Read the Businesses Respond to the Movement for School Safety case study (attached) on page 20. Then, answer the following

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C H A P T E R T W O

Managing Public Issues and Stakeholder Relationships Businesses today operate in an ever-changing external environment, where effective management requires anticipating emerging public issues and engaging positively with a wide range of stake- holders. Whether the issue is growing concerns about climate change, health care, safety at work or in our schools, social equality, or consumer safety, managers must respond to the opportunities and risks it presents. To do so effectively often requires building relationships across organizational boundaries, learning from external stakeholders, and altering practices in response. Effective man- agement of public issues and stakeholder relationships builds value for the firm.

This Chapter Focuses on These Key Learning Objectives:

LO 2-1 Identifying public issues and analyzing gaps between corporate performance and stakeholder expectations.

LO 2-2 Applying available tools or techniques to scan an organization’s multiple environments and assess- ing stakeholder materiality.

LO 2-3 Describing the steps in the issue management process and determining how to make the process most effective.

LO 2-4 Identifying the managerial skills required to respond to emerging issues effectively.

LO 2-5 Understanding the various stages through which businesses can engage with stakeholders, what drives this engagement, and the role social media can play.

LO 2-6 Recognizing the value of creating stakeholder dialogue and networks.

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A 2016 study from the Public Affairs Council found that many major corporations are feeling increased pressure to speak out on social issues, ranging from discrimination and human rights to environmental sustainability and quality education. Among companies with more than $15 billion in annual revenue, more than three in four said expectations for engagement had risen. Most of the pressure to engage in social issues, said the companies, has come from their own employees.1

Legislative battles in North Carolina, Tennessee, Mississippi, and Georgia prompted business leaders to take a stand favoring rights for transgender individuals. Dow Chemical, Alcoa, and Northrup Grumman lobbied elected officials and publicly condemned measures seen as discriminatory. Monsanto lead the fight in Missouri against a bill that would allow businesses to deny certain services to same-sex couples as a matter of religious freedom. In response to North Carolina’s state legislature passing a law that blocked antidiscriminatory protections at the local level, Deutsche Bank, the German financial institution with signifi- cant business in the United States, said it would freeze its plans to add jobs in North Caro- lina. PayPal announced it would halt its plans to open a new global operations center there.

While some thought these issues had little to do with business, executives pointed out these discriminatory state laws could harm local economies and hamper business’s ability to recruit and retain bright young workers. In the past few years, businesses have employed a number of measures to voice their views. These have ranged from joining coalitions, to issuing press releases, to engaging in lobbying at the state or local governmental levels. Experts believe that these efforts had some impact, such as in North Carolina where com- pany protests contributed to the state legislature’s repeal of a law that discriminated against gays and lesbians. Public reaction has been generally positive to these business actions. A Global Strategy Group poll found that 78 percent of Americans supported corporate engagement in social issues such as discrimination, human rights, and equality.2

In this case, emerging social issues focused on individual rights prompting various busi- nesses and their executives to become engaged and take action. This will likely improve the communities where these firms hire employees, operate, and sell their products. Yet, as this chapter will show, companies sometimes also ignore or mismanage public issues.

Public Issues

A public issue is any issue that is of mutual concern to an organization and one or more of its stakeholders. (Public issues are sometimes also called social issues or sociopolitical issues.) They are typically broad issues, often impacting many companies and groups, and of concern to a significant number of people. Public issues are often contentious—different groups may have different opinions about what should be done about them. They often, but not always, have public policy or legislative implications.

The emergence of a new public issue often indicates there is a gap between what the firm wants to do or is doing and what stakeholders expect. Scholars have called this the performance–expectations gap. Stakeholder expectations are a mixture of people’s opin- ions, attitudes, and beliefs about what constitutes reasonable business behavior. Managers and organizations have good reason to identify emergent expectations as early as possible. Failure to understand stakeholder concerns and to respond appropriately will permit the

1 “Taking a Stand: How Corporations Speak Out on Social Issues,” Public Affairs Council, 2016. 2 “Why Companies Are Getting More Engaged on Social Issues,” Public Affairs Council, August 30, 2016, pac.org; “Big Busi- ness Speaks Up on Social Issues,” The Wall Street Journal, April 17, 2016, www.wsj.com; and “Seeking End to Boycott, North Carolina Rescinds Transgender Bathroom Law,” Reuters, March 30, 2017, www.reuters.com.

