[CSR Monitor Vol.3] Factors Affecting Corporate Trust: Focusing on Creating Shared Value (CSV)

I. Introduction

The global financial crisis of 2008 exposed the limitations of the market, leading to an increased emphasis on concepts such as 'Capitalism 4.0' and 'sustainable development.' It has become crucial to achieve social innovation that enables citizens to be protected from social and environmental risks and live happily, through the fundamental resolution of social issues via cooperation between the market and the government.

In the past, corporations and governments operated with distinct goals of profit generation and public interest, respectively, maintaining an exclusive stance that their domains should not overlap. However, as social issues have become increasingly complex and diverse, it has become difficult to resolve them effectively through the traditional roles of government alone (Lee, M. S. et al., 2009). Consequently, corporations, possessing abundant capital and ideas, have begun to play a pivotal role in addressing social issues. This marks the advent of an era of governance, where the government, corporations, and even civil society collaborate towards the common goal of resolving social problems (Agranoff & McGuire, 2003).

As times change and various crises occur, expectations of the market, i.e., corporations, are growing. Initially, international organizations such as the ILO and the UN encouraged corporations to fulfill their social contributions and Corporate Social Responsibility (CSR). With the increase in standards and certifications related to social responsibility, such as ISO 26000, CSR has come to be accepted as an integral part of corporate management activities (Jang, Y. S. & Cho, H. J., 2013; Jeong, H. N., 2013). CSR involves corporations considering social and environmental goals alongside economic objectives, representing a progression from earlier arguments that a corporation's role was solely profit generation (Elkington, 1994; Steurer, 2010). In essence, corporate management activities become a significant driving force for social development.

In response to these trends, corporations are actively practicing social responsibility. While some corporations voluntarily fulfill their social responsibilities, governments also provide an indirect foundation for corporations to do so through various policies (Albareda et al., 2007). Ironically, however, corporations continue to be targets of criticism (Porter & Kramer, 2011). This issue is particularly severe in South Korea. Despite a more than twofold increase in average corporate social contribution expenditure per company, from the 5 billion KRW range between 2002 and 2005 to 14.07 billion KRW in 2011, public trust in corporations continues to decline. Furthermore, most citizens perceive that corporations engage in social responsibility solely for image enhancement (Jeong, H. N., 2013).

This report focuses on the aforementioned phenomenon, seeking to explore its causes and propose alternatives. To this end, it utilizes international survey results from GlobeScan, the East Asia Institute, and the Social Enterprise Research Center to demonstrate the shift in corporate management paradigms from CSR to Creating Shared Value (CSV), suggesting it as a potential solution for restoring corporate trust. This is because CSV, compared to CSR which has a strong philanthropic nature, is superior in terms of sustainability. In other words, to innovate society and ensure its effects are sustained, we must emphasize changing corporate management practices based on the CSV perspective.

II. Changes in Corporate Management Paradigms

Corporate management paradigms have evolved with changing times and environments, expanding from profit generation to Corporate Social Responsibility (CSR), and now to Creating Shared Value (CSV), which integrates these two concepts. Historically, corporations perceived profit maximization as the sole method for value creation, overlooking various factors that impact their long-term growth and survival, such as customers, natural resources, and local communities (Porter & Kramer, 2011; Jang, Y. S. & Cho, H. J., 2013). Even governments and civil societies viewed corporate participation in social problem-solving as exacerbating the issues. This reflects a perception that economic efficiency and social development are conflicting concepts.

However, profit maximization alone has reached its limits in securing corporate competitiveness. This is because the continuous tarnishing of corporate image and decline in trust due to the condoning of unethical practices for profit maximization have persisted. Consequently, Corporate Social Responsibility (CSR), which involves adhering to principles such as human rights, labor, environment, and anti-corruption as proposed by the UN, has emerged as part of sustainable management to ensure long-term competitiveness. Under pressure from the international community, many countries have actively implemented CSR (Campbell, 2007; Lim & Tsutsui, 2012; Jang, Y. S. & Cho, H. J., 2013). However, CSR, contrary to its intentions, has proven to be insufficient in addressing the core of social issues (Porter & Kramer, 2011). This is because corporations still perceive CSR as a separate activity distinct from their primary role of profit generation. Thus, a new approach to corporate management, 'Creating Shared Value (CSV),' has emerged.

