENERGY EFFICIENCY ENVIROMENTAL IMPROVEMENT EDUCATION Social deficits and environmental impact create economic costs for companies 2 3 4 WATER USE COMMUNITY ECONOMIC DEVELOPMENT AFFORDABLE HOUSING COMPANY PRODUCTIVITY WORKER SAFETY WORKFORCE SKILLS HEALTH Community weaknesses affect company productivity Social needs represent the largest unserved market opportunities There is growing congruence between economic value creation and societal objectives * Professor Michael E. Porter Harvard Business School, presentation to Babson Entrepreneurship Forum Boston, Massachusetts, November 13, 2011 Novo Nordisk* (PROJECT IN CHINA, 2010 DATA) Social Issue: HEALTH & NUTRITION (catastrophic prevalence rate of diabetes) Approach: STRENGTHEN HOLISTIC MARKET ENTRY STRATEGY INTO CHINA SOCIETAL VALUE** Professional Training of 220,000 physicians: Investments in strengthening the local healthcare system have built strong relationships with local stakeholders including people with diabetes and healthcare professionals. Training of 280,000 people with diabetes Since 1997, patient education had saved the Chinese society DKK 3.7 billion by reducing diabetes related complications As result, 140,000 saved life years, and this number was projected to increase by 30% annually BUSINESS VALUE** Novo Nordisk realised 63% market share and sales of DKK 4,500 million, and insulin sales by volume of 12,000 mega units Strengthen trust and reputation among physicians, population, government agencies compared to competition. * http://www.novonordisk.com/sustainability/how-we-manage/blueprints.asp ** Measurement Methodology (Attachment 1)

NESTLE CASE -CSV COMMITMENTS (*) Starting in 2012, Nestle shared a number of robust commitments to support the long-term goal of CSV and changed its performance measurement system (KPIs or using measures attached to specific initiatives, such as the Nestle Cocoa Plan and the Nescafe Plan). Commitments cover: 2 * http://www.nestle.com/asset-library/documents/library/documents/corporate_social_responsibility/nestle-csv-full-report-2013-en.pdf

CHALLENGE FOR COMPLIANCE New CSV strategy requires re-engineering of Risk Management & Compliance Infrastructure to secure long-term brand protection, keep competitive advantage CSV-based Compliance Strategy Existing Compliance strategy to comply with laws, external & internal regulations new CSV-based Compliance strategy to comply with laws, external & internal regulations to comply with CSV business principles Principles for CSV Compliance strategy development (Compliance Triangle): CSV opportunities (economic & social values) to comply with CSV business principles* Financial & Economic stability - Economic and societal benefits relative to cost; Accountability To implement and enforce policies and procedure aimed at ensuring operations are in compliance with laws & CSV Strategy Integrity consistent commitment act according to the values, Compliance strategy needs to be integral part of CSV Strategy to ensure fair strategic differentiation and CSV-effectiveness; principles Company claim to hold To upgrade Risk& Compliance Strategy in accordance with new CSV business model ** Talented management policy to attract professionals able to develop, implement and train business people how manage risk and opportunities Challenge for CSV-based Compliance: * Nestle case (Attachment 3) ** Embedded Approach to Shared Value (Framework, Attachment 4) 8

MATURITY OF CSV CONCEPT CSV: INTERNATIONAL EXPERIENCE CSV: RUSSIAN INITIATIVES Creating Shared Value Initiative & APC Network established to promote CSV globally: A profound theoretical framework for the concept is being developed; Corporate practices are being streamlined; Commercial practices to measure performance resulting from application of this concept are being prepared; National network communities are being established (Australia) A move from examination of CSV concept towards its implementation as part of the corporate business strategy and revision of business processes in the companies has become a consistent trend; Approaches towards implementation of CSV in different sectors (upstream, education, finance, healthcare) and countries (Chile) are being investigated; A pilot training module on CSV developed (Harvard Business School); The first training - December 10-12, 2014; NPO Working Group is developing approaches to forming efficient partnerships on CSV concept Evolution & Philanthropy s (E&P) representative office established : a member of Shared Value Initiative network; an official representative of APS Networking (global consultancy) in Russia E&P focus on development of potential for social innovations and measuring social results. Russian research work on business social involvement directly covers the aspects of CSV concept development and implementation (Managers Association presentation on social investments in Russia) Regular talks and consultations in professional networks in Russia (including those initiated by E&P) regarding new practices and approaches to business social innovations, including approaches to creating shared value (CSV). Russian universities are interested in best international business practices, including CSV, and training for new type managers (MIRBIS, the Higher School of Economics)

STEPS FORWARD We believe it is required to: Continue investigations and discussions over CSV best practices among professional networks and institutions and their impact on: Revision of corporate business strategies Re-engineering and re-design of business processes, including: Strategy development, Talent management; Risk management, compliance, internal control and audit, Internal reporting preparation. Revision of roles of business partnerships, NPOs, state and institutions Development of a toolset to accurately measure correlation between a contribution to social development and core business indicators 2