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performance–expectations gap to grow: the larger the gap, the greater the risk of stake- holder backlash or of missing a major business opportunity. The performance–expectations gap is pictured in Figure 2.1.

Emerging public issues are both an opportunity and a risk. On one hand, correctly anticipating the emergence of a public issue can confer a competitive advantage. However, they also are a risk because issues that firms do not anticipate and plan for effectively can seriously hurt a company, as the following example shows.

The Italian–U.S. automobile maker, Fiat Chrysler, became aware of a serious prob- lem involving more than 11 million vehicles, including older Jeeps with rear gas- oline tanks that were linked to numerous fatal fires. Yet, Fiat Chrysler was slow to respond to the increasing expectations of its customers and regulators, the National Highway Traffic Safety Administration (NHTSA). The NHTSA accused the firm of misleading and obstructing regulators tasked with overseeing the resolution of many consumer complaints, inadequate and lagging repairs authorized through their dealerships, and failing to notify car owners of the recalls in a timely manner. The firm agreed to a consent agreement that included a fine of $105 million and an unprecedented buyback option covering hundreds of thousands of vehicles, whose owners can receive a trade-in or a financial incentive to get their vehicles repaired. Fiat Chrysler also agreed to submit to an independent monitor’s audit of its recall performance over the following three-year period.3

Understanding and responding to changing stakeholder expectations is a business neces- sity. As Mark Moody-Stuart, former managing director of Royal Dutch/Shell, put it in an interview, “Communication with society. . . is a commercial matter, because society is your customers. It is not a soft and wooly thing, because society is what we depend on for our living. So we had better be in line with its wishes, its desires, its aspirations, its dreams.4

3 “U.S. Auto Safety Regulators Fine Fiat Chrysler Record $105 million,” Reuters, July 26, 2015, www.reuters.com. 4 Interview conducted by Anne T. Lawrence, “Shell Oil in Nigeria,” interactive online case published by www.icase.co.

FIGURE 2.1 The Performance– Expectations Gap

Time

Expected Corporate Performance (What stakeholders expect)

Actual Corporate Performance (What actually happens)

Performance– Expectations Gap

High

Low

Pe rf

or m

an ce

(S oc

ia l a

nd E

co no

m ic

)

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Every company faces many public issues. Some emerge over a long period of time; others emerge suddenly. Some are predictable; others are completely unexpected. Some companies respond effectively; others do not. Consider the following recent examples of public issues and companies’ responses:

∙ Sexual harassment: An often well-kept secret vaulted into the public spotlight in 2017: accusations of sexual harassment in the corporate boardroom, executive suite, and workplace. Numerous high-profile business leaders were accused, including Fox News host Bill O’Reilly, film producer Harvey Weinstein, television show host Matt Lauer, Fox News CEO Roger Ailes, Ford Motor Company president for North America Raj Nair, CEO of the Humane Society of the United States Wayne Pacelle, and billionaire and casino executive Steve Wynn, along with many others. These executives resigned or were fired amidst sexual harassment accusations.

∙ Consumer safety: The Centers for Disease Control and Prevention declared separate E. coli outbreaks that sickened hundreds of customers at two different Chipotle Mexican Grill restaurants in the Pacific Northwest in 2015. These incidents followed other occur- rences where customers became ill from a salmonella outbreak involving tomatoes in Minnesota, as well as an outbreak of norovirus in California and Massachusetts. Chipotle tried to counter the negative publicity by pledging $10 million to help local growers meet new food safety standards and invited its 50,000 employees nationwide to tune in to a broadcasted meeting with executives at their Denver headquarters.

∙ Protection of personal information: Instances of the illegal acquisition, or hacking, of individuals’ personal identification and financial information have become common occurrences. Yahoo, Equifax, Delta Airlines, FedEx, England’s National Health Ser- vices, Merck Pharmaceuticals, Forever 21, Target, and many more organizations expe- rienced data breaches that compromised and exposed personal data of its customers or employees. These breaches may have reflected managers’ failure to keep abreast of the latest techniques used by sophisticated cybercriminals.

