Ram Charan What Every Company Should Know

Consider the following scenario: A company's new strategy is built around an innovative new product it recently launched with much fanfare. Tremendous time and effort have gone into developing it, and everyone at the Chicago-based company is pleased with the early results.

The Snowball Effect

But someone in Poughkeepsie is not. A consumer advocate sits down at his computer and composes an incendiary email in which he declares the new product unsafe. He sends the message to hundreds of his colleagues, media contacts, and people in his social network.

His message plays loose with the facts, but its alarming tone is convincing. His email includes two very explicit calls to action: 1) Boycott all the company's products, and 2) Forward the email to everyone you know.

In no time at all, the boycott cuts deep into sales of the new product. The media picks up on it and depicts the company as placing profits over consumer safety. And a powerful congressman, looking to curry favor with consumer groups, comes out publicly against the company's "irresponsible business practices" and announces his intention to introduce legislation banning the sale of the product.

The result is predictable: For all of its importance to the future of the company, the new product -- and the strategy tied to it -- must be abandoned.

Outside Groups Serve a Purpose

Consumer groups and other outside constituencies have long been a positive force in society. Remember the corrosion problems in BP's Prudhoe Bay oilfield in Alaska?

BP's internal process for identifying trouble spots somehow failed to call attention to the problem, but an industry gadfly succeeded in eliciting investigations by both the Environmental Protection Agency and the Department of Transportation.

Ask any experienced leader who's seen how the game has changed and he or she will tell you that these aren't your father's external constituent groups. They're numerous and complex, and their agendas can conflict not only with a company's but also with each other's. Even lone individuals can create a critical mass to champion an important societal good -- or torpedo otherwise sound products and business strategies.

It takes know-how to sort through these external constituencies and respond to them appropriately, whether that means pushing back against their agendas or adjusting the business in line with their legitimate concerns.

The Right Traits and Behaviors

Managing external constituencies requires a combination of skills and leadership traits. Specifically, it demands the following:

• Being psychologically open.

You have to accept that you don't have control over outside groups as you do over employees, vendors, or business partners. And you must be willing to see things from their point of view, even if it doesn't seem rational to you.

Remember that criticism may well be based on goals and intentions entirely different from your own, and that the social good will ultimately prevail over business.

If you're thin-skinned or have a big ego, you may be unable to look beyond the posturing, personal attacks, and anti-business rhetoric that characterize some groups' messages.

• Understanding that perceptions trump facts.

One of the most frustrating aspects of dealing with external groups is that their views, and the public perceptions they create, may not be based on accurate or current information.

Coca-Cola and PepsiCo were caught off guard when an environmental group in India claimed their products contained dangerous levels of pesticides. The group even brought about a ban of the cola products in some parts of the country. This was despite the fact that both companies had been sponsoring community clean-water programs in India and other countries where they operate.

In the court of public opinion, perceptions are more powerful than facts. As a leader, you can't forget that. It's your job to respond appropriately.

• Keeping your antennas up.

If you identify external groups and issues as they emerge, you may be able to build relationships, understand their concerns, and even shape the agenda.

You can enlist the help of your public affairs and public relations people, and even your salespeople, to help spot societal trends and identify the sources of potential resistance and controversy. You can also encourage leaders throughout the company to be active in the community, not just to raise the company's visibility but also to pick up cues about the company's reputation.

It's also wise to periodically do an Internet search of the company's name to get a sense of what people are saying.

• Being proactive.

Decide which external groups or issues seem most important and enter into a dialogue or negotiations swiftly. Maybe you need to do some lobbying so that lawmakers understand the company's views and intentions.

The aim must be to demonstrate that the company takes the issues seriously and is committed to doing the right thing. The sooner you act, the better your likelihood of success.

Wal-Mart, which has come under fire over its labor practices, is being proactive on the issue of environmental sustainability. A fact sheet on the company web site clearly spells out its ambitious environmental goals: "To be supplied 100 percent by renewable energy; to create zero waste; and to sell products that sustain our resources and our environment."

Wal-Mart's efforts to be "green" have offset some of the negative press it receives on labor issues.

What You Can't Afford

For all the time and attention it requires, managing external constituencies is not likely to create value for your company. On the other hand, if you fail to manage these groups and issues and instead let them manage you, you may very well destroy value.

If you don't think you can develop this know-how, you may have to leave leadership to others, especially at the highest organizational levels. In today's world, there's no escaping the need to deal with external constituencies directly, fairly, and with the courage to do what's right even in the face of conflicting agendas.