"Social Risks" ... Being Prepared for Inclement Weather

I would like to thank the AACR for inviting me here today to discuss Booz Allen Hamilton's latest work on Social Risk. We see Social Risk as the next major issue facing corporations as they navigate the pressures produced by globalization. Today, there are a number of groups working on sustainability activities and in particular Corporate Social Responsibility (CSR) initiatives that include reporting business practices according to triple bottom line metrics.

From Booz Allen's perspective, these types of activities are absolutely essential but have the unintended consequence of defining Corporate Social Responsibility as an "answer" or "end goal;" rather, we see it not as an end, but as means — CSR is a tool to address a much larger trend that we observe in the global marketplace.

In particular, Booz Allen is addressing CSR from the standpoint of how to use it to help create the conditions that make globalization sustainable. We are exploring how the constant push and pull (a dynamic tension) between government, business and civil society is necessary to achieve and maintain the positive effects of globalization. Specifically, Booz Allen's asserts that CSR is an essential element of this dynamic tension because of the much larger topic of "Social Risk" management, needed by global companies today.

It is our contention that successfully implementing and utilizing a CSR program requires an enterprise to have strong linkages with other public, private and civil sector organizations.

This morning, I would like to discuss the results of a paper we just released in collaboration with the Kennedy School of Government's Corporate Social Responsibility Initiative, entitled "Corporate Social Responsibility as Risk Management: A Model for Multinationals." The report documents work we have just completed with John Ruggie who is the Kirkpatrick Professor of International Affairs and Weil Director at the Center for Business and Government exploring the applicability of CSR as a means of effectively managing Social Risk.

We define Social Risks as "challenges by stakeholders to companies' business practices over social consequences."

Our paper demonstrates how corporations operate in the global economy as key players in a dynamic system made up of government, other business and civil society organizations. The more interactions that these groups have with one another, the more pressures or "levers of influence" are introduced that impact the overall relationships.

Specifically, the pressure points on business operating in a global economy, most notably those pressures by civil society and stakeholders more broadly, constitute Social Risk.

We think of Social Risk in this way: all global companies may face a chance of being hit with a low-impact social risk; (e.g., a negative report or public criticism by a civil society actor). However, being hit by a major social risk incident can be a death blow for a company. It is difficult to know which type of company you are. In this light, social risk is very much like every other risk facing a global company: you might not get hit, but does your company systemically think about your likelihood of getting hit, and are you prepared if you do get hit?

Joshua Margolis, Professor at Harvard Business School described our term social risk with this analogy:

"Social risks resemble the weather. Typically, bad weather requires moderate, standard protection. A few simple items like an umbrella and rain coat are suitable in general for inclement weather, but what if you're the one hit by a tornado, blizzard, or hurricane? Most companies will not suffer more than a rainstorm or snowstorm, but if they are the one to get hit by a significant social risk, it can be a death blow. Estimating whether your company resides in a flood plane or hurricane region is difficult to do, though research would suggest that size, industry (dirty industries), and visibility (consumer goods) are good indicators."

The fact is, the likelihood of a perceived social risk being (a) noticed and (b) broadcast has increased with the proliferation of empowered stakeholders in the global environment, particularly NGOs and new forms of media. Their proliferation means there are more eyes out there and that they face intense contests for funding and attention, which hinge in part on their capacity to demonstrate impact (often time by associating their social platform with strong international brands).

The impact of civil society criticism has increased as (a) new forms of media have made it easier to promulgate criticism and negative consequences and (b) companies depend on their brands and reputation to survive in home markets and expand into new ones. (For example, a large international auto manufacturer discussed how it hopes that its positive reputation as a result of its CSR activities would help it break into the 40% of car buyers that traditionally do not buy its products).

From an objective perspective, a company may well deserve criticism for its social practices. Think of, upscale apparel retailers purchasing from sweatshop suppliers, unsustainable forestry practices by the timber industry, or big pharmaceutical companies going into court to keep imported generic AIDS treatment drugs out of a country, suffering high HIV prevalence rates. Unfortunately, the objective "wrongness" of the action is not always enough to engender change — the change usually occurs after a third party group has "picked up" the issue.