Creating Shared Value (CSV) refers to creating social value through the generation of economic value, specifically corporate profits, thereby harmonizing corporate success with societal progress. This is not limited to corporate philanthropy or social contribution activities but aims to expand the overall volume of economic and social value. For instance, societal issues such as the depletion of natural resources or energy can increase corporate costs, motivating the development and innovation of new technologies or operational/management methods. These efforts to reduce costs and resolve societal problems contribute to enhancing corporate productivity and expanding the overall market. Ultimately, markets can be formed not only by economic demand but also by social demand (Porter & Kramer, 2011). In essence, CSV, grounded in the core corporate function of profit generation, enables sustainable social development and innovation. Consequently, corporations and even citizens worldwide increasingly recognize its importance.

This report examines the shift in corporate management paradigms toward CSV, based on international survey results from GlobeScan, the East Asia Institute (EAI), and the Social Enterprise Research Center. First, we will chronologically examine the proportion of countries that have chosen CSV—the pursuit of both economic and social value, requiring corporations to generate profits while establishing high ethical standards to build a better society—as a role for large corporations.

<Figure 1> Trend of Perception Change on Creating Shared Value (CSV) (%)

Source: GlobeScan, East Asia Institute, Social Enterprise Research Center RADAR 2013 International Survey (Q6t)

Comparing the results from 2001, 2006, 2008, and 2013, the countries with a high proportion of respondents indicating the importance of CSV in 2001 were primarily developed nations such as Australia (72%), Canada (50%), the United Kingdom (52%), and the United States (48%). In contrast, countries like Chile (29%), France (21%), India (20%), Nigeria (16%), Russia (25%), South Korea (28%), and Turkey (29%) showed lower levels of awareness regarding CSV. However, over time, awareness of CSV tended to increase in most countries, excluding Chile, Nigeria, and Russia. Notably, countries that showed a decline in 2006 and 2008 exhibited an upward trend by 2013. Conversely, in the case of South American countries with unfavorable economic conditions, such as Brazil, Chile, and Mexico, along with Nigeria and Russia, awareness of CSV actually decreased by 2013. Nevertheless, as shown in <Figure 2>, the perception of CSR has rapidly increased, indicating that most countries recognize the importance of the social role of corporations.

<Figure 2> Trend of Perception Change on CSR (%)

Source: GlobeScan, East Asia Institute, Social Enterprise Research Center RADAR 2013 International Survey (Q6t)

Meanwhile, the changes in the proportion of countries agreeing on the necessity of government regulation for corporate social responsibility are shown in <Figure 3>.

<Figure 3> Trend of Perception Change on CSR Regulation (%)

Source: GlobeScan, East Asia Institute, Social Enterprise Research Center RADAR 2013 International Survey (Q8t_dt)

Generally, the proportion of agreement on government regulation of corporate social responsibility has shown an increasing trend over time. In particular, South Korea showed the largest increase from 2002 to 2013. As of 2013, South Korea also exhibits the highest approval rate for government regulation of CSR. Excluding a few European countries like the United States, France, and Germany, where CSR is well-implemented through voluntary corporate efforts, most countries showed majority approval for government CSR regulation across the surveyed years. This implies limitations in the current implementation of Corporate Social Responsibility (CSR). In practice, people believe that the government should intervene and regulate it because they do not feel the tangible effects of CSR that they expect. In South Korea's case, laws such as the Industrial Development Act, the Small and Medium Enterprise Basic Act, and the Small and Medium Enterprise Promotion Act mandate corporations to fulfill their social responsibilities. Furthermore, government ministries are actively pursuing policy initiatives to promote corporate social responsibility. Despite this, the fact that the approval rate for government CSR regulation is highest in South Korea indicates that corporate social responsibility falls short of public expectations. In other words, while the public expects corporations to actively address social issues, corporations are continuing with philanthropic and charitable social contribution activities. This is not solely a South Korean issue and signifies that corporate social responsibility alone does not significantly contribute to resolving social problems.

