Strategy and Social Issues: Ceos On

s t r at e g y
october 2007
CEOs on strategy and

social issues
Business leaders are now more inclined to incorporate societys expectations into
their core strategies but face many challenges when they do.
Debby Bielak, Sheila M. J. Bonini, and Jeremy M. Oppenheim
Article
at a
glance
Chief executives have increasingly incorporated environmental, social, and governance

issues into core strategies, McKinsey research shows.
These CEOs are responding to increasing pressure from employees and consumers, but some
also see opportunities to gain a competitive advantage and address global problems.
CEOs view globalization as the key development reshaping the contract between business
and society. They identify talent constraints, poor public governance, and climate change
as the issues most critical for their companies to address.
Competing strategic priorities and the failure of financial markets to recognize the importance
of implementing a strategic approach to societal issues are among the barriers to change.
Chief executives around the world increasingly believe that they have a strategic
rationale for taking on environmental, social, and governance 1 issues. However,

they also understand the challenges that must be overcome when they
dochallenges that include the difficulty of managing supply chains across
countries with different regulations and norms for corporate social
responsibility.2
According to our survey 3 of CEOs at companies participating in the United
Nations Global Compact,4 more than 90 percent of them are doing more than they
did five years ago to incorporate environmental, social, and governance issues into
their core strategies. Our research5 shows that while pressure from employees,
consumers, and other stakeholders plays an important part in this trend, some
CEOs see the new demands as opportunities to gain a competitive advantage and to
address global problems at the same time.
Great expectations
According to 95 percent of the CEOs in our survey, society has greater expectations
than it did five years ago that companies will assume public responsibilities. More
than half predicted that these expectations would increase significantly during the
next five years as well. Low levels of trust among consumers underscore the pressure
to act. In a 2006 McKinsey global survey, for example, only 33 percent of European
and 40 percent of US consumers said they believed that large global companies acted
in the best interest of society at least some of the time. 6
EX HI B IT 1
Societal expectations
A new class of stakeholder
Many of the CEOs we interviewed observed that satisfying the shareholders is no

longer good enough: consumers will punish companies that dont fulfill their public
responsibilities, causing their market shares to decline. Socially irresponsible
business practices could also make it harder for companies to attract and retain
talented people. It is important, said the CEO of a retailer, for our employees to
know and see that they are working for a company where these things are held to be
important. CEOs ranked employees as the stakeholder group that has the greatest
impact on the way companies manage their societal expectations, with consumers a
close second. Both groups are joining nongovernmental organizations and activists
in making increased demands on companies. Over the next five years, respondents
expect consumers to become the most influential stakeholder group, with employees
dropping to second place.
EX HI B IT 2
Stakeholder impact
Globalization ups the ante
The terms of the contract between business and society have undoubtedly become
more extensive and complex: difficult environmental, social, and governance
challenges have accompanied the rise of emerging economies, which are both drivers
of global demand and providers of goods, services, and talent. CEOs in our survey
identified increasing environmental concerns as the most important trend
influencing public expectations of business, followed by the limited supply of
natural resources and the emergence of China and India as powers in the global
marketplace.
Clearly, companies operating in these countries will be affected by local
interpretations of environmental, social, and governance norms. They will have to
find ways of demonstrating their local loyalties and, at the same time, build globally
integrated systems of values.
EX HI B IT 3
Trends influencing societys expectations of business
Critical for success
The approach a global company takes in dealing with cross-border environmental,

