Strategy in a Hyperpolitical World

Almost everything about business today is political, in the sense that it requires consideration of a wide range of often controversial ethical, social, and ecological issues. Choices that may have been clear-cut in purely economic terms—such as what business to be in, where to do business, whom to do business with, and even how to price goods or hire and promote employees—can now easily become complicated by politics.

The stakes for skillfully managing this situation are higher than ever. When Delta stopped offering discounts to NRA members following a 2018 school shooting in Florida, it was threatened with the withdrawal of fuel subsidies in Georgia. When Disney spoke up on LGBTQ+ rights in Florida, it lost its special governance status and rights in the state. When H&M voiced concerns about cotton sourcing and human rights in China, its revenues in that country plummeted. When the Ukraine crisis broke, McDonald’s was forced to exit the business it had painstakingly built in Russia over a 30-year period.

The assumption that business and politics can and even should be separate is no longer realistic—especially where values, identity, and security are concerned. And these days it’s not enough to attempt to defuse political issues when they arise by relying on messaging from the corporate affairs department.

What has changed?

Technology has created a new degree of transparency. Companies can no longer manage political tensions by talking and behaving differently to different audiences at different times. In an age when people “bowl alone,” the workplace has become the main vehicle for socialization and self-expression. As employees seek to express their identities and beliefs at work, they increasingly expect that their companies will support the issues they care about. It is notable that many CEOs who have taken a stance on social issues say the impetus was that their employees expected and lobbied for it.

At the same time, societies have become more divided, both in opinion and in substance. Inequalities of wealth and income are now more obvious in many countries, generating differences of interest and opinion that are rapidly picked up and amplified on social media. And as economic integration across societies with very different political models, religious beliefs, and values has intensified, new fault lines have appeared, especially between the established nations of the OECD and rising powers such as China.

The assumption that business and politics can and even should be separate is no longer realistic—especially where values, identity, and security are concerned.

For business, the result is a web of often conflicting political issues. Backlash can come from a variety of stakeholders. At Google, for example, employees protested the company’s proposed censor-friendly Chinese search engine. At H&M the company’s Chinese customers opposed its environmental stance. And the backlash may be felt at home for action abroad (Google), abroad for appeals to home values (H&M), or at home for actions that simultaneously appeal to some and inflame others (Delta and Disney).

So what does that mean for strategy?

We define strategy as the art of making informed choices in a competitive environment. Choices are important when differing paths lead to differential risks and rewards. When the social environment is broadly favorable to business, a company’s strategic choices can be justified in purely business terms or, as necessary, finessed with carefully crafted press releases. Today, however, choices must be made on an expanded playing field. They are often complex because the underlying ethical, social, and political issues are constantly evolving and defy simple analysis. To make and implement the best strategic choices in this environment, leaders will have to (1) develop robust principles to guide strategic choices, (2) address ethical issues early, (3) consistently communicate and implement their choices, (4) engage beyond the industry to shape the context, and (5) learn from mistakes to make better choices in the future.

Let’s examine what those actions involve.

Develop Robust Principles

The aspects of business that can become politicized, and the ways in which that can occur, are so numerous that you can’t foresee every challenge. Even some companies that invest in scenario planning failed to predict the Russian invasion of Ukraine. But you should try to anticipate the challenges that are most likely to touch your operations and devise principles that will address them.

Such principles are especially helpful for navigating ethical and political issues that, unlike analytic questions in finance or marketing, are often nuanced and cannot be easily quantified. It was not possible to quantify either the anger of Disney employees over Florida legislation limiting discussion of LGBTQ+ issues in schools (known as the “Don’t Say Gay” bill) or the hostility of Florida’s Republican governor, Ron DeSantis, in response to Disney’s statement on the issue.

Moreover, unique solutions can rarely be deduced for ethical issues, which always involve a judgment call. If your values haven’t been codified in a set of principles, it is impossible to choose a reasonable course of action from the facts of the situation alone. What’s more, the most complex issues are almost always the most controversial and divisive ones—within a company as well as in the outside world. Having well-thought-through and agreed-upon principles can help minimize the undue politicization and emotional polarization of discussions within the company.

