Book Excerpt from RESET: Business and Society in the New Social Landscape

In August, nearly 200 Business Roundtable CEOs dominated the news cycle declaring the purpose of a corporation is to deliver value to all stakeholders, not just shareholders. They may have also catalyzed the risk inherent to corporate purpose in this new social landscape with a web-empowered public auditing ALL of a company’s actions, not just its self-selected, carefully curated positive examples.

“Purpose washing” has become a thing. And the backlash of getting outed when actions do not meet high-minded purpose statements disrupts business and erodes value.

Given the ramp speed of viral moments, anticipating negative social impacts embedded in a business has never been more urgent, as investors like BlackRock examine social risk in their portfolio reviews. The problem is breaking through the corporate cultural bubble to see social risks coming.

Social risks are serious business, but they lie hidden in corporate blind spots. This excerpt from RESET: Business and Society in the New Social Landscape introduces a new model for conducting a social risk assessment.


 

A Business Risk Wakeup Call

The strategic surprise of the 2007–2009 global financial crisis provided a wakeup call for C-suite management and their boards of directors to re-examine their predictive risk management protocols, with a particular interest in strategic risk management. Ram Charan’s Owning Up: The 14 Questions Every Board Member Needs to Ask, published in 2009, quickly made the must-read short list for corporate board members. “Risk,” wrote globally recognized business consultant Charan, “is an integral part of every company’s strategy; when boards review strategy, they have to be forceful in asking the CEO what risks are inherent in the strategy.”

Often, business risk assessment has been confined to a data-driven analyses based on technically oriented financial or engineering assessment protocols. However, particularly in the new social landscape with empowered stakeholders on social media, that technical bias can overlook the very real potential business risks from fast-moving issues gaining traction and substantially disrupting business strategies.

Shell, a world leader in oil and gas exploration and production whose Brent Spar encounter with Greenpeace began this book, has clearly recognized the blind spot a technical bias in risk assessment can foster. Operating in some of the most challenging geographies in the world, Shell acknowledges that its industry has made substantial progress in addressing its technical challenges, but not in its capacity to manage nontechnical challenges, which arise from its interactions with its broad range of stakeholders:

Non-technical risks are the most common cause of project delays and most likely to be underestimated and overlooked but have the potential to cause significant erosions of project value when they manifest at project level and in extreme cases significant portfolio value erosion, when they manifest at corporate or industry level.

Shell has proactively integrated assessing nontechnical risks (which they call NTRs) into their way of doing business. NTRs are part of Shell’s impact assessment process to ascertain stakeholder interests and concerns at the project concept stage when the project viability is being evaluated. According to Shell, well-managed NTRs have upside impact on a project’s financial and operational success and have the potential to positively differentiate the company.

Embedded Stakeholder Impact
Any business has a dominant risk or set of risks that are inherent to the business model itself. Thus, the more successful a company is, the more potential harm an unrecognized risk can cause, substantially magnifying the company’s risk profile.

Any business has a dominant risk or set of risks that are inherent to the business model itself. Thus, the more successful a company is, the more potential harm an unrecognized risk can cause, substantially magnifying the company’s risk profile.

Inherent negatives are business risks derived from the negative stakeholder impact of latent attributes in a given business model; for example, attributes in the product or service itself, impacts from the upstream product or service lifecycle supply chain from sourcing raw materials or service capabilities to the downstream use and disposal of the product or service by customers, and impacts from C-suite governance and policies as management stewards the business model. Because inherent negatives are embedded in a company’s strategies, operations, or policies, as the company grows, its unmitigated negative stakeholder impacts also grow. When an enterprise’s growth and success also multiply its negative impacts, outrage can follow and with it, the potential for boycotts, constraints on the license to operate, and disrupted implementation of strategic plans.