Amidst these realities, corporations are introducing and implementing Creating Shared Value (CSV), a new management approach where businesses and society can achieve a win-win outcome, moving beyond social responsibility. In other words, the management paradigm is shifting from corporate social responsibility (CSR) to Creating Shared Value (CSV). Particularly, as discourse emerged that Creating Shared Value (CSV), as argued by Porter & Kramer (2011), could serve as a new alternative to the crisis of capitalism, many corporations began to shift their management strategies from social responsibility (CSR) to Creating Shared Value (CSV). Based on the aforementioned facts, it can be understood that the role of corporations is progressing from profit generation to social responsibility, and now to Creating Shared Value (CSV).

III. Corporate Trust and Creating Shared Value (CSV)

As the limitations of corporate social responsibility are pointed out, the paradigm of corporate management is evolving towards CSV. Historically, corporations have fulfilled their social responsibilities through philanthropic activities such as helping the less fortunate and volunteering. Large corporations, in particular, have actively practiced social responsibility, with average annual expenditures per company exceeding 14 billion Korean won as of 2011. As seen in <Table 1>, the average social contribution expenditure per company has been increasing annually. Specifically, the average social contribution expenditure per company has surged approximately 2.6 times from 2002 to 2011. Despite this, as shown in <Figure 4>, the trust in large corporations in South Korea has been steadily declining and was the lowest among other countries as of 2013.

<Table 1> Average Social Contribution Expenditure of Companies Participating in the FKI Survey

Source: Reconstructed from Jeong Han-wool (2013).

<Figure 4> Trend of Change in Large Corporation Trust (%)

Source: GlobeScan, East Asia Institute, Social Enterprise Research Center RADAR 2013 International Survey (Q1At_bt)

Generally, developed countries such as Canada, the United Kingdom, and the United States, as well as developing countries like India, Indonesia, and Nigeria, showed high levels of trust in large corporations. Despite South Korea's advancement to developed country status, why is its trust in large corporations lower than that of developing countries? And why does trust in corporations not increase despite significant expenditure on social contributions? This report seeks to identify the cause in the role of corporations. As explained earlier, corporate social contributions and CSR alone cannot meet the expectations of the public, nor can they adapt to the changing corporate management paradigm.

To examine this in more detail, an empirical analysis was conducted based on the international survey results from GlobeScan, the East Asia Institute, and the Social Enterprise Research Center. Specifically, to identify the corporate roles that enhance corporate trust, an exploratory pooled time-series regression analysis was conducted using data from 2001 to 2013 for a total of 29 countries. Pooled time-series regression analysis is an analytical method that simultaneously conducts time-series and cross-sectional analyses, offering the advantage of resolving the issue of small N (Ryu Yeon-gyu & Baek Seung-ho, 2010).

The variables used for the pooled time-series regression analysis are presented in <Table 2>. First, the dependent variable was 'trust in large corporations,' calculated by summing the proportions of respondents who answered 'trust a lot' or 'trust somewhat' to the question 'Do you trust large corporations?'. The independent variables were set as the proportion of respondents who chose 'Creating Shared Value (CSV)'—emphasizing profit generation while establishing high ethical standards to build a better society—the proportion who chose 'Social Responsibility (CSR)'—emphasizing establishing high ethical standards to build a better society—and the proportion who chose 'Profit Generation'—focusing on generating profits. Control variables included GDP per capita and a lagged dependent variable. GDP per capita is highly useful for understanding a country's economic level (Park Myung-ho et al., 2009). This report uses data from the World Bank presented in current US dollars, which were log-transformed for normalization. Generally, countries with higher economic levels tend to have more active corporate activities and better performance, thus increasing corporate trust. Furthermore, the issue of autocorrelation was addressed by controlling for the level of trust in large corporations from the previous survey year as a lagged dependent variable.

<Table 2> Variable Measurement

Note: Data for dependent and independent variables are from the GlobeScan, East Asia Institute, Social Enterprise Research Center International Survey (Q1At_bt, Q6t).

