Public-Private Partnerships

Stephen DeAngelis

June 29, 2006

Even though public-private partnerships have been around for hundreds of years, many such relationships were exploitative (think about the role of the British and Dutch East India Companies in carrying out their respective governments’ colonial foreign policies in return for trade monopolies). Slowly corporations have come around to the idea that partnering with governments in a socially responsible way also makes good business sense. I recently posted a blog about the letter to the editor of the Financial Times written by Samuel Palmisano, Chairman/CEO of IBM, [Globalization and Resilient Enterprises] in which he discusses the need for multinational corporations to transform into globally integrated enterprises which help strengthen the nations in which they operate.

An article in today’s New York Times, discusses why companies are helping developing nations deal with their malaria problems [“Business Joins African Effort to Cut Malaria,” by Sharon LaFraniere]. While there is certainly some altruism involved, there are also good business reasons:

With malaria spread across southern Mozambique, executives at the international mining company Billiton expected some workers to call in sick as it began building a massive new aluminum smelter amid the cornfields here. What they did not expect was that nearly one in three employees would fall ill — 6,600 cases in just two years. And they certainly did not expect 13 deaths, not after the company had built a medical clinic, doused the construction site with pesticides and handed out bed nets to thwart malaria-carrying mosquitoes. “You can imagine, it was a huge disaster,” said Carlos Mesquita, the general manager. “We could not deal with that level of absenteeism, and we would have had more fatalities. If we didn’t treat malaria we could not operate.”

With over a billion dollars of investment on the line, the company realized that its efforts could not be confined to prophylactic efforts inside of its fences. Working beyond its boundaries, however, required the approval and cooperation of the government.

And so one of the world’s biggest aluminum producers joined in an exceptional partnership with the governments of three countries and with other businesses to take on malaria systematically across a broad region. Six years later, the scorecard is in. Amazingly, malaria is losing. Wielding a combination of new medicines, better bed nets, old-fashioned pesticides and computer analysis to clean up the most afflicted areas, the smelter and its partners in business and government have turned malaria in one of its former hot spots into a manageable threat. The results are a rare bright spot in fighting a parasitic killer that has thrived in the face of flawed, inadequate programs by African nations and international organizations.

Yesterday I mentioned efforts in this area by the Bill and Melinda Gates Foundation and how communities of practice, supported by a Development-in-a-Box approach, can start to make a difference without having to create some large, ineffective oversight group. Some companies caught the vision of socially responsible public-private partnerships early on. For example, I have mentioned Timberland before. I noted that the company has tried to reduce its “carbon footprint” by strategic use of alternative futures and by changing the feed used by cattle (whose hides are used to make Timberland boots) so that they release less methane (we’re all grateful!) Timberland has been around for 30 years and its executives believe that being socially responsible is good for business as well as good for society.

Timberland allows workers to take a full week off each year, with pay, to help local charities. It also offers four paid sabbaticals each year to workers who agree to work full-time for up to six months at a nonprofit. And it shuts down operations for a day each year so its 5,400 workers can take part in various company-sponsored philanthropic projects. [“Doing Good and Doing Well at Timberland,” by Joseph Pereira, Wall Street Journal, 9 September 2003]

Timberland executives believe they have been able to retain good employees because they are not asked to leave their ideals at the door. Getting workers involved wasn’t as easy as one might think. Employees were concerned those who volunteered would be perceived as employees with too little to keep them busy and, thus, prime targets for being made redundant. To counter this perception, the company established a “community enterprise” department to find appropriate projects that would appeal to workers and to stress the company’s sincerity about wanting its employees to get involved in the community. It worked. A 2003 company indicated that more than half of its employees indicated that community service opportunities was the main reason they worked there. Timberland, of course, operates in Boston not Botswana. The question is whether this model can be used in the developing world as well.

A December 2002 Harvard Business Review article by Michael Porter and Mark Kramer [“The Competitive Advantage of Corporate Philanthropy”], notes that “executives find it hard, if not impossible, to justify charitable expenditures in terms of bottom-line benefit.” Therefore, the article reports, companies look for “strategic philanthropy” opportunities. Porter and Kramer assert, however:

What passes for “strategic philanthropy” today is almost never truly strategic, and often it isn’t even particularly effective as philanthropy. Increasingly, philanthropy is used as a form of public relations or advertising, promoting a company’s image or brand through cause-related marketing or other high-profile sponsorships.