Whether the focus is sexual harassment in the workplace, consumer safety, or the pro- tection of personal information, society has increased its demands that businesses take on important public issues and become more involved in addressing them. Another critical public issue that caught the attention of many business organizations after a school shoot- ing in Florida—gun violence and school safety in America—is discussed in the case at the end of this chapter.

A survey of Millennials (people born between 1977 and 1994) was conducted in 2014 and found that four out of five Millennials “need (not just want) business to get involved in addressing social issues and believe business can make a greater impact.” One Millennial from China explained: “Compared to governments, businesses have the potential and the possibility to make real change in society happen faster and more efficiently. Businesses have the resources—from financial means, collective intelligence to technology—to con- tribute and make a difference.”5

Environmental Analysis

As new public issues arise, businesses must respond. Organizations need a systematic way of identifying, monitoring, and selecting public issues that warrant organizational action because of the risks or opportunities they present. Organizations rarely have full control of

5 The Future of Business Citizenship, People’s Insights Magazine, www.scribd.com.

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a public issue because of the many factors involved. But it is possible for the organization to create a management system that identifies and monitors issues as they emerge.

To identify those public issues that require attention and action, a firm needs a frame- work for seeking out and evaluating environmental information. (In this context, environ- mental means outside the organization; in Chapters 9 and 10, the term refers to the natural environment.) Environmental analysis is a method managers use to gather information about external issues and trends, so they can develop an organizational strategy that mini- mizes threats and takes advantage of new opportunities.

Environmental intelligence is the acquisition of information gained from analyzing the multiple environments affecting organizations. Acquiring this information may be done informally or as a formal management process. If done well, this environmental intelli- gence can help an organization avoid crises and spot opportunities.

According to management scholar Karl Albrecht, scanning to acquire environmental intelligence should focus on eight strategic radar screens.6 Radar is an instrument that uses microwave radiation to detect and locate distant objects, which are often displayed on a screen; law enforcement authorities use radar, for example, to track the speed of passing cars. Albrecht uses the analogy of radar to suggest that companies must have a way of tracking important developments that are outside of their immediate view. He identifies eight different environments that managers must systematically follow. These are shown in Figure 2.2 and described next.

∙ Customer environment includes the demographic factors, such as gender, age, marital status, and other factors, of the organization’s customers as well as their social values or preferences, buying preferences, and technology usage. For example, the explosion of social media has created opportunities for creating new marketing approaches that provide potential consumers with coupons or sales information on their smartphones as they leave their car and walk toward the retail store.

∙ Competitor environment includes information on the number and strength of the orga- nization’s competitors, whether they are potential or actual allies, patterns of aggres- sive growth versus static maintenance of market share, and the potential for customers to become competitors if they “insource” products or services previously purchased from the organization. (This environment is discussed further in the next section of this chapter.)

∙ Economic environment includes information about costs, prices, international trade, and any other features of the economic environment. The severe recession that hit the world’s economy in the late 2000s greatly shifted the behavior of customers, suppli- ers, creditors, and other stakeholders, dramatically impacting decision making in many firms.

∙ Technological environment includes the development of new technologies and their applications affecting the organization, its customers, and other stakeholder groups. Faster access to information through cell phones, tablets, and other handheld electronic devices changed how people around the world were alerted to the devastation of natural disasters or terrorist actions and how they could be contacted regarding new job open- ings or the launching of innovative consumer products.

∙ Social environment includes cultural patterns, values, beliefs, trends, and conflicts among the people in the societies where the organization conducts business or might

6 Adapted from Karl Albrecht, Corporate Radar: Tracking the Forces That Are Shaping Your Business (New York: American Management Association, 2000).

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conduct business. Issues of civil or human rights, family values, and the roles of spe- cial interest groups are important elements in acquiring intelligence from the social environment.

∙ Political environment includes the structure, processes, and actions of all levels of government—local, state, national, and international. Awareness of the stability or insta- bility of governments and their inclination or disinclination to pass laws and regulations is essential environmental intelligence for the organization. The emergence of strict environmental laws in Europe—including requirements to limit waste and provide for recycling at the end of a product’s life—have caused firms all over the world that sell to Europeans to rethink how they design and package their products.

