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

Blurring boundaries between responsibilities and laws

It is increasingly unclear who should provide basic social services (eg, pensions, public-health services, school infrastructure), regulate business and personal behavior (eg, self-regulation vs government oversight), and be accountable for protecting rights, public goods, and resources.

What it means for business (selected examples):

• Responsibility for obesity shifting from individuals to companies in food and beverage sectors
• Provision of insurance benefits shifting from employer to employee

Since 1990, more than 100,000 new citizens' groups have been established around the world. Even in China, a country not known for freedom of political expression, the number of social protests increased from just under 10,000 in 1993 to more than 58,000 in 2003.1 The balance of power has shifted in favor of individuals and small single-issue groups increasingly armed with tools and tactics that can easily be deployed through the Internet. Trust in nongovernmental organizations (NGOs), citizens' groups, and online information sources has risen as inexorably as faith in business—Enron, WorldCom— has declined.

Management's slow reaction

Large organizations must shift their thinking in this area. Typically, businesses are taken by surprise when faced with negative press and stakeholder pressure. After all, they provide plenty of benefits to society—products of good quality or low prices—and employ vast numbers of people. Yet the rising tide of expectations means that companies must now strive to anticipate and understand those expectations and to embed them in their business strategy.

In the banking industry, for example, money center banks have been caught out by higher expectations. Criticized for making loans to companies that damage the environment, several have now pledged, in different ways, to restrict their lending and underwriting for industrial projects that would have an adverse environmental impact. These moves were largely reactions to protests coordinated by the Rainforest Action Network.

Companies are often on the defensive because CEOs and others in the top team find it difficult to wield what Harvard's Joseph Nye calls "soft forms of power"2 or to deal with players, such as NGOs, that trade in emotional arguments. By comparison with the hard skills and in-depth knowledge of most senior executives, sociopolitical issues require statesmanship, the fostering of relationships with stakeholders, and the nurturing of assets that could be called "reputational." Irritatingly for many executives, the arguments of pressure groups are frequently low on evidence. Furthermore, estimating the impact of most sociopolitical trends on corporate value requires executives to make assumptions and test sensitivities that MBA textbooks generally don't discuss.

How to manage these forces

We believe that the case for adopting a wholeheartedly strategic approach to the sociopolitical agenda is threefold. First, these forces can alter an industry's landscape in fundamental ways. In pharmaceuticals, for instance, social concerns about the cost and safety of the industry's products, as well as access to them, have made the regulatory environment tougher during the past decade. CEOs should take part in the debate so that they, their employees, and their investors have a stable set of rules.

Second, the immediate financial and longer-term reputational impact of social issues that backfire can be enormous. Ask Monsanto, which lost significant market value in the backlash against genetically modified organisms (GMOs) in the European Union, or ExxonMobil, whose cleanup costs for the Exxon Valdez oil spill amounted to $2 billion—on top of $5 billion in lawsuits.

Finally, new product or market strategies can emerge from changing social and political forces. Toyota Motor's success with the Prius can be attributed to a growing interest in environmentally friendly products. Unilever's innovative product offerings in developing countries, such as its Wheel detergent brand in India, were a response to the unmet needs of lower-income consumers there.

At the practical level, a company can take a number of steps aimed at making its approach to sociopolitical issues more strategic. It can develop "radar" systems to anticipate future risks and opportunities, master the range of options available for dealing with them, engage in the external debate, and ensure that the entire organization takes part in a coherent and forceful way.

Develop reliable radar

Sociopolitical issues and regulatory shifts may appear to come out of the blue. But the success of savvy newcomers such as Whole Foods Market confirms the fact that companies can indeed spot new trends and that early-warning signs of imminent change are plentiful. Not all issues, of course, evolve in a way that changes the social contract. Nonetheless, an early awareness of the concerns of NGOs and stakeholders enables companies to join and shape the debate before it turns against them—or at least to prepare themselves for turbulence ahead. Businesses that end up publicly fighting their stakeholders can well damage the brand or destroy the morale of their employees; much better to engage in a minor strategic foray than to be forced into a full-scale war.

