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Ignoring Social and Political Reality Can Sink Global Companies

May 2004

Daniel Litvin, author
Litvin

STANFORD GRADUATE SCHOOL OF BUSINESS
—Western companies investing in Iraq must listen to the warning of history. Since the 17th century, companies that ignored the social and political environments in which they did business risked their very existence, author Daniel Litvin told the Business School's first Global Business and Global Poverty Conference on May 19.

Companies interested in oil investment in Iraq should look to the history of other oil-rich developing nations such as Nigeria, "where there has been a huge conflict among ethnic groups about how the revenues from that oil should be distributed," Litvin explained. As the director of Percept Risk and Strategy, a London-based consultancy specialized in corporate responsibility and reputation risk, he advised investors to make sure that the Iraqi government distributes the oil revenues fairly among the different ethnic groups. "Foreign companies cannot tell governments what to do, but they can exert influence," he said.

The myth that multinationals "cleverly manipulate governments and societies in their own interest" has been sustained by the companies themselves and also by their Western critics, said Litvin. Companies are interested in assuring stockholders they are in control of the situation while critics see the myth as supporting their anti-globalization concerns.

Today, "modern companies are in general less brutal and less willing to resort to naked force than the companies from the Imperial Era," said Litvin, author of the book Empires of Profit. Yet if today's multinationals continue to behave "like clumsy giants," using simplistic management techniques, their reputation and bottom line will be endangered, Litvin warned.

He cited the experience of the East India Company, Cecil Rhodes' British South Africa Company in what is now Zimbabwe, Nike in Asia, and global energy giant Shell. The four, he explained, failed to understand the social and political complexities of the local communities and, therefore, did not anticipate problems.

A clear example of multinationals' "blindness" was Rhodes' company. Only one month before the 1896 rebellion against the company, one of Rhodes' men wrote in a letter sent to Britain: "There was a rumor about a possible rising among some of the tribes, but that of course was all moonshine; the natives are happy, comfortable and prosperous and the future must be magnificent."

The Matabele were not happy with Rhodes, nor were the Indians happy with the East India Company. While East India directors in England called for "peaceful trade," the local managers engaged in struggles with the Indian authorities and even took over part of their territory. The conflict ended with a rebellion against the East India Company in 1857, and the firm eventually was nationalized.

This disconnect between headquarters and local management also affected Nike when the accusations of sweatshop working conditions started circulating in the 1990s. According to Litvin, the company "was basically paying its Asian contractors to make shoes knowing very little about how they were treating their workers."

In addition to local politics, multinationals have to face the suspicion of Western activists whose criticism rarely matches "what's really important on the ground." Thus, companies have to learn how to balance both local and Western pressures, Litvin said. Corporate social responsibility actions may help, but they are not a "magic bullet" to enhance reputation. Indeed Nike's and Shell's recent efforts to demonstrate social concern have been unsuccessful in neutralizing local and Western antagonisms. A basic lesson for management, said Litvin, is that the traditional reactive approach of public relations is insufficient. Companies have to be attentive to the social and political problems before these become unmanageable, he advised.

—Isabel Awad

Stanford GSB News

Ignoring Social and Political Reality Can Sink Global Companies

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