Those principles must be comprehensive enough to apply across the major sources of political tension to which a company is likely to be exposed. For example, they should be appropriate in all jurisdictions, not just straightforward and familiar ones. They should be clear enough to guide choices. “Never commit or condone bribery” is simple and clear. “Do no evil” and “Contribute to societal well-being” are not. And principles should be tangible enough to determine whether they have been applied or not. Tesla’s commitment to open-sourcing its patents in the interest of a “common, rapidly evolving technology platform” to fight climate change can be audited easily and objectively.

To develop such principles, the first step is understanding the salient social and political issues for your company. The second step is envisioning where and how those issues might intersect with your business and the choices that they imply. The third step is hearing and understanding the opinions of your employees on those issues—because, as we’ve noted, they are often the reason that companies take a position on political issues.

Once they’ve considered these factors, companies can articulate the principles that will guide their choices about where and how to do business. The principles can be tested by predicting where they might realistically prevent you from doing something and what the resulting costs would be over different time periods.

Consider Starbucks, which operates 34,000 stores worldwide in 83 markets and accounts for more than 3% of the global coffee trade. Its segments include at-home coffee, ready-to-drink, and food service channels. Although the company’s scale is monumental, its sourcing is localized, encompassing 400,000 farmers in 30 countries across Central America, South America, Africa, and Southeast Asia. In sourcing its beans, Starbucks makes countless business decisions, including which farms to work with, what environmental standards and labor practices to set, how to pay farmers, and what benefits to provide to their communities.

Historically, market forces drove such decisions, but Starbucks and its competitors came under increasing pressure to consider other factors in their sourcing activities. So in 2004 Starbucks decided to codify its commitment to ethical sourcing standards, becoming the first in the coffee industry to do so. The company collaborated with Conservation International to develop the Coffee and Farmer Equity (C.A.F.E.) Practices, which set economic, social, and environmental standards for its sourcing program.

The principles in C.A.F.E., such as “Permanent and temporary/seasonal workers must be paid at least the nationally or regionally established minimum legal wage on a regular basis,” are clear, values-informed, and achievable. Each principle comes with explicit policies for enforcement, and a third party monitors farm verification and adherence, flagging shortfalls when they occur. By proactively establishing C.A.F.E. and moving swiftly to correct noncompliance, Starbucks motivated its supplier network to improve practices and transformed reports of abuse from potential public catastrophes into evidence of its commitments writ large.

New principles will serve to guide future business decisions and may very well require immediate changes to company operations if they conflict with prior ones. A commitment to them means that the company will make the principled rather than the commercially expedient choice when required. To be sure, predicting the future perfectly is not possible. But investing in the thought process can reduce the incidence of unanticipated issues and rushed ad hoc decisions.

Address Ethical Issues Early

Just as a company assesses where to operate on the basis of markets’ potential attractiveness, evolving trends, and expected competitors’ moves, it now also needs to anticipate, preempt, and shape nascent ethical challenges. That may require a high degree of creative problem-solving, but it often garners outsize public goodwill and strategic advantages for early movers. Once an issue has become front-page news, political camps will be entrenched, and the company’s room for maneuver will be limited.

Anticipating and shaping ethical challenges requires a delicate balancing act. Individual companies may be able to move earlier and with greater control, but eventually complex issues may necessitate collective action, often initiated by a market leader. Sometimes a combination of collective and individual initiatives can build momentum, influence the issue, and offer advantages of differentiation for the initiator.

In the early 2000s the diamond-mining giant De Beers, like other leaders in its industry, faced a potentially existential crisis. Human rights groups were sounding the alarm on “conflict diamonds”—stones sourced from rebel-controlled regions where they were often mined using inhumane practices or slave labor, with the proceeds going to finance brutal wars. Although they accounted for less than 5% of the world’s supply of diamonds and were recovered from countries other than those where De Beers mined, these “blood diamonds” had the potential to tarnish the reputation of the entire industry, erode consumer confidence, and result in a full-scale boycott.

In his series Mapworks the artist Chris Kenny transforms cut map fragments and found materials into three-dimensional collages and sculptures.