The growing sophistication of global supply chain management and the adoption of corporate social responsibility initiatives have allowed many companies to discover and proactively address inherent negatives stemming from the negative stakeholder operational footprint of their businesses. UPS and the Coca-Cola Company provide two examples to which we will return. Through its size and business model, UPS creates a large carbon footprint, which grows as its business expands: a classic example of an inherent negative. Recognizing this, the company has taken a variety of comprehensive actions to shrink its carbon footprint. As the world’s largest beverage company and an iconic brand, Coca-Cola has long depended on the sales of its flagship brand, which became problematic as concerns over obesity and a healthy diet became widespread and when producing a Coke product requires vast amounts of water, a diminishing natural resource. By adjusting its product portfolio and its water resource management, the company is taking proactive actions to mitigate these inherent negatives.

Companies that strategically integrate these mitigating actions as a way of doing business—as part of their business model, rather than as incremental initiatives—are building resilient enterprises positioned to grow and remain competitive in this new social landscape of rising expectations and diminishing trust. To apply the Champion Brand model, these mitigating actions, at minimum, ensure alignment with stakeholder expectations and can, if taken further, become positive platforms that advance authenticity, attachment, and even shared advocacy with stakeholders.

However, inherent negatives extend beyond product attributes and operational supply chain management. They can also be embedded in corporate policies ranging from labor and human resources to governance, making them a C-suite management imperative. For example, companies like Facebook, Google, and Twitter operate at the epicenter of social media and the Internet, with their growth in active users, who pay no fee to use their products, directly linked to the companies’ financial growth. The business model for

these social media enterprises is to monetize the value of a growing, active user base in the form of advertising revenues, somewhat comparable to the Nielsen ratings used to measure the viewership of broadcast television shows. As the reach and scale of these businesses have grown pervasive, however, so has the potential for damaging stakeholder impact—providing a timely example of the dynamic of inherent negatives in action. The unprecedented global penetration of social media has sometimes outdriven management’s understanding of the potential for negative stakeholder impact left in its wake—for example, fake news websites, the propagation of hate speech, or live videos of murders or suicides—leading to increasing public criticism of these businesses and demands for changes to the governance policies that steward these companies’ business models.

Whatever their source, inherent negatives are embedded in the business model itself, ironically making them so ingrained that they sometimes go unnoticed when living inside the bubble of corporate culture. The consequences of that blind spot, however, can be substantial in this new era. Today, web-enabled stakeholders seeing the negative impact of an inherent negative through their outside-in lens have an unprecedented array of instant communications channels and social networks at their disposal to communicate their disapproval. If left unrecognized and unaddressed, a corporation’s inherent negatives can become visible or viral well before it is prepared to constructively address them, potentially disrupting business strategies or—at the extreme—threatening its license to operate.

If left unrecognized and unaddressed, a corporation’s inherent negatives can become visible or viral well before it is prepared to constructively address them, potentially disrupting business strategies or—at the extreme—threatening its license to operate.

In fact, according to data from the Institute for Crisis Management, nearly 78 percent of business crises in 2015 were not due to sudden external events but due to smoldering issues that escalated to crises when they became public. The degree of management control and responsibility is the key differentiator between sudden versus smoldering crises. While both categories of crises produce headlines, sudden crises are external events which are perceived as being beyond management control. Smoldering crises, the category in which inherent negatives belong, are perceived as being the responsibility and fault of a firm’s leadership. “In extreme cases, and according to the Institute of Crisis Management database, it is in fact leadership decisions and actions that form the basis of most modern-day crises—not external threats or acts of God that we most frequently think of as a business crisis,” explain Erika Hayes James and Lynn Perry Wooten.


 

Photo Credit: Susan Wormington

James R. Rubin
James Rubin (1951–2016) was a member of the faculty at the University of Virginia Darden Graduate School of Business for more than two decades, serving as area coordinator for its management communications course. He authored numerous case studies on crisis communications and corporate branding, and was a long time member of the Arthur Page Society.

 

 

Barie Carmichael
Barie Carmichael is a Batten Fellow at the University of Virginia Darden Graduate School of Business and a senior counselor at the global communications consultancy APCO Worldwide. She has more than thirty-five years of experience in corporate communications, having been a partner at the Brunswick Group, a global advisory firm, and Dow Corning’s corporate vice president and chief communications officer.

 



Excerpted from Reset by James Rubin and Barie Carmichael Copyright (c) 2018 Columbia University Press. Used by arrangement with the Publisher. All rights reserved.

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