In fact, our survey suggests that executives already know that they need to anticipate social pressure much more successfully. In our view, they should use systematic methods, including trusted techniques such as economic analysis and scenario planning, to evaluate the strategic impact of sociopolitical trends. If companies had tracked topics such as the obesity debate in the media, they would have become aware that reports on those issues were appearing more and more frequently in the mid- 1990s. But volume alone isn't a sufficient guide. New evidence from, say, a well-respected academic can quickly change the dynamics of an argument. The obesity debate is one of those that took a significant turn during the 1990s. We can measure the change by following articles in the New York Times (Exhibit 3): blame for the problem shifted from individuals (overeating, lack of exercise) to "environmental" causes, including corporate marketing. The new outlook was at least in part the result of research by Harvard's Walter Willett showing a link between childhood obesity and the marketing of junk food.

Large-scale problems generally start as small regional ones before Western NGOs champion them

Local antennae are also vital. Large-scale problems generally start as small regional issues before they are championed by larger, typically Western NGOs that have the clout and media contacts to launch global campaigns. The triggers are often practices—for example, working conditions that are below Western standards or "facilitation payments" to local government officials—that seem acceptable in some countries but not others. These practices may have a detrimental effect on corporate reputations when activists highlight and replay them for a global audience. What's more, the damage will be done notwithstanding any ethical policies that may have been promulgated throughout a business. Most companies become aware of the risks only at this late stage, when their direct stakeholders have already started to change their behavior. Mapping the landscape of different stakeholders is therefore important for a company's sociopolitical radar system. An understanding of the influence of various groups, their agendas, and their level of activism is a vital first step before a company chooses the best partners for its socio-political strategy.

Companies should aggregate this information to identify where they are most at risk and the economic implications of potential actions by stakeholders—particularly when they face a number of issues all at once. To evaluate what's at stake, companies must scan the whole value chain, looking, for example, at the way they source raw materials and make and sell their products. They should develop potential future scenarios that take into account the reaction of competitors, shifts in consumer patterns, and the possibility of litigation and regulation. Governments, for instance, may ultimately regulate the sale of fast food in schools through legislation or enhanced nutritional requirements for any foods sold in them (this issue is currently under debate in the California legislature). Alternatively, the success of several class action lawsuits could force the food and beverage industry to negotiate multiyear settlements. At the consumer level, educational campaigns and articles in the media will likely promote healthier options for food.

Place strategic bets

Armed with a more solid approach to the management of social issues, companies can not only reduce the risk to their reputations by anticipating new regulations but also create value by making the most of social and political shifts.

Indeed, companies should place bets on opportunities that emerge from their radar-tracking activities. Toyota's Prius is an example: the car's initial success puts the company in a position to move hybrid technology toward profitability faster than its competitors can as well as to augment its reputation by helping to address environmental issues—even if the jury is still out on the technology's effectiveness. GE's ecomagination initiative, reinforcing the company's commitment to clean products and reduced emissions, is a relatively low-cost, low-risk way of anticipating products and services that might be built on the back of emerging sociopolitical trends.

In general, more uncertain circumstances warrant a broad set of strategic options, and less uncertain circumstances warrant more narrow ones. To cope with emerging sociopolitical issues, we would expect companies to use a wide range of small investments that should be culled and narrowed as the issues move further into the explicit social contract with business. Given the unpredictable way socioeconomic trends develop, a strategy using a portfolio of initiatives is particularly relevant.3

Participate in the external debate

CEOs should also be prepared to take the lead in socioeconomic debates that could alter the structure of their industries and the rules of engagement in the long term. Business, in essence, involves a series of complex and continually evolving social trade-offs. In the power sector, the goals of low prices, energy security, and environmental friendliness are in permanent tension. So are the affordability of drugs, product safety, and innovation in pharmaceuticals. Business leaders need to raise the public's understanding of these unavoidable trade-offs.