social, and governance issues, many of which demand both systemic change and
sustained engagement by business, may affect not only its reputation but also its
competitive position. A company that offers better working conditions and health
care benefits than local norms stipulate, for example, may have an easier time finding
skilled employees in areas with limited educational systems. Likewise, a company
that invests in water conservation may be protecting vital resources for continued
growth. As the CEO of a consumer-packaged-goods company said, Water is the
biggest issue for our company right nowthe ability to do business in
water-stressed areas is critical to our growth.
CEOs in our survey identified talent constraints, poor public governance (such as
corruption or underdeveloped legal and judicial systems), and climate change as the
most critical environmental, social, and governance issues their companies must
address to succeed in the future.
EX HI B IT 4
Address for success
Barriers to engagement
These challenges seem daunting enough, but the barriers to implementing strategic
approaches to themapproaches representing sustainable wins for companies as
well as for societyare formidable too. Competing priorities are the biggest
impediment. Shareholder demands for strong short-term financial performance, for
example, compete with environmental, social, and governance investments that are
longer term by nature. The absence of clear and consistent metrics that could relate
such investments to (or correlate them with) investor returns exacerbates this
conflict. In fact, fewer than one-fifth of the CEOs we surveyed believe that financial
markets account for the way a company approaches environmental, social, and
governance issues when they value it. As the CEO of a financial institution noted, the
standards that do exist 7 have yet to become benchmarks to look up in theWall
Street Journal , where we can see, alongside stock prices, that a companys ESG
[environmental, social, and governance] impact rating went from 2 to 12, and this
somehow becomes a factor in how we value it.
Another barrier is a lack of consistent industry regulations (or even norms) that
might level the playing field across countries. One CEO described this complicated
state of affairs by saying, The world is not flat, but quite hilly. Companies that
wish to deploy tough international norms (on labor practices, for example)
therefore face a significant risk of losing out to less scrupulous noncompliant
competitors.
EX HI B IT 5
Barriers to CEO engagement
Performance gaps
Substantive challenges await any company bent on translating its good intentions
into good deeds. While 72 percent of the CEOs we surveyed said companies should
fully incorporate a stance on environmental, social, and governance issues in
strategies and operations, only 50 percent said that their own companies actually
do. Changing the practices of suppliers is particularly complex. First, as the CEO of
a manufacturing company said, There are questions about how far up and how far
down the supply chain responsibility goes. Moreover, if a company does decide to
implement a global code of conduct, local suppliers often ask why they should invest
in equipment or more humane management practices to suit the whims of the
customer. While 59 percent of the survey respondents believe that their companies
should incorporate environmental, social, and governance issues into the
management of supply chains, only 27 percent say that those companies actually do.
EX HI B IT 6
Performance gap
Debby Bielak is a
consultant in
McKinseys
Philadelphia office,
Sheila Bonini is a
consultant in the
Silicon Valley office,
and Jeremy
Oppenheim is a
director in the
London office.
The barriers to implementing strategies that benefit companies as well as society

often seem very hard to overcome. Yet during our research we found that many
businesses are developing creative and commercially viable solutions for addressing
issues such as water conservation, biodiversity management, finance for the poor,
and treatment of HIV/AIDS. These corporate pioneers are redrawing the global
playing field around a new set of competitive advantages and relationships with
consumers.
1
The authors wish to

acknowledge the
contributions of
Tarrah L. Kehm, a
consultant in
McKinseys Brussels
Knowledge Center.
These include global public-governance issues (such as different regulations and norms in different countries), local
public-governance issues (such as corruption or underdeveloped legal and judicial systems), and
corporate-governance issues.
2
The full report underlying this article, Shaping the New Rules of Competition: UN Global Compact Participant
Mirror, is available free of charge online.
3
The 391 survey respondents represent 230 organizations with headquarters in Europe, 73 in the Americas, 47 in
Asia, 25 in Africa, 9 in the Middle East, and 7 in Australasia. They include 275 private and 79 public companies, 28
state-owned ones, and 9 nonprofits.
4
The United Nations Global Compact is an initiative, established in 2000, to encourage businesses around the world to
adopt sustainable and socially responsible policies and to report on them.
5
In addition to the survey, we conducted in-depth interviews with leaders of 38 organizations participating in the
United Nations Global Compact. Thirty-one of them were companies (24 multinational and 7 national) and 7 were
civil-society organizations.
6
Sheila M. J. Bonini, Kerrin McKillop, and Lenny T. Mendonca, The trust gap between consumer and
corporations, The McKinsey Quarterly, 2007 Number 2, pp. 710.
7
Initiatives such as the Goldman Sachs global ESG framework have made progress bringing environmental, social,
and governance issues into the mainstream of the capital markets. The Goldman Sachs framework is designed to
incorporate such issues into industrial analysis and valuations on a sector-by-sector basis.
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Copyright 2007 McKinsey & Company. All rights reserved.

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s t r at e g y

CEOs on strategy and

Debby Bielak, Sheila M. J. Bonini, and Jeremy M. Oppenheim

Chief executives have increasingly incorporated environmental, social, and governance

rationale for taking on environmental, social, and governance 1 issues. However,

A new class of stakeholder

Many of the CEOs we interviewed observed that satisfying the shareholders is no

Globalization ups the ante

Critical for success

The approach a global company takes in dealing with cross-border environmental,

The barriers to implementing strategies that benefit companies as well as society

The authors wish to

Related Articles on www.mckinseyquarterly.com

Copyright 2007 McKinsey & Company. All rights reserved.

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