Magazine article Stanford Social Innovation Review

A New Era for Business

Magazine article Stanford Social Innovation Review

A New Era for Business

Article excerpt

More and more business leaders recognize that their company's future is increasingly intertwined with the needs and demands of society. What many executives don't understand is how best to manage that changing relationship. In this article, McKinsey & Company consultants provide a model for incorporating sociopolitical issues into the strategic decision-making process.

BUSINESSES HAVE NEVER BEEN INSUlated from expectations about their social responsibilities. What is different today is that the issues are far more numerous, complex, global, and fast-changing than ever before. Global warming, childhood obesity, unfair labor practices, air and water pollution - the list goes on and on. The impact that these issues can have on a company's future has also increased - to potentially devastating levels - because today's social activists have more avenues and tools to influence and mobilize public opinion around hot-button issues.

Some business executives are resisting these trends, arguing that a company's obligation to society is only to provide the best return possible for its shareholders. But more and more executives are taking a strategic approach to the problem, recognizing that the short- and long-term interests of their company and its shareholders are increasingly intertwined with the interests of society, and that the best response is to become more engaged with the issues and activists in the nonprofit and public sectors.

We believe that business does have a strategic interest in becoming more aware of and engaged in sociopolitical debate and issues. The reasons are twofold. First, social and political forces can fundamentally alter an industry's strategic landscape and even torpedo the reputations of businesses that have been caught unawares or are seen as being culpable in creating the problem. second, companies that are engaged can significantly benefit from these trends, by creating new products, services, and markets for unmet social needs, as well as for new consumer preferences.

The challenge that business leaders face is to find ways to incorporate an awareness of sociopolitical issues more explicitly and proactively into their strategic decision-making processes. Companies must see social and political dimensions not just as risks - areas for damage control - but also as business opportunities. They need to scan the horizon for emerging trends and integrate their responses across the organization, so that the resulting initiatives are coherent rather than piecemeal. (see sidebar to the left for examples of how the sociopolitical concerns of executives and consumers diverge.)

Having worked with many companies around the world, we have learned which areas companies need to master in order to understand and manage these complex sociopolitical issues. We call these the Five R's: risk renewal, regulation, relationships, and reputation. We have also learned that managing these issues is not a peripheral task to be relegated to public relations or corporate social responsibility departments. Instead, it requires leadership by the CEO and coordination throughout the organization. To succeed in today's smaller, faster-changing, more complex world, business leaders must systematically incorporate an awareness of sociopolitical issues into their strategic decision-making processes.

The Social Contract

Corporations have always had complex relationships with the rest of society. These relationships embrace not only direct stakeholders (shareholders, consumers, government regulators, and employees), but also, and increasingly, a broader set of stakeholders throughout the rest of society (such as the communities where a company operates, the media, the nonprofit sector, and others).

One way to understand these relationships is to think of them as social contracts - sets of laws, regulations, and obligations that guide corporate behavior. The political philosophers Thomas Hobbes, John Locke, and Jean-Jacques Rousseau first wrote about social contracts, describing the relationship between individuals and society. …

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