<Table 3> presents the basic statistical results examining the characteristics of the analysis sample. From 2001 to 2013, the average trust in large corporations across the 29 countries in the sample was 53.31%. The average proportion selecting CSV as the role of large corporations was 32.53%, CSR was 34.85%, and profit generation was 25.91%. On average, the proportion selecting CSR was slightly higher than that selecting CSV. The average GDP per capita for the 29 countries is approximately $17,881, but the GDP per capita ranges from $381 in the lowest-income country to $67,036 in the highest, indicating significant variation across countries.

<Table 3> Basic Statistical Results

Based on the variables above, a pooled time-series regression analysis was conducted on the corporate roles affecting corporate trust. The results are shown in <Table 4>.

<Table 4> Analysis Results

The analysis results indicate that countries with a higher proportion of respondents choosing CSV as the role of large corporations show a gradual increase in corporate trust. For example, in France, the proportion selecting CSV increased by 18 percentage points from 21% in 2001 to 39% in 2013, while trust in large corporations rose by 10 percentage points from 42% in 2001 to 52% in 2013. In Indonesia, the proportion selecting CSV surged by 21 percentage points from 30% in 2001 to 51% in 2013, accompanied by a 15 percentage point increase in trust in large corporations, from 67% in 2001 to 82% in 2013. Conversely, in Mexico, the proportion selecting CSV decreased from 32% in 2001 to 13% in 2013, and trust in large corporations plummeted from 67% in 2001 to 43% in 2013. These findings suggest that CSV has a significant impact on trust in large corporations over time. However, the possibility of reverse causality, where higher trust in large corporations leads to a higher proportion of selecting CSV, cannot be ruled out. Therefore, an additional analysis was conducted with a one-year lag between the dependent and independent variables and control variables. The results are presented in [Appendix 2] and are consistent with the findings in <Table 4> regarding the relationship between the main independent and dependent variables. That is, countries with higher public perception of CSV showed a gradual increase in corporate trust. High public perception of CSV implies that the logic of CSV has become a universally accepted norm, suggesting the need for corporations to adapt their roles accordingly. Ultimately, CSV is acting as a significant factor in enhancing corporate trust. On the other hand, the proportion of respondents choosing CSR or profit generation as the role of large corporations does not have a significant impact on corporate trust. Therefore, to enhance corporate trust, it is necessary to take the lead in solving social problems by developing revenue models that can create social value.

As discussed earlier, corporate social responsibility alone has limitations in addressing social problems. The most common examples of CSR include employee volunteer activities, donations to the needy, and support for arts and sciences. Such one-sided donation of corporate resources is not only limited in terms of sustainability but also provides only temporary effects for the beneficiaries. In particular, CSR activities that resemble charity are perceived as additional costs by corporations, making it difficult to pursue them continuously in the long term. Consequently, even with extensive efforts in CSR, public perception does not improve because CSR does not fundamentally solve social problems. Furthermore, since CSR activities have been confined to a select few marginalized groups, the majority of the public does not experience their tangible benefits. These factors combine to create a public opinion that CSR is merely a strategy for image improvement.

Til and Gurin (1990) argued that social contribution activities should evolve from 'charity' to 'philanthropy.' While 'charity' refers to donation activities based on altruism, 'philanthropy' refers to organized and planned activities focused on improving the quality of human life. Moreover, while the motivation, or mindset, is important for 'charity,' the outcomes are crucial for 'philanthropy' as it aims to fundamentally improve and enhance the quality of human life (Hong Hyun-min, 2013). This ultimately implies that social contribution activities should not end at the charitable level of helping the less fortunate but should lead to CSV, which expands the overall volume of economic and social value to enrich the lives of all citizens by fundamentally resolving social problems.

A company's survival and growth depend on its consumers, i.e., the public, who use its products or services. Therefore, it is necessary to solve the problems they face. Consequently, a company's goals or management strategies should not be confined to profit generation or charitable social contribution activities; they should macroscopically improve the quality of public life and lead to social and national development. To achieve this, companies must realize CSV, where profit-generating activities lead to the creation of social value. This is excellent in terms of sustainability as it resolves social problems while simultaneously generating corporate profits. It is a particularly necessary strategy in the context of South Korea, where corporate trust is exceptionally low.

