March 2005, Beth Kytle, John Gerard Ruggie / Corporate Social Responsibility Initiative
This paper develops a conceptual framework for companies to manage the emerging social risks they encounter as they go global, and of the contribution of corporate social responsibility (CSR) programs to managing those risks.
Globalization offers many opportunities to companies, but also poses novel sources of uncertainty and risks. Multiple business indicators show that the level of uncertainty for corporate leaders has increased, due in large part to:
- Large extended enterprises made up of independent organizations but with tremendous pressures to grow and perform as a unit;
- Rapid rates of change in technology, connections and information flows as a result of globalization; and
- Problems in managing scale using methods rooted in controlling all decisions across the entire extended enterprise.
The result of the greater interdependencies and hidden vulnerabilities that businesses now face is an increased number of uncertainties in corporate decision-making. Current network-based operating models highlight the growing importance of the extended enterprise by establishing greater connectivity among and between stakeholders across the globe. This connectivity has also created entirely new stakeholders and requires innovative forms of risk management.
These changes in the operating model have led to a significant shift in market power – not just to customers and traditional investors but also, and more importantly, toward stakeholders: communities, employees, regulators, politicians, suppliers, NGOs and even the media. As a result of this shift in market power, “social risk” is a rising area of concern for global corporations.
From a company perspective, social risk, like any other risk, arises when its own behavior or the action of others in its operating environment creates vulnerabilities. In the case of social risk, stakeholders may identify those vulnerabilities and apply pressure on the corporation for behavioral changes. As the ability to listen to corporate stakeholders' perspectives on social issues becomes a competitive necessity, managing social risks will need to become more fully embedded in corporate strategy. Social risk management strategies can be extremely complex undertakings that must account for and balance numerous conditions, perspectives and variables across the business enterprise. The very nature of social risk places management teams in the challenging position of setting clear direction for a diffused function. For the complex and evolving area of social risk, corporate social responsibility (CSR) programs represent an excellent mechanism for addressing these challenges across the business enterprise.
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 programs are a necessary element of risk management for global companies because they provide the framework and principles for stakeholder engagement, can supply a wealth of intelligence on emerging and current social issues/groups to support the corporate risk agenda, and ultimately serve as a countermeasure for social risk.
