The social environment of business
As complex as the world of nonprofits has grown, challenges face all organizations today. Brought about partly by the dynamics of globalization and information technology, firms now must contend with renewed pressures from activists, regulatory agencies and other macroeconomic forces. World markets appear more porous, bringing both new opportunities and threats. To succeed in this climate, MBAs must accept that their careers will demand more understanding of the political, economic and public policy factors that impinge on traditional business strategies, says Professor Daniel Diermeier.

"Businesses, rather than governments, are increasingly the main engine of social change globally,” says Diermeier, the IBM Professor of Regulation and Competitive Practice.

Indeed, today more than half of the world’s 100 largest economies are corporations, not countries. According to a 1997 Multinational Monitor study, the combined sales of the top 200 multinationals were greater than the GDP of 182 countries — about 30 percent of global GDP.

"People are holding companies accountable by standards other than just financial performance,” Diermeier says. “That’s just a fact. Like it or not, it’s part of your game.”

He and colleagues Timothy Feddersen, the Wendell Hobbs Professor of Managerial Economics and Decision Sciences, and Lawrence Rothenberg, the Max McGraw Distinguished Professor of Management and the Environment and co-director of the Kellogg School Ford Center for Global Citizenship, believe BASE offers much more than optional lessons for ambitious MBAs. “Managing in the social environment is now a general leadership skill,” insists Diermeier, a political scientist who also serves as director of the Kellogg School Center for Business, Government and Society.

Globalization has eroded the ability of nations to regulate business, says Diermeier, with instruments and institutions such as GATT, NAFTA and the World Trade Organization frequently trumping local concerns in favor of trade.
In response, activists have grown efficient at using digital tools to organize boycotts and other consumer resistance against companies perceived to be violating environmental or labor laws.

"What makes the social dimension of business so difficult,” Diermeier contends, “is that you’re not working with people who are motivated by the bottom line. They may be political activists motivated by factors that have nothing to do with money.”

It’s Kellogg School courses, such as Strategic Management in Nonmarket Environments, Public Policy and Management Strategy, Socially Responsible Business Practices, and Values and Crisis Decision Making, that are providing Kellogg MBAs with the tools to meet contemporary global business challenges. The nonmarket environment, including regulatory costs, trade restrictions and public subsidies, may be a critical determinant of industry profitability, says Feddersen, a political scientist by training.

Feddersen, whose research involves political economy and democratic institutions, says that deregulation offers a complicated context in which to make strategic business decisions. He and Rothenberg say regulation has a place in commerce, but too often policy decisions get bogged down in bureaucracy, resulting in “frustratingly inefficient” (in Rothenberg’s opinion) efforts.

Both professors also believe that regulation has become, to some degree, overshadowed by other market-force constraints.

"The backlash today occurs not in the regulatory environment, but in the market where you have activist action that targets firms,” says Feddersen. “Deregulation creates opportunities for firms to behave badly from the perspective of some stakeholder groups, but it also increases their vulnerability to activists.”

There are also opportunities in the deregulated environment for firms to behave better than one another, and so gain a competitive advantage, he says.

Rothenberg agrees, saying that these nonmarket pressures can, if managed properly, “actually be a profit center.” The political scientist points out that while there are clearly some firms that are more progressive than others, increasingly all firms are being compelled to manage in this fashion.

"There’s a whole host of forces pushing them in this direction,” he says. “Lending institutions are increasingly going to demand evidence of sustainability. Capital markets are going to be affected. Outside groups continue to pressure and monitor corporate activity. There are programs that publicize not only what companies have manufactured, but also details about how they have tried to meet their environmental obligations.”

Indeed, Rothenberg notes, many companies make significant efforts to document their attempts at being good corporate citizens. “Exactly what they mean by ‘environmentally sustainable’ can be ambiguous,” he admits, but the general trend toward progressive corporate culture seems less ambiguous.

Feddersen suggests that we are entering a new era of global market complexity that will demand new frameworks. “We need to understand that we must work toward developing viable, stable international institutions, international law and trade agreements,” he says. “We’re just not going to be able to enjoy the autonomy we did 200 years ago, so we will be better off having these functional international institutions in place.”

Achieving such sweeping change will obviously require vision and determination of the sort that the BASE major strives to inculcate in Kellogg School students. Diermeier, for one, has already seen the way the BASE curriculum has changed his students’ perception of the world.

"The classes are eye-openers to many MBA students,” he says. “They start looking at their newspapers and see that these serious nonmarket issues are everywhere. MBAs now have to pay attention to politicians, regulators, activists — all of whom are not part of the traditional day-to-day business environment.

"Kellogg has a unique chance to take a true leadership position in this area.”