The moral imperative and the business imperative were both clear. De Beers moved swiftly to communicate how it would ensure that it sourced and sold only conflict-free diamonds. But the long value chain from mine to finger and a sophisticated smuggling network presented the risk that illicit diamonds would enter the global supply chain. Safeguarding the industry and ensuring customer confidence would require unique solutions.

De Beers worked with others in the industry and with the UN to establish the Kimberley Process for international certification of conflict-free diamonds. But De Beers went further: It developed a more comprehensive suite of standards—its Best Practice Principles—to address a range of supply chain risks and differentiated itself strategically as “best in industry” for diamond provenance. That involved actions such as limiting diamond sourcing to company-owned mines and developing Tracr, the world’s only distributed diamond blockchain, to provide an immutable record of a gem’s provenance. This solution, first implemented in 2018, uses artificial intelligence, the internet of things, and advanced security and privacy technologies to enable De Beers to provide assurance not only of a diamond’s origins but also of the company’s positive impact on the people and places involved in its supply chain (supported by its Building Forever sustainability framework).

De Beers is again leveraging its position to protect the industry and reinforce its brand by spearheading a campaign to expand the definition of conflict diamonds, thus extending the scope of the Kimberley Process, and to cover a wider range of supply chain risks. Meanwhile, it is using Tracr to provide provenance information to the many customers who seek additional assurance in light of sanctions on diamonds from Russia.

Consistently Communicate and Implement Choices

Principles will often collide with reality in either the day-to-day operations or the future planning of an organization and should therefore be communicated to and understood by all employees. Because they will influence the expectations of stakeholders outside the company, they should also be publicly transparent.

However, leaders should not use a megaphone to communicate. The aim is not to provoke, confront, or embarrass but, rather, to convey what guides the company’s decision-making and to reduce future disconnects and surprises. Disney did itself no favors by using a megaphone in its tussle with DeSantis. Its strong statement may have appealed to Disney employees, but it acted as a dramatic provocation for the governor.

Principles are credible only if they are consistently applied. So they must be part of the everyday making of business decisions, not simply called up in response to pressure after a situation has exploded. Navigating the political dimensions of business is hard enough without also having to explain and remedy inconsistent communication or application. And principles that mainly inform communications but not action will not be credible over time or effective in navigating risk.

In applying a company’s principles, the aim should not be to judge stakeholders and situations at arm’s length. Rather, it should be to engage with and solve issues preemptively and collaboratively whenever possible. A company standing against corruption will have a greater impact if it works with other stakeholders to address that issue and improve the context—even if, at the end of the day, a decision about whether to stay in the business in question or exit it is required.

Since exit or disengagement is by design a possible outcome, orderly exit options should be prepared for, along with clear communication regarding why the company is stepping away. There should always be a plan B for when principles are breached. And exiting is not necessarily inconsistent with continuing to work collaboratively on an underlying issue or with reengaging when the situation has improved.

Principles are credible only if they are consistently applied. So they must be part of the everyday making of business decisions.

CVS Health, which includes the U.S. pharmacy chain CVS, provides a good example of getting communication and implementation right. Historically, chains like CVS, Walgreens, and Rite Aid have been community resources: Local residents use them to pick up not only medications but also household essentials—toilet tissue, detergent, stationery—and even cigarettes and alcohol in some places. Over the past decade, however, they have increasingly served as health care providers—administering flu shots, providing basic care, monitoring for chronic conditions, and more. As the chains’ health services proliferated, harmful tobacco products sitting on the shelf grew more conspicuous, pitting corporate principles against the bottom line—an opportunity ripe for public outrage.

In February 2014 CVS became the first national pharmacy chain to address this conflict by ending the sale of tobacco products—a decision that would result in an annual revenue loss of $2 billion. But for the company’s leaders, removing tobacco was an imperative beyond sales: It was essential to enacting their public principles consistently.

CVS’s key competitors took partial measures—raising the minimum age to buy tobacco products to 21 but continuing to sell them—and faced increasing public scrutiny as a result. CVS avoided that scrutiny and used its action as a catalyst for the successful transformation into a health care company. In September 2014 CVS rebranded as CVS Health; in 2018 it acquired Aetna; and throughout the pandemic it stepped up as a key access point for Covid-19 testing and vaccines. The company’s president and CEO, Karen S. Lynch, says, “We have rebuilt and continue to rebuild ourselves as a health care company with a clear purpose of ‘Bringing our heart to every moment of your health.’”

