Business leaders often lament the lack of political leadership and community support. It’s only going to get harder. WA Premier Colin Barnett, at LNG 18 – the premier global conference of the LNG industry – offered some advice to the industry: you guys have to do more of the heavy lifting. It is no longer viable, if it ever was, for industry to expect the politicians to take the lead in the public battles.
And yet the list of examples of decisions which make it nearly impossible for business to win public support continues to grow.
There are the big global scandals: most recently VW’s decision to fudge its emissions testing data. Who can forget Enron? These, and a myriad of failures in between, feed a negative sentiment toward business.
Australia has had plenty of its own failures. Last year 7-Eleven admitted that the company and its franchisees had engaged in widespread exploitation of vulnerable workers. The banks are embroiled in a rolling series of scandals from financial advice, to insurance, and interest rate rigging. Target colluded with some of its overseas suppliers to inflate its first half profit results. Wesfarmer’s MD Richard Goyder described the decision as “mind-blowingly stupid”.
And just now we had Rio’s decision to extend payment terms for suppliers to 90 days. Political leaders condemned the decision and threatened a legislative response. Rio has since reversed its decision. Rio’s defence was that it was simply following what others in the market were doing. But it’s a poor basis for decision making: we’re no worse than others.
This is a classic case of ‘the normalisation of deviance’ which describes a cultural drift in which circumstances classified as ‘not okay’ are slowly reclassified as ‘okay’.
These various decision failures impact three critical stakeholder groups: the community; the suppliers; and employees. And this has both direct and indirect costs. Let’s start with the community.
Nearly 50 years ago Theodore Leavitt (of ‘marketing myopia’ fame) penned an article for Harvard Business Review: Why Business Always Loses. He noted that business had been a persistent loser in all its major legislative confrontations with government and the public despite its “enormous economic power and sophisticated persuasive skills.” Business typically placed itself “in the unedifying role of contending against legislation that the community view as liberating, progressive and necessary”.
And yet Leavitt’s analysis suggested that in the long run business actually benefitted from many of the legislative initiatives they argued against. The CEO of BHP Andrew Mackenzie has similarly argued “business runs the risk of losing its right to take part in important political debates unless it sides with social progress … some of the regulations … are the regulations of progress”.
Rio’s decision was clearly damaging to supplier relationships, despite its assertion that it wanted to work collaboratively with its suppliers. At LNG 18 Shell’s integrated gas boss commented that even if their suppliers gave up all of their profit margins a ‘typical’ LNG plant would still not be affordable. Shell’s response: if we cannot achieve it by negotiation, we have to achieve it by collaboration. But starting the process "with a discussion about squeezing a little bit of profit out is not going to help”.
When Woodside CEO, Peter Coleman, was asked what kept him awake at night, he expressed concern about the longer term strength and vitality of the service companies as they are squeezed ever more tightly. Coleman is right to be worried. A decade ago Rio began to explore technology opportunities to respond to the emerging China boom. A review of R&D spend in the industry ecosystem found little R&D by the industry’s suppliers. Why? Their margins had been squeezed so tight there was nothing left for R&D.
Finally, let's turn our attention to employees. The damage goes beyond direct first order effects such as failure to pay entitlements. These decisions eat away at employee engagement. How engaged do you imagine employees are when their company makes some of these decisions? Would they feel comfortable explaining the decision to their friends?
And yet, the major corporations are not naïve about these issues. Indeed, they actively set out to be ‘good corporate citizens’. However, in teaching an MBA case study on corporate social responsibility I argue that this is an order of magnitude more complex than most of our market dynamics.
We need to get much smarter at anticipating and addressing these broader stakeholder issues.
The examples above suggest that one dimension of the decision overly dominates the discourse and minimises the broader implications: Rio the cost savings; Target the first half results; Seven11 near term profits. But rarely is this a one step process. Often these decisions reflect a progressive, cultural failure – recognisable in hindsight as ‘the normalisation of deviance’ – compounded by hubris and arrogance. Just because you can doesn’t mean you should.
We need to ‘inoculate ourselves’ from this cultural detritus. What can we do in the short term? From time to time you need to re-calibrate your decision processes. Here are three possible re-calibration processes:
1. Expose decisions to third party review … search for evidence of ‘cultural drift’ that might land you somewhere you never set out to be.
2. Explicitly identify the dominant dimension of the decision. And then ask which stakeholders have we relegated to second or third order? What if these other stakeholders[i] were equally important?
3. Ask yourself what are the second and third order consequences of this decision? What are the 3-5 core strategic themes of the business? Does it support your broader strategic directions (eg. collaboration)?
Feel free to offer your own suggestions.
[i] Stakeholder theory posits that there is no prima facie priority for one set of stakeholders interests above another. For me, this is too Panglossian. But then again, these corporations would have lost a lot less gloss if they’d adopted this principle.