The Big Idea: Leadership in the Age of Transparency
Rarely do before-and-after business cases present such a neat study in contrasts. Compare the recent actions of the key players in the food industry with those of the tobacco industry two decades earlier.
In the 1980s, executives at Philip Morris were still fighting energetically to hold back the tide of evidence that cigarettes cause lung cancer, and claiming that customers were exercising free will in choosing to smoke. A 1993
Fast-forward to the turn of the millennium and you see a very different kind of behavior in the packaged food and restaurant industries. As the dangers of trans fats came to light, managers in the most powerful firms took the health implications to heart and responded quickly, before the issue became a cause célèbre, by changing recipes, funding public education campaigns, and pushing reduced-fat products. By 2005, a trade publication was already announcing "Kraft completes trans fat reformulation," and every one of the company's competitors was following suit. Given that the first U.S. state law outlawing trans fats in restaurants went into effect only this year, these were voluntary changes taken well in advance of legal or regulatory compulsion—or even public anger.
What transpired over those 20 years to drive such divergent managerial responses? Something very big, actually: As the impacts of business on the environment, on society, and on individuals became too substantial to ignore in many realms, and cheaper and easier ways to measure those impacts were devised, the rules of doing business shifted. Considerations that hadn't previously complicated the plans of corporate leaders started getting factored in. In other words, it was no longer possible to ignore externalities.
The concept of externalities goes beyond impacts on the physical environment. Say your menu-driven phone system keeps callers on the line a bit longer and eats up their minutes, or your subcontractor decides to cut costs by using undocumented workers, or property values near your facilities start to slide: Those are impacts for which you will likely not be called to account.
When Kraft, Nabisco, and Nestlé decided to reformulate their recipes, and national restaurant chains such as Wendy's and Burger King switched to less artery-choking fats in their fry-o-laters, they were choosing to internalize an externality. They were taking ownership of an issue that they could, by law, have continued to say was not their problem. Yes, they did so under some activist pressure, and yes, they could still do more. But unlike tobacco companies in the 1980s, the food companies didn't wait for regulation or lawsuits. They acted. That's a big change, and what's behind it isn't as simple as good public relations. There's something more nuanced, and at the same time more hardheaded, going on.
In this article, we'll explore the forces behind what we see as a coming sea change in corporate leadership. We'll make the case that the true measure of corporate responsibility—and the key to a business's playing its proper role in society—is the willing, constant internalization of externalities. Today, business leaders are bombarded with messages through many channels that they owe more to society, and many think so themselves. But often the result is an incoherent mishmash of charitable giving, CSR programs, and "going green" initiatives. Here, we present a far more disciplined way to respond to the challenge.
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