Business School

Corporate Diplomacy: Connecting Profits and Purpose

August 4, 2021  • Ideas Worth Teaching

It’s not every day that a reshuffle of a corporate board of directors makes global news. But this June it did, when Exxon Mobil lost a vote on board appointees to an upstart hedge fund, Engine No. 1, who had charged the energy giant with making too little progress on climate change mitigation. News reports hailed the victory as a turning point for activists increasingly adept at navigating the corporate world. Could it be a model for progress on a defining challenge of the 21st century?

Wharton Professor Witold Henisz

To explore this question, we spoke with Wharton School of Business Professor Witold Henisz. The winner of an Ideas Worth Teaching Award for his course, Corporate Diplomacy: Aligning Stakeholder Analytics & Strategy, Henisz also serves as an advisor to Engine No.1. Henisz describes how future business leaders can piece together stakeholder and shareholder concerns, an approach he calls “Corporate Diplomacy.”

The 2019 Business Roundtable redefinition of corporate purpose, 2020’s business commitments to racial equity, Covid-19, and activist shareholders have helped shift discussions of stakeholder capitalism from the philosophical to the strategic. How is your course particularly suited to meet this moment?

Managers, consultants, investors and creditors increasingly acknowledge the importance of stakeholder opinions of the acceptability of a company’s operations (i.e., the social license to operate) for that company’s ability to achieve its organizational mission and to deliver a sustainable long-term financial return. The rhetoric that companies must manage their stakeholder relations as well as shareholder relations is rapidly shifting from a philosophical critique of the capitalist system to a strategic, financial, operational and societal imperative. Managersconsultantsinvestors and board members are increasingly drawing on new unstructured data on stakeholder identity and concerns to align corporate and investment strategy with stakeholder demands, on issues ranging from environmental externalities (e.g., climate change) to human rights.

Yet, at the same time the discussions have shifted, the self-reported confidence of managersinvestors and board members in using this data to assess the financial implications of ESG factors and alter strategy is rapidly declining. We know racial justice, environmental justice and other ESG factors are strategic but don’t know how or what strategies will generate win-wins for shareholders and stakeholders alike.

The course provides students with cases in which protagonists deploy the latest tools to use this data for stakeholder and issue mapping as well as financial valuation. It also offers more behavioral skills critical for external stakeholder engagement, including trust building and communications as well as internal stakeholder engagement. In short, it prepares students to engage in Corporate Diplomacy (i.e., to influence or assess external stakeholders’ opinions of the acceptability of a company’s operations at a moment in time and to convince internal stakeholders to adapt their behaviors, systems and outputs when necessary).

Your course makes a distinction between corporate diplomacy and corporate propaganda. What is the difference, and what’s at stake?

Once managers recognize the strategic importance of stakeholder opinions and relationships they can either (1) alter their strategies to address stakeholder concerns, or (2) deploy strategies that alter their stakeholders’ opinions without altering their actual strategies. The former is corporate diplomacy and the latter constitutes corporate propaganda.

In an era of fake news and misinformation across the political spectrum, efforts modeled on the long-standing misinformation campaigns organized by tobacco, oil & gas and food & beverage companies (to distort the scientific evidence regarding the links between smoking and lung cancer, fossil fuels and global warming, and sugar consumption and obesity, for example) could become templates for stakeholder engagement.

In the course we highlight the modern origin of corporate propaganda in the practices of Edward Bernays, who coined the term “Public Relations” as the title for the 4th edition of his book after Joseph Goebbels’ application of Bernays’ toolkit from the previously-titled version discredited the use of corporate “Propaganda.” We then link Bernays’ efforts in support of big tobacco, automobile manufacturers, and agribusiness to modern efforts at corporate propaganda by some of these same companies, as well as new contexts like the battle for net neutrality.

If such practices continue to diffuse, particularly if turbocharged by social media, bots, sock puppets and other innovations, confidence in private corporations will plummet further and stakeholders would view large corporations and the capitalist system with even greater cynicism and distrust than they do now. At a time when many stakeholders look to corporations to discipline the excesses of the political system, arguably, no less than the sustainability of the post-war capitalist system is at stake.

The course pivots from discussions of geopolitical risks in countries like China and Russia to environmental, social and governance issues. How do businesses, and students planning their career paths, integrate such complex topics?

While the breadth of topics may seem large, I see a close connection and coherence in that the course studies the drivers of business success and failure that lie outside the traditional models of finance, marketing or strategy.

The course focuses on non-market forces including the quest for political power in corrupt institutional environments (including not only Russia, China, Thailand, the Republic of Georgia and Indonesia but also the corruption of the US campaign finance system). It similarly analyzes growing stakeholder interest in climate risk, human rights—including racial justice, LGBTQ rights and indigenous rights—and other ESG factors which can mobilize consumers, activists and, ultimately, government policy.

The tools to integrate such complex topics are common and boil down to understanding the stakeholder landscape, including the preferences of key stakeholders and their power as well as the relationships between them, and linking this stakeholder landscape to the profit and loss statement by understanding how stakeholders can probabilistically impact revenues and costs over time. The second half of the course focuses on how, once you identify the set of stakeholders and issues where you need to alter current strategy to achieve higher revenues or lower costs, you can build trust with stakeholders, communicate effectively with them and achieve an organizational mindset that supports such efforts by all employees. These same tools apply whether you are dealing with political or regulatory officials in Georgian electricity distribution or activists seeking to alter your strategy to better address climate risk.

As alumni from your course go into leadership positions across industries and sectors, what is the one lesson that you hope will stick with them throughout their careers?

Corporate Diplomats (i.e., the alumni from my course) recognize the interdependence of an organization and its ability to achieve its mission and the stakeholder landscape in which it operates. They aim to achieve harmony among a wide variety of stakeholders including shareholders and creditors but also employees, suppliers, community-members, regulators, legislators, opposition politicians and activists. They understand that any financial, strategic or marketing plan is contingent upon stakeholder support. They have undertaken the analysis and have already or are ready to adapt their plans to achieve and maintain such support over time. That is not to say that all stakeholders necessarily approve but that an analysis has been done to ensure that the strategy to be implemented will maximize profits considering its stakeholder support and opposition over the long-term. In undertaking this analysis and implementing this strategy, they have the confidence to effectively question plans and strategies that lack this analysis.

As is the case with public diplomacy, negotiating and understanding your peers in the stakeholder environment is only half the challenge. Convincing the CEO, the CFO, the COO and the analysts is as or more important. Corporate Diplomats have mastered the science and the art of both sides (i.e., external and internal) of the diplomatic effort.

Perhaps most importantly, my students understand that, as individuals and collectively, they are potential change agents. Their actions have the potential to renew, reshape, or increase the accountability of capitalism at a transaction, corporate, industry, national and global level.

I close the class with the words of Mary Parker Follett, who wrote:

“The world will be regenerated by the people who rise above these passive ways and heroically seek, by whatever hardship, by whatever toil, the methods by which people can agree.”

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