Furthermore, we observed a trend of steadily increasing corporate trust in countries that previously had high trust, and a more pronounced increase in corporate trust in countries with lower GDP per capita. Developing countries often face severe social problems such as poverty and crime/safety issues, but the government's capacity to address these is insufficient. Therefore, the role of corporations in complementing this is crucial. Driven by these practical needs, corporations actively attempt to adapt their roles to meet public expectations. The trend of increasing awareness of CSV in India shown in <Figure 1>, and the fact that 51% of respondents in Indonesia considered CSV important in 2013, support this. These combined efforts contribute to increased trust in corporations.

In modern society, the expected roles of corporations are becoming increasingly diverse. Unlike the past, where the roles of government, corporations, and civil society were clearly delineated, there is an expectation that each entity will fulfill new roles in addition to their inherent ones, with the overarching common goals of sustainable development and social innovation. Therefore, collaboration among government, corporations, and civil society is crucial. In particular, corporations can gain high public trust and lay the foundation for sustainable growth by actively realizing CSV and addressing social problems.

IV. Case Studies of Creating Shared Value (CSV)

CSV is a corporate management strategy that fundamentally resolves social problems, complementing the limitations and shortcomings of CSR, thereby enabling social innovation and sustainable national development. Consequently, when corporations actively implement CSV, they can positively shift public perception and enhance trust.

Although CSV is a recently emphasized concept and may be unfamiliar, its examples can be found around us. This report will focus on examples of social enterprises, which are organizations with the specific purpose of establishing and promoting CSV. A social enterprise is an organization that produces and sells goods or services to realize social value, such as benefiting local communities (Shim Chang-hak, 2007). In South Korea, the 'Social Enterprise Promotion Act' enacted in 2007 led to the establishment of a large number of social enterprises in a short period. While there were only about 50 social enterprises in 2007, this number reached 1,012 as of the end of December 2013 (Social Enterprise Promotion Agency website). Among these, we will examine 'Happy Narae,' a leading social enterprise that supports other social enterprises and thus pioneers CSV, as a representative case.

Happy Narae originated from 'MRO Korea,' established in 2000 through a partnership between Grainger, the largest MRO (Maintenance, Repair, and Operations) supplier in the United States, and the SK Group. MRO Korea achieved sales of over 100 billion Korean won in 2010 and over 150 billion Korean won in 2012 through transactions with SK affiliates. In August 2011, the SK Group declared its intention to convert 'MRO Korea' into a social enterprise. Two years later, in July 2013, it obtained social enterprise certification from the Ministry of Employment and Labor.

Upon its conversion to a social enterprise, the company name was changed to 'Happy Narae,' with the vision of being 'the nation's best Total Service Provider creating social and customer value.' It is establishing a new mechanism in the distribution ecosystem through the harmonization of economic and social value. Happy Narae handles MRO materials—factory supplies, construction materials, office supplies, communication equipment, and facilities management supplies—which are non-strategic indirect materials necessary for corporate operations and product manufacturing, excluding raw and subsidiary materials directly used in product production.

<Figure 5> Happy Narae Biz Model Concept

Source: Happy Narae website http://www.happynarae.co.kr/

As shown in <Figure 5>, Happy Narae realizes corporate value such as cost reduction through economies of scale and enhanced profitability by expanding its MRO supply base. Simultaneously, it creates social value in the following three dimensions. First, by purchasing products from small and medium-sized enterprises (SMEs) and social enterprises, it fosters the sustainability of social enterprises and promotes win-win cooperation between large and small businesses. Most importantly, by prioritizing the purchase of goods from social enterprises and socially disadvantaged businesses (e.g., businesses employing people with disabilities), it enables the sustainable growth of social enterprises. It also contributes to improving the quality of life for vulnerable groups by employing them to support their economic self-reliance. Second, profits generated from sales are used to enhance the competitiveness of social enterprises through cost reduction, marketing channel support, and management consulting, or are channeled back into society, thereby creating social value. Furthermore, Happy Narae strives to pursue 'contribution activities where participants are happier' with the goals of 'participation' rather than 'charity' and 'continuous value creation' rather than 'one-off events.' Notably, approximately 20% of its employees participate in pro bono activities, and pro bono work is conducted with 17 out of 55 partner social enterprises. By actively practicing pro bono activities, where knowledge and skills acquired through their professions are provided for social and public purposes, they contribute to enhancing the competitiveness of social enterprises (Happy Narae website). In this manner, Happy Narae leads the realization of CSV, enriching the lives of stakeholders through profit generation and enabling the happiness of all its members.