There is a real danger for a company in ignoring social criticism of its practices: simply because a social risk may initially be "picked up" as a CSR issue, there is no guarantee that is where it will remain. A host of "social risks" have begun as issues that were primarily understood and addressed by CSR departments. However, as those social risks continued to gain attention with civil society, public policy and media outlets over time, senior managers were also forced to pay attention, as core business operations became impacted.

In sum, companies need the ability to discern rising Social Risks, to identify which stakeholders with whom to speak, and to determine which types of response should be used for which types of concerns. The good news is that a means exists today to do this — the CSR program.

So, how does Corporate Social Responsibility fit in with as Social Risk Management?

Due to the growth in the sophistication, number and connectivity of well informed civil society organizations, a sound CSR program must be based on stakeholder engagement.

To appreciate the importance of CSR to social risk management requires understanding three premises.

• First, CSR is a natural extension of going global analogous to other adjustments of "scaling up" (e.g., forming strategic alliances, finding skilled staff in foreign countries).



• Second, CSR activities are not discretionary expenditures or the target of cost-cutting activities.



• Third, CSR must be linked strategically to core business functions to reap the full benefits.

CSR, particularly for a global company, contributes to Social Risk management, and corporate risk management more generally, through two means:

1. By providing intelligence, awareness and insight about what those risks are, and



2. By offering an effective means to respond to them. The key to both is more effectively "managing stakeholder relationships."

Managing stakeholder relationships is important for global companies because if they do not effectively manage those relationships, and build additional 'levers of influence' stakeholders who feel an obligation to address a social risk issue will have few options other than engaging companies in the court of public opinion with little to no say so by companies.

For a global company, stakeholder groups can provide strategic intelligence regarding the company's risk environment around particular economic, social, political or environmental issues.

So, CSR's first major contribution to Social Risk Management is providing insight and understanding.

Stakeholder engagement strategies essentially provide antennae through which companies can pick up signals of impending challenges and also possible responses. But only if they are tuned into the right frequency!

Over time, integrated information flows between stakeholders and companies can form the base of knowledge about social issues and the systemic nature of those problems. Among the key questions that can be answered by engaging with stakeholders on a particular social issue are these:

• What is the issue or problem?
• How complex is it?
• What is its scope?
• Who else has an interest in the problem?
• What is working and not working in the current approach?
• What would be accomplished by engaging others in the dialogue?

Secondly, CSR programs' second major contribution to Social Risk management is providing effective response mechanisms.

In order to manage these newly identified social risks, the tools to assess and manage social risks (specifically, the CSR program) needs to be fully aligned with other, more familiar forms of risk management.

Primarily, elevating social risk to a level of equal strategic importance as technical, economic and political risk requires developing an analogous system for managing it or integrating it into the existing system.

In order to integrate CSR as a means of social risk management with, or into, other forms of strategic risk management, a comparable process for internal and external risk sensing, reporting and monitoring should be employed.

Also, by partnering with other social actors, including civil society organizations, as many companies now do, companies can also work to improve the contextual conditions that pose emerging risks for them in the first place. Thus, a growing number of global and national companies now collaborate to build greater social capacity to respond to shared challenges like the HIV/AIDS crisis in heavily impacted countries.

Companies with global operations can only address social risks by balancing those risks against business decisions and determining the quality of engagement with stakeholders and their associated issues. Companies should begin the process by 1) identifying the empowered stakeholders and their key issues and 2) work with the stakeholder in determining the appropriate level of engagement and information sharing necessary to address their concerns and reap the mutual benefits from improved accountability and better relations with stakeholders.

In sum, with insight gained in our recent project, we think the following points are part of the cutting edge/emerging themes in the evolving discussion about CSR:

• CSR is a means to an end: it needs to be viewed in a broader and more systemic context within a company;



• CSR is not a single issue-based program (e.g., addressing one particular pressing issue);



• Due to the growth in the sophistication, number and connectivity of well- informed civil society organizations, a sound CSR program must be based on stakeholder management; and



• CSR is a means to brand enhancement, sustainable growth, and most importantly, the basis of the capabilities a company needs for effective Social Risk management.