∙ Legal environment includes patents, copyrights, trademarks, and considerations of intel- lectual property, as well as antitrust considerations and trade protectionism and organi- zational liability issues. China’s commitment to triple its patent filings from nearly one million in 2013 to three million by 2020 sent shock waves through the global business community.

∙ Geophysical environment relates to awareness of the physical surroundings of the orga- nization’s facilities and operations, whether it is the organization’s headquarters or its field offices and distribution centers, and the organization’s dependency and impact on natural resources such as minerals, water, land, or air. Growing concerns about global warming and climate change, for example, have caused many firms to seek to improve their energy efficiency.

FIGURE 2.2 Eight Strategic Radar Screens

Source: Adapted from Karl A. Albrecht, Corporate Radar: Tracking the Forces That Are Shaping Your Business (New York: American Management Association, 2000).

Customer Environment

Seeking Environmental

Intelligence

Social Environment

Geophysical Environment

Legal Environment

Political Environment

Technological Environment

Economic Environment

Competitor Environment

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The eight strategic radar screens represent a system of interrelated segments, each one connected to and influencing the others.

Companies do not become experts in acquiring environmental intelligence overnight. New attitudes have to be developed, new routines learned, and new policies and action pro- grams designed. Many obstacles must be overcome in developing and implementing the effective scanning of the business environments. Some are structural, such as the report- ing relationships between groups of managers; others are cultural, such as changing tradi- tional ways of doing things. In addition, the dynamic nature of the business environments requires organizations to continually evaluate their environmental scanning procedures.

Competitive Intelligence One of the eight environments discussed by Albrecht is the competitor environment. The term competitive intelligence refers to the systematic and continuous process of gathering, analyzing, and managing external information about the organization’s competitors that can affect the organization’s plans, decisions, and operations. (As discussed in Chapter 1, competitors may be considered a nonmarket stakeholder of business.) The acquisition of this information benefits an organization by helping it better understand what other compa- nies in its industry are doing. Competitive intelligence enables managers in companies of all sizes to make informed decisions ranging from marketing, research and development, and investing tactics to long-term business strategies. “During difficult times, excellent competitive intelligence can be the differentiating factor in the marketplace,” explained Paul Meade, vice president of the research and consulting firm Best Practices. “Companies that can successfully gather and analyze competitive information, then implement strategic decisions based on that analysis, position themselves to be ahead of the pack.”7

However, the quest for competitors’ information can also raise numerous ethical issues. Businesses may overstep ethical and legal boundaries when attempting to learn as much as they can about their competitors, as the following example shows.

Today, Deloitte is one of the world’s largest accounting firms, employing 245,000 people in 150 countries and providing various accounting and consulting services. But, in the mid-2000s, the firm wanted to dramatically grow its federal security consulting services from a $300 million to more than a billion dollars in annual revenues. Deloitte formed a competitive intelligence unit (CIU). “Our job was to spy on Ernst & Young, PriceWaterhouseCoopers, KPMG, and some of the consulting competitors,” said a CIU employee. “We were trying to steal their pricing models, how they determined discounts, and especially new product lines or service lines.”

One example of how the CIU conducted its business occurred in 2007 when they learned that BearingPoint, a consulting firm, was struggling financially and had called an emergency meeting to determine its fate. Deloitte’s CIU agents traveled to the meeting location and spent several days stationing themselves at a bar, picking up scraps of conversation from distraught BearingPoint partners. Others spent time in bathrooms. “You can’t believe what people will say while they’re in there,” said a CIU agent. The best source for information was a Bearing Point meeting room the agents discovered. They entered the meeting room, found notes and other docu- ments left behind, and brought this information back to Deloitte’s CIU. According to one Deloitte CIU employee, “There were accounts that would have taken years

7 See Best Practices report at www.benchmarkingreports.com/competitiveintelligence.

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for Deloitte to develop relationships at the Department of Defense, the Department of Homeland Security, and other institutions. It was a huge opportunity.” A few years later, Deloitte was able to take advantage of an opportunity to buy BearingPoint’s North American public services unit for $350 million as Bearing- Point worked through a bankruptcy.