Engage Beyond the Industry

There are limits to the power that companies can exercise individually or even in cooperation with competitors, and they will often need to work with civil society and government on the hardest and most deeply entrenched issues to effect change. Therefore they should actively participate in existing solution forums and where necessary help create new ones. The costly alternative is accepting the unpredictability of an endless series of ad hoc responses or having regulation forced on the industry owing to insufficient impact from their own efforts. And there are important new issues around which to build consensus. Applications of AI are a case in point. Over the past decade AI hiring algorithms have become ubiquitous: Now 99% of Fortune 500 companies rely on software to sift through job applicants, and 55% of HR leaders in the United States use predictive algorithms in the hiring process.

But controversy has surrounded the rise of AI-based hiring systems, as a lack of external regulation and limited industry-driven standards have allowed them to introduce bias and produce discriminatory outcomes. After all, algorithms reflect the intentions and biases of their architects and the data used to train them. Without careful design and transparency about outcomes, they can become a major source of friction.

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In the face of this nascent political issue, Pymetrics, a vendor of algorithm-based hiring software, has sought to change the industry from the inside and preemptively lobbied to bring about regulation. In November 2021 Pymetrics banded together with other software vendors, civil society groups, and corporate users of the software and worked with the city of New York to pass the first law in the nation setting standards for the unbiased use of AI in hiring. In the view of Frida Polli, the CEO of Pymetrics, shaping the discussion and self-regulating were essential for the health of the industry and her own company: “Consumers are losing faith in tech, and there is a real threat of others’ imposing legislation if we don’t act to bring it about ourselves. Everyone, our company included, loses when tech perpetuates bias.”

Learn from Mistakes

Even if you have the best intentions and analysis, political and social issues are intrinsically complex and unpredictable, making surprises and missteps inevitable. When they occur, it’s important to extract and incorporate lessons and leverage crises to good effect. In our discussions with company executives, we found that some of the most devoted saints were reformed sinners whose transformations had been catalyzed by public scandal.

For the electrical-engineering giant Siemens, the watershed moment came when an international investigation revealed that the company had paid $1.4 billion in bribes to government officials in Asia, Africa, Europe, the Middle East, and the Americas over several decades. Siemens was brought to account and faced intense public criticism. But it used that moment as the impetus for initiating sweeping internal change.

Siemens began by cleaning house: It hired the company’s first-ever external CEO, Peter Löscher, who, within months of taking over, had replaced about 80% of the top level of executives, 70% of the next level down, and 40% of the level below that. Next, it made earnest and long-term commitments to atone for its past actions: It has supported government investigations and set up the global Siemens Integrity Initiative to fund collective action to reduce corruption, which has allowed the company to continue to bid for government contracts. As of July 2021 the initiative’s portfolio included 85 projects in more than 50 countries with funding of nearly $120 million committed.

Finally, and most important, Siemens used the scandal to transform its culture and increase its nimbleness. In Löscher’s words, “Never miss the opportunities that come from a good crisis—and we certainly didn’t miss ours. The scandal created a sense of urgency without which change would have been much more difficult to achieve.” He and his team refocused the business, removed management layers, and altered how the managing board made decisions, thereby resetting the system of control that had enabled the scandal while repositioning the company for market success. (For details, see “The CEO of Siemens on Using a Scandal to Drive Change,” HBR, November 2012.)

. . .

We anticipate that with the continued rise of China, instability on Europe’s doorstep, and escalating economic and social polarization, the intersection of politics and business will become more fraught. It is time to accept and embrace politics as part of strategic choice and to build the tools and capabilities required to do so. But CEOs must not confuse themselves with politicians or moral watchdogs. Instead they must focus on what is within their purview, albeit in a new context. They must steward the credibility, trustworthiness, and vitality of their enterprises by appreciating the broader and longer-term forces at work in their environment. And they must use what they learn about those forces to make informed choices, to communicate and implement them consistently, and to proactively engage with other actors to shape the context in which they do business.