Institute Insights: How Companies Respond to Pressures on Issues

Monday, June 3, 2019

Featuring research by Center for Sustainable Enterprise Faculty Director Olga Hawn and her colleagues on sustainable business practices.

New research paper provides a framework for companies to respond to pressures on issues from global warming and sustainability to child labor and discrimination

Corporations face constant pressure to respond to a wide range of social, environmental and governance issues, many of are outside the company’s core mission. Determining whether or how to respond to such pressures is a complex process, often requiring substantial time and resources on the part of senior management.

In a new paper, “Willing and Able: A General Model of Organizational Responses to Normative Pressures,” Olga Hawn, University of North Carolina Kenan-Flagler Business School Assistant Professor for Strategy, Entrepreneurship, and Sustainability; Rodolphe Durand of HEC Paris; and Ioannis Ioannou from the London Business School provide a dynamic framework for understanding how companies analyze and respond – or don’t respond – to “normative pressures” on matters that include global warming, environmental stewardship, occupational health, executive compensation and corporate governance, among others. This pressure comes from a wide range of interest groups that may include activists, non-governmental organizations (NGOs) and other stakeholders.

“Companies are continually pressured by various constituencies to address multiple social, environmental and political issues, many of which may not be directly relevant to their day-to-day operational concerns,” says Hawn. “With this research, we are providing a framework for understanding the factors that describe whether, and how, companies choose to respond.”

Hawn and her colleagues propose that the two key determinants for a company’s response are “issue salience” and “cost-benefit analysis.” To provoke a meaningful response, issues generally must have some relevance to the company’s business model and market positioning. Further, the response needs to be manageable in terms of its demands on both financial resources and management time.

“A good example of this might be a food company under pressure from activists to improve the sustainability of their produce,” says Hawn. “In this case, taking action makes sense as it would serve to bring the company into better alignment with its customers, their core values and demand. By contrast, a professional services company asked to address an issue like global warming may find it less compelling to respond as its energy footprint is likely to be fairly modest.”

A range of possible actions

Hawn and her colleagues suggest that based on issue salience and the cost-benefit analysis of resource mobilization, organizations tend to respond along a continuum:

  • Inaction. Management concludes that the issue is not sufficiently relevant or that responding will be too costly to the organization based on the potential benefits and costs, and does nothing.
  • Substantive conformity. Conformity applies primarily to social rather than legal demands by going beyond what is legally required of business. Here, significant steps are taken to bring the company and its values into alignment with the issue. This might include a change in personnel policies impacting a particular group (the LBGQT community, for example), or reducing waste through a new sustainability initiative. Companies undertake substantive conformity when they perceive that the benefit of resource mobilization exceeds the perceived cost.
  • Substantive compliance. Compliance refers to legal requirements across various jurisdictions. In this instance, the company uses the basic legal framework to implement changes consistent with what is demanded by law, integrating those changes into company policy (making them real or substantive). A substantive compliance response is put into motion when the net benefit of an action is viewed as still positive but diminishing. Companies will comply with laws and regulations but will not seek to differentiate themselves by meeting more informal expectations.
  • Symbolic conformity. Here management takes largely superficial steps to address an issue, without implementing fundamental, and presumably costly, change. (An example is so-called “greenwashing” – a nod in the direction of environmental consciousness but unsupported by any specific action.) The net benefit of the action is negative, yet growing because less expensive resources are utilized to address the issue.
  • Symbolic compliance. Here, the net benefit is negative but higher than that of inaction, and companies simply take the minimal steps required by law, sometimes in a symbolic fashion. This reduces the costs of responding while still yielding some benefits.

Hawn notes that corporate culture is often a major determinant of how companies
respond to external pressure. “Senior leadership may feel varying degrees of responsibility to conform with or exceed the normative demands of the community,” she says. “This can be significant in determining how they view the significance of a wide range of social, environmental and business issues.”

The researchers used individual issues as the unit of analysis in seeking to determine
why a particular issue was resolved or even addressed. They offer two reasons for this: first, not all issues are of similar importance, either from a corporate or a societal point of view, and that allows for some issues to be reasonably ignored. Second, because salience is by definition subjective, it provides a window into management’s decision-making process that can be useful for other leaders who find themselves confronting similar circumstances.

Doing nothing as an option

According to the study, companies may perceive two primary reasons for inaction in the face of outside pressure. The first is salience: the issue may simply not be sufficiently relevant to generate action, or may not be aligned with the firm’s core values or affect its bottom line in the future. Second, of equal importance, the salience may be low and the cost of action high, suggesting little to no benefit to the organization from acting. In both these instances, doing nothing may be preferable.

The authors note, however, that there may be social as well as monetary costs associated with inactivity and that these may, in some cases, supersede the economic argument. For example, reputational issues are increasingly recognized as having real world costs in terms of money, recruiting, and business development, and have to be taken into consideration.

“With the growth of social media and the increasing interconnectedness of global economies, companies find themselves under pressure from one interest group or another on an almost daily basis,” says Hawn. “Not every issue has the same relevance, but nearly all have the potential to inflict some level of reputational damage and that has to be taken into account in determining a response.”

The study further notes that not every corporation will have the same cost of responding to an issue and that those that are the most “agile” are generally able to react to external pressures more efficiently and at lower cost, increasing the potential range of responses.

“Organizational structures also help define how a company responds,” says Hawn. “Companies with more distributed architectures can often react faster while drawing on fewer resources. This figures into the calculation as to whether or not to act.” Another consideration: some companies view external pressure as an opportunity to strengthen relationships while others focus more on threat reduction, Hawn notes. This, too, impacts the choice of responses.

Finally, the authors note that some issues may be beyond the ability of an individual company to effect, citing global warming as an example. “There’s a recognition that no single company can address an issue like global warming on its own,” Hawn says. “At some point, this realization may actually result in a less robust response in spite of a high level of salience.”

A framework for decision-making

A primary benefit of the paper is the authors’ creation of a decision-making matrix detailing when and how companies react to normative pressures. The matrix charts “net benefits” (benefits minus costs) against “salience” from the point of view of the decision-maker. It is designed to facilitate a more systematic comparison of actions across companies, industries, issues and geographies.

“Historically, management has been forced to respond in an ad hoc way to pressure groups, without a tool for systematically analyzing the impact or locating its response in the context of its competitors,” Hawn says. “We view this research as a significant step forward in moving from a theoretical to a more practical decision-making framework.”

Click here to view the full paper.