The seminal 1997 speech of John Browne, BP's CEO, on global climate change—when he promised that BP would become an active, concerned participant in dealing with the problem of global warming—was notable as the first time a multinational corporation (other than a reinsurance company) had joined the emerging consensus on the topic. Bruce Bodaken, of Blue Shield of California, was the first health plan CEO to offer a proposal specifically for universal health coverage in his state.

To reduce uncertainty for all players, including investors, businesses need stable guidelines about the future evolution of their industries. An analogy can be made with the technological shifts that occur before industries adopt common standards. Industry leaders are in a strong position to ensure that a rational, evidence-based discussion of social and political trade-offs takes place. Without such a discussion the social contract remains unpredictable, investors suffer, and the social benefits of finding appropriate solutions are deferred.

Like any strategic shift, calls for change in the social contract involve a degree of risk. But if a company could be seen to have any responsibility for causing a sociopolitical problem, change is a no- regrets move, particularly for an industry leader that has the scale to alter the market. In some cases, change can confer a clear strategic advantage: for example, after the "blood diamonds" campaign,4 De Beers helped to develop a global certification system that enabled it to charge a premium for diamonds mined in conflict-free areas. Few companies get involved in a sociopolitical debate at the stage when they might be at risk for being ahead of the curve. The prevalent risk is not getting involved early enough.

Collaborate, cooperate

Many sociopolitical issues are intractable and can't be resolved by a single company or even an industry. The most successful companies see beyond competitive rivalries and look for collaborative ways both to meet social concerns and to find new ways for industries to create value. The difficulty is knowing when to work with others and when to go it alone.

Working across different organizations with different cultures can be time consuming and slow moving; Nike and other branded marketers took seven years to establish the Fair Labor Association to strengthen labor rights in the supply chain. Industry associations often lack the capabilities to tackle broad issues across a sector, as well as the power to mobilize enough support. That's why CEOs of mining companies recently set up a new body, separate from the existing industry association (the International Council on Mining & Metals), to take on the sociopolitical issues facing them.

Coca-Cola and PepsiCo have benefited from a common approach to marketing to children under 12: both have a clear policy not to market their core carbonated soft drinks to this group. For other collaborative efforts, the attractions are the potential revenue upside and the ability to share costs. As a rule, companies should consider responding on their own if they think they can capture the first-mover advantage (as BP did in acknowledging the dangers of global warming), if they are a target, or if a collective approach is too difficult or costly. Collaboration can be attractive if the stakeholders regard all companies as equally culpable, if regulation is imposed on an entire industry, or if isolated, individual action would clearly destroy value.

and coordinate

As our survey indicates, most business executives expect CEOs to take the lead in managing the corporate sociopolitical agenda. What's more important, though, is how well companies integrate such issues not just into the making of strategy but also across all dimensions of the business (Exhibit 4). A piecemeal approach runs the risk of misalignment— a CEO saying one thing, the rest of the company failing to translate these fine intentions into practical action. A company whose external-communications strategy emphasizes the search for more environmentally friendly products and processes, for example, probably won't make much headway if the company's government and regulatory functions are simultaneously fighting limits on carbon dioxide emissions.

Without a CEO's personal involvement, sensitivity to the sociopolitical agenda probably won't become embedded in an organization's culture and values. Neither will organizational coordination—always difficult to achieve across different divisions and functions—for the CEO plays a vital role orchestrating departments (such as PR, legal, regulation, and marketing) that ordinarily wouldn't act in concert. When CEOs such as BP's John Browne and GE's Jeff Immelt show their personal commitment, the response from stakeholders is remarkably positive.

Sociopolitical trends will increasingly affect the strategic freedom of companies, which just can't ignore the rising tide of expectations resulting from these trends and the power and influence of the stakeholders who mobilize around them. For stakeholders, companies are, in many ways, already agents of social change and must become much more deliberate in understanding the way they affect society. Businesses that follow the approach we outline and proactively understand and engage with social issues will benefit most. They will be better able to shape the social contract and to identify ways of creating value from the opportunities and risks arising from sociopolitical issues.

Source: McKinsey & Company, 2006