CSV is a management strategy that can be practiced not only by social enterprises but by all corporations. With creativity and technological capability, any company can easily solve social problems through CSV. Kotler (2010) explains that modern society has evolved from Market 1.0 (industrialization) centered on 'reason' and Market 2.0 (information age) centered on 'emotion' to Market 3.0, centered on 'co-creation of value.' In other words, it has evolved into an era of participation where collaboration among diverse stakeholders is fundamental. In line with these changes, corporations must create a sustainable society by driving social innovation through CSV, which harmonizes corporate, consumer, and societal values (Jang Yong-seok & Cho Hee-jin, 2013; Chosun Ilbo, 2013). Furthermore, the government, sharing the common goal of solving social problems, must provide continuous support to enable corporations to voluntarily pursue CSV.

V. Conclusion

This report has explained the importance of CSV based on the international survey results from GlobeScan, the East Asia Institute, and the Social Enterprise Research Center. The main findings are summarized as follows:

First, it was found that the corporate management paradigm has evolved from profit generation to social responsibility (CSR) and further to CSV. Examining the trend of perception change regarding CSV, in the early 2000s (2001), awareness of CSV was high primarily in developed countries. However, over time, awareness of CSV increased in most countries, excluding Chile, Nigeria, and Russia. Additionally, the proportion of agreement on government regulation of CSR showed an increasing trend in most countries over time. South Korea, in particular, showed the largest increase from 2001 to 2013, which is evidence that the CSR pursued thus far has not been effective in solving social problems. In this situation, the management paradigm is shifting towards emphasizing CSV, which offers a win-win outcome for both corporations and society.

Second, focusing on the fact that South Korea still has low corporate trust despite its active social contribution activities, a pooled time-series regression analysis was conducted on a total of 29 countries from 2001 to 2013 to propose the necessity of changing the corporate role. The analysis results showed that corporations realizing CSV enhance corporate trust, whereas focusing on CSR or profit generation has no impact on corporate trust. These findings demonstrate the limitations of corporate social contribution activities, which have been provided philanthropically, in terms of sustainability. They also signify that the expectations of the public, who anticipated corporations to solve social problems, have not been adequately met. Therefore, to increase public trust in corporations, CSV must be actively realized.

Third, although CSV was emphasized by Porter & Kramer (2011) in 2011, its examples have existed for a long time and can be found around us. Social enterprises, which aim to realize CSV by their very establishment, are a prime example of its promotion. Among these, the case of 'Happy Narae,' a social enterprise that leads CSV by supporting other social enterprises while realizing corporate value, was examined in detail.

The significance of this report lies in identifying a solution to the persistent problem of low corporate trust in South Korea by examining changes in the corporate role. It is also meaningful in that it has revealed the limitations of CSR in enhancing corporate trust in terms of sustainability. To meet the demands of modern society, a transition to CSV is urgently needed, where corporations create social value through profit generation, thereby fundamentally resolving social problems. This requires restructuring the entire corporate framework—including vision, goals, strategies, and culture—to enable CSV realization. Furthermore, active government support and collaboration from civil society are essential to allow corporations to fully leverage their capabilities.

The arguments and content of this report represent the personal opinions of the author and are not indicative of the official position of the collaborating research institutions, the Social Enterprise Research Center and the East Asia Institute. When citing data from this report, please attribute it to the 'GlobeScan, East Asia Institute, Social Enterprise Research Center Survey'.