This second level of management is based on an “outside-in” investigation of major trends in the immediate and wider business environment. These trends produce issues that exacerbate risks in the business model and the business strategy, or create new risks thereby affecting the sustainability of the business.
Issues are related to the less formal, more implicit or even frontier expectations within social contracts, that are vague when latent but can become more concrete as they mature. These issues often serve as social symbols, channelling critique of business and its perceived lack of responsibility or a lack of regulatory intervention by public authorities in the face of global business dominance. Backlash over social issues may appear disproportionate and helpless executives can be left bewildered by accusations of a lack of corporate responsibility.
Issues may be mature like corruption, inequality, poverty, privacy, obesity, off-shoring, access to medicines, resource depletion, forest destruction, climate change. Issues may be emerging like tax avoidance and tax competition, fugitives and migration, emissions testing and performance of cars, programmed obsolescence of electrical and electronic products. Issues might be linked to industry structures or even global trade conditions. (see WTO rules playing a major part in the Chap. 8 Nike case).
Adopting appropriate organisational responses to major trends in the business environment and to the latent, emerging and maturing issues of “corporate responsibility” and developing the organisational capability for timely responsiveness is key. As a consequence, issues management should be on the agenda of top management and boards.
Ethical issues, such as corruption are particular challenges. Corruption is a mature issue. The past 15 years provide ample evidence of the risks of engaging in corrupt practices. A list of the top 10 settlements (Merrill Goozner, The Fiscal Times, December 13, 2011) reveals names (with DOJ settlements in brackets) such as: Siemens ($1.6 billion), KBR/Halliburton ($579 million), BAE Systems ($448 million), Daimler Benz ($195 million), Alcatel Lucent ($137 million), and even Johnson & Johnson ($70 million)
What are the current major trends in the business environment?
Which major issues – latent, emerging or maturing – are affecting the business model and exacerbating the business model risks?
How is the company managing these issues: is it defensive, compliance, managerial, strategic in approach?
How will the business model be affected in the long term by major macro trends like climate change, resource depletion, demographic change, geo-political change, and the way these interact and reinforce each other?
How should the company protect and enhance value in the face of these issues and trends?
How is organisational capability and leadership developed to respond in a timely and appropriate way?
Ten sustainability mega-forces will impact business over the next 20 years, requiring strategic stances by businesses to cope in a timely and effective way. These megaforces are systemically linked: climate change, volatile energy markets, material resource scarcity, water scarcity, demographic growth, the emerging global middle class, urbanisation, food security, declining ecosystems, deforestation. Trend projections prepared without consideration of the entire system of megaforces are increasingly inadequate. The authors identify three nexuses which represent the challenges of sustainable growth which companies need to address: the footprint nexus, the erosion nexus, the innovation nexus. A sector analysis of external impacts and pressures to internalise costs for these is provided for the following sectors: airlines, automobile, beverages, chemicals, electricity, food, industrial metals, marine transportation, mining, oil and gas, ITC.
The key issue in this case is child labour. Child labour was rampant in Europe and the US until the early twentieth century, merely 100 years ago. It still persisted in small family businesses in France, Germany the UK and Italy till WWII. It was estimated by the ILO in 1999 that child labour still accounts for 1% of the workforce in Europe, the US and Canada. But in Africa it accounts for 32%, in Asia 22%, and in Latin America 17%. Nike’s suppliers used child labour which is an endemic practice in many Asian societies. “Do not use child labour” is a simple policy statement which may be backed up by an ethical code for managers, but it is hard to implement the policy. At Nike, installing a CSR department to implement compliance policies was wholly ineffective. Nike went through 4 stages of organisational learning over many years to come to a more or less positive outcome. It lost considerable brand value and incurred considerable costs before it realised it had to change its business model and rally the industry sector around a campaign to change an international trade agreement. To its critics, Nike’s business model amounted to a license to print money: the lowest possible cost in the supply chain, no capital employed in production, nor in working capital thanks to just-in-time supplies, high margins in sales and marketing with exclusively branded products. But the party did not last forever. Impressively high profitability and returns mostly always hide high risks in the business model which can be exacerbated by emerging issues and pose serious threats to business sustainability .
The key issue in this case is access to medicines. Access to medicines as a universal human right is now a mature issue. Providing medicines to poorer countries at affordable prices may make economic sense because it enhances economies of scale in production and extends global brand reach. But it can undermine the very business model of a pharmaceutical business which requires high margins to remunerate extremely high investment levels in research and development before the patents run out and the medicine becomes “generic”. High prices in developed markets can be obtained, but practice showed how parallel trade from low margin developed countries into the high margin Western countries undermined the integrity of the business model. GSK needed to ensure that medicines which it provided in South Africa at affordable prices would arrive in the clinics with the patients and not disappear into parallel trade to Europe. Partnerships with NGO’s to extend its distribution chain to patients appeared to be the answer. The case also poses the question how far a company needs to go to solve social issues. How to deal with the ever extending demands of “corporate responsibility” is central to Issues Management.
Human rights is a key issue in this case, along with environmental harm, government corruption and poverty. Oil companies often require 30-year payback periods to fund the huge investments required in exploration and production. It is therefore surprising that these companies do not take more account of the social, environmental and political issues likely to emerge over such a long timeframe. Is it the “can do” engineering mindset? Ignorance of context issues while rolling out a business model which was elsewhere successful? Complacency by refraining from getting embroiled in thorny issues like civil wars? Lack of courage to stand up to corrupt host governments? In Nigeria, Shell got almost everything wrong by ignoring the social, environmental and political impacts of its business. In 2013, CEO Peter Voser admitted that trouble in Nigeria continued to depress financial performance and announced that Shell would pull out from the Niger Delta oil production. Shell did learn from this experience in three ways. First, it implemented a comprehensive risk assessment model, charting all the potential costs required to mitigate these risks, including social, environmental and political risks BEFORE a major investment decision would be taken. As a result, some highly promising projects from a technical and (at first glance) financial perspective were abandoned. Second, environmental and social impacts of running projects are continuously monitored and are redressed by targeted programmes (also see chap. 15). Third, Shell became the founding partner in EITI, Extractive Industries Transparency Initiative, an industry wide initiative to curb corruption by governments.
The key issue here is clearly bribery and corruption. Are bribes to be considered as a cost of doing business in emerging and developing countries, or is the social cost of corruption so disruptive that it stands in the way of economic and social development and therefore in conflict with the medium term interests of businesses? The case illustrates the challenges of a social enterprise business in an emerging country like India, where Ziqitza took a decisive stance to make anti-corruption part of its brand, its value proposition and its legal policy.
The company found itself in a difficult balancing act with on the one hand a business brand and mission to fight corruption and on the other hand a public sector where corruption is rampant. Corruption is an ethical issue with destructive social impacts and which is very much mature but many businesses fail to abstain from the practice and can suffer heavy financial and reputation losses as a result.