CONTACTS & PROJECT PARTNERS We appreciate our partner - Evolution & Philanthropy for their contribution to the project. Ingo Böbel, Dr. Dr. habil., Professor of Economics and Strategy, International University of Monaco, Affiliate of the MOC Teaching Network (ISC at Harvard Business School) and Member of Creating Shared Value Initiative ibobel@monaco.edu Evolution & Philantrophy (UK, Russian Branch) Olga Evdokimova Director Evd_oa@uralsib.ru Olga Zubrilova, PhD, MBA, MICA, International University of Monaco ozubrilova@monaco.edu Sergey Martyschenko Program Director MartyschenSV@uralsib.ru 2

ATTACHMENT 1

BUSINESS & SOCIAL RESULTS LINKS (*) LEVELS OF SHARED VALUE BUSINESS RESULTS SOCIAL RESULTS 1 RECONCEIVING PRODUCTS AND MARKETS How targeting unmet needs drives incremental revenue and profits Increased revenue Increased market share Increased market growth Improved profitability Improved patient care Reduced carbon footprint Improved nutrition Improved education 2 REDEFINING PRODUCTIVITY IN THE VALUE CHAIN How better management of internal operations increases productivity and reduced risks Improved productivity Reduced operating costs Secured supply Improved quality Improved profitability Reduced energy use Reduced water use Reduced raw materials Improved job skills Improved employee incomes 3 ENABLING CLUSTER DEVELOPMENT How changing societal conditions outside the company unleashes new growth and productivity gains Reduced costs Secured supply Improved distribution infrastructure Improved workforce access Improved profitability Improved education Increased job creation Improved health Improved incomes * http://www.fsg.org/portals/0/uploads/documents/pdf/measuring_shared_value.pdf

CSV MEASUREMENT: THE PURPOSE OF MEASUREMENT* Existing social performance measurement covers: (1) sustainability, (2) social and economic development impact, (3) reputation, and (4) compliance. These metrics demonstrate a company s progress in managing its social impact-but they don t capture CSV creation. The Purpose of Measurement: MEASUREMENT FOCUS WHAT TO MEASURE? WHY MEASURE? FOR WHOM? Sustainability Efficiency in use of input factors (e.g., natural resources and labor) and improved product and community impact Minimize negative externalities and augment positive impacts Maintain a license to operate Management Communication to external stakeholders Impact assessment The long term social and economic development Impacts of operations and/or philanthropy Track progress on social and economic development impact Maintain a license to operate Management Communication to external stakeholders Reputation How societal impacts contribute to company reputation Manage reputation Primary for management Compliance Compliance with laws and voluntary policies, standards, and codes Ensure adoption and compliance Maintain a license to operate Management Communication to external stakeholders (!) When companies do not understand or rigorously track the interdependency between social and business results, they miss important opportunities for innovation, growth, and sustainable social impact at scale. An approach to shared value measurement that focuses on the interaction between business and social results is among the most important tools to drive shared value in practice. Shared Value Joint business and social value creation Grow the total shared value created Primarily for management (!) new Targeted communication to external stakeholders * www.isc.hbs.edu/creating-shared -value/emerging topics

SHARED VALUE MEASUREMENT PROCESS Shared value measurement requires an iterative process that is integrated with business strategy, not a one-time or periodic effort separate from measuring business performance. An integrated shared value strategy and measurement process includes four steps: 2 1 2 3 4 Identify the Social Issues to Target The result of this step is a list of prioritized social issues that represent opportunities to increase revenue or reduce costs Make the Business Case Solid business case development based on research and analysis of how social improvement will directly improve business performance. This step includes: Identifying the targets and specifying activities and costs involved for each shared value opportunities; Modeling the potential business and social results relative to the costs (value creation potential) Making a go/no-go decision Track Progress Measure Results and Use Insights to Unlock New Value Using the business case as a roadmap, companies then track the progress against the desired targets: tracking inputs and business activities, outputs, and financial performance (revenues, costs) relative to projections The focus is validating and anticipating link between social and business results and determining whether the outlay of corporate recourses and efforts. Insights and lessons from this analysis will inform opportunities to unlock further value creation through refining the shared value strategy and execution * http://www.fsg.org/portals/0/uploads/documents/pdf/measuring_shared_value.pdf

EMBEDED APPROACH TO SHARED VALUE (FRAMEWORK*) Embedded Approach to Shared Value Identify the shared value opportunities for a Company: strategic objectives to create value for shareholders and other stakeholders groups 1. Materiality Assessment: key drivers, risks & opportunities to realize shared value opportunities (to meet shareholders & society s expectations multi-criteria analysis to be sure that CSV strategy will be achieved). Companies need to bring materiality assessment forwards in the business planning and reporting cycle, and put materiality assessment at the heart of the strategy development process. 2. Strategic Assessment: the Company will need to develop business plans which cascade from and support the achievement to capture the Shared Value opportunities 3. Capability Assessment: to evaluate and put in place plans to establish the enablers of a Shared Value strategy. 2 * http://valueesg.com.au/wp-content/uploads/2013/09/eassy-shared-value.pdf