Last week we learnt that, despite “Project Merlin”, bank lending to small and medium sized enterprises fell short of expectations by some £2bn in the first quarter of this year, only adding to fears that we are set for a sluggish recovery. This together with the news that the Chief Executives of both Barclays and HSBC have been awarded £9m in pay apiece will have done little to assuage public anger over bankers’ behaviour. What is so strange in all this is that the banks are apparently oblivious both to the public mood and to what seems to be the makings of an emerging consensus amongst politicians and policy makers that business must urgently rediscover its social purpose. Suffice it to say that when as luminous a business luminary as Harvard Business School’s Michael Porter argues that capitalism is facing a crisis of legitimacy you know that something is up.
For those business leaders attuned to the zeitgeist and concerned about its implications for their companies’ reputation in the eyes of the public, the concept of “public value” should be of help. The term “public value” was first coined by Michael Porter’s Harvard colleague Mark Moore at the Kennedy School for Government in the mid 90s. His intention was to import some of the rigour of the commercial world into strategy development in the public sector. In his thinking it’s the task of business leaders in the public sector is to create value every bit as much as their counterparts in the public sector.
At its heart, public value is a very simple concept – it’s the value that society as a whole derives as a result of the provision of products and services to individuals. So for instance, school children benefit as individuals by being educated but there is a much wider benefit to society as a whole in economic, democratic and cultural terms in having a highly educated society. Economists call such wider benefits “externalities”. Moore’s aim was to encourage public sector managers to stop conceiving of themselves as mere administrators and to start seeing themselves in a more creative, innovative way as men and women charged with a responsibility to maximise this kind of wider social value just as their commercial counterparts are charged with the responsibility to maximise private or economic value.
Here in Britain the BBC has pioneered the application of public value and I and my colleague Martin Vogel were among the first to put it into practice through the use of something called the “Public Value Test” or “PVT”. This is a test that the BBC applies to major investments in either new services or major changes to existing ones. Its aim is to help the BBC Trust (that’s the body that sets the strategy for the BBC and makes its key decisions) decide whether or not an investment can be justified both in terms of the public value it is likely to create and its likely impact on the commercial market place.
It was clear to us from the outset that one of the key challenges with public value is how to measure it. Whereas economic value in terms of profitability and return to shareholders is very easy to assess, public value is inherently difficult. In the case of education for instance, how can you realistically put a hard economic value on the benefit to society of universal primary and secondary education? And yet everyone knows it is enormous. The answer is to use proxy measures and this usually involves asking the public what their perception of the value created is. While this always means that any assessment of public value rests on judgement what we found at the BBC is that the general public readily – even enthusiastically – understand the idea of public value. So, for instance, audiences have no trouble distinguishing the difference between the value they derive as individuals from consuming high quality news and current affairs from the wider benefit to society of this being available to all licence fee payers. More than that, they are comfortable about making judgements about the level of public value likely to be created by one kind of investment versus another. (Diane Coyle and Chris Woolard’s book Public Value in Practice provides a detailed account of the BBC’s experience.)
Although the idea of public value was developed to help the public sector it’s clear that the private sector is a vital source of it as well. The banking sector – for all its current travails and poor reputation – is a case in point. Banking shares some of the characteristics of the public utilities. Without the efficient flow of money around the system our economy would go into cardiac arrest and that, of course, was the great fear in the months following the collapse of Lehmann Brothers. And this, of course, underlines why last week’s news that the banks are undershooting on their lending targets while at the same time paying out very large sums in remuneration to some of their top executives is so damaging. Failure to lend means not just trouble for the businesses that need loans but a whole host of wider impacts in terms of depressed economic activity and failure to create new jobs. It’s this very failure to create public value that makes the high returns for bank chief executives look as if the banking sector has lost sight of what it is there to do – as if personal economic gain is all that drives it.
This is where the key issue of legitimacy comes into play and why public value is of such importance to commercial organisations as much as public sector ones. As Moore noted in his initial thinking, public sector managers have to secure legitimacy for their plans in the form of authorisation whether it be from politicians or directly from the public as without this they will not secure necessary funding. However, as he later argued the concept of legitimacy is no less relevant to the commercial sector. The hitherto “shareholder” model of capitalism has largely seen only two necessary sources of legitimacy – customers and investors. However, as Moore argues, there are others that might be termed “stakeholders” who have a key role in conferring legitimacy on an enterprise – employees, suppliers, distributors, local communities and activists such as environmental campaigners. While some may see the interests of such groups as often antipathetic to the generation of economic value, it is unarguable that such interests have a role in shaping the environment in which business operates whether it be through the political process in terms of law and regulation or more directly through the exercise of purchasing and labour power. Moore puts the stakeholder challenge like this:
“As part of a developing corporate strategy, a firm has to weigh the consequences of acting or failing to act in accord with the legal, moral, or practical standards that society has constructed for them – either through law, or through the creation of social expectations backed by the threat of economic and political damage to the firm if they do not comply. In short, the firm has to be concerned about the social and political legitimacy of its strategy as well as its economic potential. But the point is that executives could risk their legitimacy. Whether they are or are not made aware of these risks, and how they balance them is governed at least in part by how they are advised to think about corporate strategy.”
This is not a question of cravenly conceding economic value in the interests of keeping “stakeholders” happy as some who subscribe to the “shareholder” model of capitalism might argue. Instead, it’s a question of balancing competing factors in the interests of long-term competitive advantage. If, as seems likely in this post-financial crisis world, the stakeholder is about to assume a much more significant role then business leaders would be best advised to consider the public value their enterprises create. Having a convincing story for how they go about maximising this value – while at the same time minimising the more socially undesirable impacts of their activity – is likely to be a crucial strategic tool in shaping the environment in which they operate and enhancing their reputation in the eyes of customers, investors and shareholders alike.
Image courtesy Bex Walton.