They talk about Phillip Morris who made $75 million in charitable contributions in 1999 and then spent $100 million in advertising patting themselves on the back for their charitable contributions. Porter and Kramer were trying to persuade the corporate world that socially responsible public-private partnerships are indeed good for business. The logic of that premise is not clear to everyone. Porter and Kramer point to the comments by the respected economist Milton Friedman that the only “social responsibility of business” is to “increase its profits.” Friedman’s argument was that shareholders should be able to decide how to spend profits not corporate executives. Porter and Kramer attack two underlying assumptions they believe motivate corporate decisions about philanthropy:

The first is that social and economic objectives are separate and distinct, so that a corporation’s social spending comes at the expense of its economic results. The second is the assumption that corporations, when they address social objectives, provide no greater benefit than is provided by individual donors.

The article that started this post shows pretty conclusively that social spending and economic results are often intimately linked. As Porter and Kramer put it:

Corporations can use their charitable efforts to improve their competitive context — the quality of the business environment in the location or locations they operate. Using philanthropy to enhance context brings social and economic goals into alignment and improves a company’s long-term business prospects. … In addition, addressing context enables a company not only to give money but also to leverage its capabilities and relationships in support of charitable causes. … Philanthropy can often be the most cost-effective way for a company to improve its competitive context, enabling companies to leverage the efforts and infrastructure of nonprofits and other institutions.

Leveraging “capabilities and relationships” sounds suspiciously like employing communities of practice to obtain the greatest impact. As for the second assumption, I think Warren Buffet’s comments about why he waited to give away his money are pertinent here. Basically he said that if had decided to give away his money 10 or 20 years ago, charity would have received millions of dollars, by waiting they are going to receive billions of dollars. By allowing stock holders to decide whether or not to make personal charitable contributions, the beneficial effects of such giving are diluted. I don’t want to leave the impression that corporations aren’t giving, some are. Forbes provides a list of the most generous corporate givers [Forbes table].

I want to get back to the question of whether public-private partnerships can work in the developing world. Porter and Kramer provide some answers. They talk about how philanthropy can influence competitive context by addressing “factor conditions” and “demand conditions.” In their discussion of factor conditions, they write:

Achieving high levels of production depends on the presence of trained workers, high-quality scientific and technological institutions, adequate physical infrastructure, transparent and efficient administrative processes (such as company registration or permit requirements), and available natural resources. All are areas that philanthropy can influence. … Philanthropic initiatives can also improve the local quality of life, which benefits all citizens but is increasingly necessary to attract mobile employees with specialized talents. … Philanthropy can also improve inputs other than labor, through enhancements in, say, the quality of of local research and development institutions, the effectiveness of administrative institutions such as the legal system, the quality of physical infrastructure, or the sustainable development of natural resources.

For example, a company that improves roads to facilitate the transportation of its products has concomitant beneficial effects. Partnering with the local government could make such projects cheaper and easier. As for demand conditions, Porter and Kramer write:

Demand conditions in a nation or region include the size of the local market, the appropriateness of product standards, and the sophistication of local customers. Sophisticated local customers enhance the region’s competitiveness by providing companies with with insight into emerging customer needs and applying pressure for innovation. … Philanthropy can influence both the size and quality of the local market.

Porter and Kramer tacitly support a Development-in-a-Box approach by noting:

The rules, incentives, and norms governing competition in a nation or region have a fundamental influence on productivity. Policies that encourage investment, protect intellectual property, open local markets to trade, break up or prevent the formation of cartels and monopolies and reduce corruption make a location a more attractive place to do business. Philanthropy can have a strong influence on creating a more productive and transparent environment for competition.

In other words, a standards-based approach to development can benefit from corporate philanthropy. They go on to say, “Corporate philanthropy is ripe for collective activity. By sharing the costs with other companies in its cluster, including competitors, a company can greatly diminish the free rider problem.” Development-in-a-Box is offers a way for competitors to join with others to make a difference. Porter and Kramer assert:

The greater advances come not from incremental improvements in efficiency but from new and better approaches. The most powerful way to create social value, therefore, is by developing new means to address social problems and putting them into widespread practice. The expertise, research capacity, and reach that companies bring to philanthropy can help nonprofits create new solutions that they could never afford to develop on their own. … Just as important as the creation of new knowledge is its adoption and practice. The know-how of corporate leaders, their clout and connections, and their presence in communities around the world create powerful networks for the dissemination of new ideas for addressing problems. Corporations can facilitate global knowledge transfer and coordinated multisite implementation of new social initiatives with a proficiency that is unequaled by most other donors.

Sounds to me like they are describing Development-in-a-Box supported communities of practice. I close with two further comments by Porter and Kramer:

As long as companies remain focused on the public relations benefit of their contributions, they will sacrifice opportunities to create social value. …There is no inherent contradiction between improving competitive context and making a sincere commitment to bettering society.