As the example above indicates, the perceived value of intellectual property or other information may be so great that businesses or their employees may be tempted to use unethical or illegal means to obtain such information. Although questionable, Deloitte employees did nothing illegal. Competitive intelligence acquired ethically remains one of the most valued assets sought by businesses. A business must balance the importance of acquiring information about its competitors’ practices with the need to comply with all applicable laws, domestic and international, and to follow the professional standards of fairness and honesty. Disclosure of all relevant information prior to conducting an inter- view and avoidance of conflicts of interest are just a few of the ethical guidelines promoted by the Strategic and Competitive Intelligence Professional’s code of ethics.8

Stakeholder Materiality After the many environments are scanned, a company needs to evaluate and prioritize the impact that its stakeholders and their issues may have on the company. The importance attributed to a stakeholder is often referred to as materiality. Stakeholder materiality is an adaptation of an accounting term that focuses on the importance or significance of some- thing. In this case, it describes a method used to prioritize the relevance of the stakeholders and their issues to the company.

Sonoco, a global provider of packaging products and services, completed its first stakeholder materiality assessment of economic, environmental, and social issues in 2014. The company began by identifying potential stakeholders and created a list of nine stakeholders: customers, suppliers, peers, shareholders, non-governmental organizations, community leaders, government regulators, employees, and lead- ership. The company then searched various sources for information on each stakeholder, such as websites, corporate social responsibility reports, mission statements, and 10-K filings to create a list of issues. They used a four-point scale to rate each stakeholder from low to high based on the significance of the issue to the stakeholder. This scoring system enabled Sonoco to identify highly influential stakeholder groups as having the greatest potential impact on the company’s strategic objectives or those stakeholders most influenced by the company’s operations.9

After the information is collected, it needs to be analyzed and placed on a matrix that shows the importance of the issue for the stakeholder and the importance of the issue assigned by the company. This evaluation allows the company to prioritize their attention on issues in the quadrant showing issues of importance to stakeholders AND the company. An example of such a matrix representing stakeholder materiality at Nestlé is shown in Figure 2.3. Nestlé assessed the degree of stakeholder importance for an issue, as well as the potential impact of the issue on Nestlé. This combination enabled the company to place a higher, or lower, priority on many public issues.

8 For information about the professional association focusing on competitive intelligence, particularly with attention to ethical considerations, see the Strategic and Competitive Intelligence Professionals’ website at www.scip.org. 9 Information from Nestlé’s website, www.nestleusa.com/csv/what-is-csv/materiality-and-stakeholder-engagement.

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The Issue Management Process

Once a company has identified a public issue and detects a gap between society’s expec- tations and its own practices, what are its next steps? Proactive companies do not wait for something to happen; they actively manage issues as they arise. The process of doing so is called issue management. The issue management process, illustrated in Figure 2.4, has five steps or stages. Each of these steps is explained below, using the example of the poul- try industry’s response to concerns over antibiotics in chickens.

Identify Issue Issue identification involves anticipating emerging concerns, sometimes called “horizon issues” because they seem to be just coming up over the horizon like the first morning sun. Sometimes managers become aware of issues by carefully tracking the media, experts’ views, activist opinion, and legislative developments to identify issues of concern to the pub- lic. Normally, this requires attention to all eight of the environments described in Figure 2.2. Organizations often use techniques of data searching, media analysis, and public surveys to track ideas, themes, and issues that may be relevant to their interests all over the world. They also rely on ongoing conversations with key stakeholders. Sometimes firms are com- pletely unaware of the issue before it emerges and must attempt to respond to mounting public pressure by activists or government regulators.

Consumer-health groups and the U.S. Food and Drug Administration (FDA) called on animal-breeding farms in the United States to reduce the use of antibiotics in

FIGURE 2.3 The Stakeholder Materiality Matrix

Source: Nestlé

Over- and under-nutritionHuman

rights Water

stewardship

Food and product safety

Climate change

Food and nutrition security

Women’s empowerment

Water, sanitation and hygiene

Responsible sourcing and traceability

Fair employment and youth employability

Employee safety, health, and wellness

Moderate

Lo w

S ta

ke ho

ld er

In te

re st

H ig

h

Significant

Environmental sustainability Our people, human rights, and complianceWaterRural developmentNutrition

Impact on Nestlé

Major

Natural resource stewardship

Rural development and poverty alleviation

Animal welfare

Business ethics

Responsible marketing

an

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