Executives ignore sociopolitical debates at their own peril. – First of two installments

Executives with lingering doubts about the importance of sociopolitical issues to business will surely be convinced by this year's eye-catching McKinsey Quarterly survey on the topic. It's not just that an overwhelming majority of the respondents acknowledged a wider role for corporations than just maximizing investor returns, though this finding is remarkable in itself. More striking still is the way participants in our online poll saw environmental concerns, the offshoring debate, data protection, and other sensitive matters as potential threats to the creation of value and frankly conceded that their companies handled these issues poorly.

Although lobbying—often behind closed doors—is as old as business itself, high-level and concerted corporate activism in the social and political arena has been conspicuous by its absence. That deficiency, executives tell us, is the result of short- term financial pressures, a lack of familiarity with the issues, and the sense that specialists in the public- affairs and legal departments handle this sort of thing.

Such thinking, we believe, is dangerous and wrong headed. Business leaders must become involved in sociopolitical debate not only because their companies have so much to add but also because they have a strategic interest in doing so. Social and political forces, after all, can alter an industry's strategic landscape fundamentally; they can torpedo the reputations of businesses that have been caught unawares and are seen as being culpable; and they can create valuable market opportunities by highlighting unmet social needs and new consumer preferences.

The challenge is to find a way for companies to incorporate an awareness of sociopolitical issues more systematically into their core strategic decision- making processes. Companies must see the social and political dimensions not just as risks—areas for damage limitation—but also as opportunities. They should scan the horizon for emerging trends and integrate their responses across the organization, so that the resulting initiatives are coherent rather than piecemeal.

The social and managerial challenge

Businesses have never been insulated from social or political expectations. What's different today is the intensifying pressure and the growing complexity of the forces, the speed with which they change, and the ability of activists to mobilize public opinion. Yet even as the social contract evolves, the typical corporate response appears to have become increasingly flat footed.

The changing social contract

Companies have always had a contract with society. The contract embraces not just direct stakeholders (such as consumers, employees, regulators, and shareholders) but also, and increasingly, a broader set of stakeholders (such as the communities where companies operate, the media, academics, and the nonprofit sector).

Part of this contract is formalized in laws and regulations, and violating them has obvious legal ramifications. Part of it is semiformal: the stakeholders' implicit expectations, which if ignored can bring about swift action. Most multinationals in the United States, for example, are expected to maintain at least some labor standards along their global supply chains, even if they aren't legally required to do so. Violations of that semiformal contractual obligation can seriously harm a company's reputation as well as consumer demand for its products. Ask Nike.

This social contract is by nature a fluid one. Often, issues that lead to legislation start out as semiformal expectations about business; likewise, some aspects of the formal contract are "deregulated." Companies in Europe, for example, are still expected to uphold certain employment guarantees with their workers, despite their greater flexibility in deploying labor.

More challenging are the "frontier" issues that have not yet entered the formal or semiformal contracts but could, over time, become social expectations—something that business might not even realize. Take obesity. It had always been widely believed that the responsibility for avoiding it lay with individuals, who choose what they eat, not with the companies that make or sell fattening products. But the blame is shifting, much as the debate around tobacco shifted the responsibility from individuals to an industry perceived to be aggressively marketing addictive products. Food companies may not be forced to modify the fat and sugar content of their products, but the momentum on this issue could already be so great that lawmakers or regulators will step in and formalize social expectations by imposing new legal restraints.

Rising expectations Increasingly, a company's sources of long-term value (for example, its brand, talent, and relationships) are affected by a rising tide of expectations among stakeholders about the social role of business. Two forces are colliding: an emerging set of sociopolitical megatrends (Exhibit 2) that are upending the lives of people, communities, and societies, as well as ever- more-powerful stakeholders wielding wide influence.

Continued Next Week:

Source: McKinsey & Company, 2006