Go beyond legal compliance to build a social compact - KPMG Global
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Regulation by the people

Regulation by the people

Regulation by the people

Sophie Heading | Expert,

This blog is the first in a five-part series diving into our latest thinking ‘Growth in a G-Zero World’

It perhaps comes as no surprise in this age of buzzwords and neologisms that there have been some pretty interesting additions to the dictionary over the course of the past year. ‘Idiocracy’, for example, refers to the governance of a society by people that are considered idiotic, ignorant or stupid. The Philippine word ‘trapo’ (a Spanish-English play on ‘traditional politician’) means a politician who is perceived to belong to a conventional and corrupt ruling class. Even ‘purple’ hasn’t escaped, with a new homonym apparently referring to geographical areas where voters are split between Democrats and Republicans.

As we know, language is reflective of society – and in this case, it is showcasing the expanding group of people around the world who believe their political systems are not meeting their needs. In this multi-polar world, socio-political forces are redefining the role of business – and in doing so, is reshaping the social contract that exists between companies, suppliers, regulators and consumers. 

Redefining political tribalism

In most advanced industrial democracies in recent decades, ‘left’ and ‘right’ have been fairly synonymous with centrism. But high levels of social inequality, empowered by social media, has created momentum for candidates that cater for polarized ends of the political spectrum. Even the phrase ‘populism’ has come to straddle all manner of leanings: left and right; anti and pro-immigration; inclusion versus exclusion.

This has sometimes led to strongman politics in otherwise - or at least ostensibly - democratic states (the list here is long, but ‘Abenomics’ and ‘Putinism’ are great examples). But we have also seen everything from weaker centrist parties and strong electoral gains on both the (further) left and right (EU Parliament) to decisive victories by freshly-minted parties (France). Minority governments (UK and often Australia) and ruling - albeit not necessarily long-lasting - coalitions of far-left and far-right parties (Italy). Plays to identity politics (India) and slides towards autocracies (Hungary and Poland). 

Society may be disillusioned, but is not disengaged

At a global level, voter turn-out and membership of political parties actually increased in 2018. Nearly two-thirds of eligible voters turned out for the 2019 Indian elections (thanks to female participation equalling male rates for the first time), while more than half voted in the EU Parliament elections - the strongest showing since 1994.

Meanwhile, end-consumers have jumped on-board #SocialMediaActivism, where technology has facilitated arguably harder and much faster social movements. A South Korean retail giant, for example, was forced to exit one of its markets after a politically sensitive decision led to a consumer boycott. Investors are also driving change: institutional funds are reconsidering positions due to ethical concerns. Labour forces are taking action in new ways for new reasons: employees of a Global Tech giant used their shareholdings to submit proposals on climate change and the use of AI. 

Regulation by the people matters more

In the latest WEF Global Risks Report, ‘increasing polarization of societies’ was ranked second only to climate change as an underlying driver of developments in the global risks landscape. When polarization plays out on the socio-political spectrum, the ability to create policies (read: regulation) from the politics becomes increasingly challenged. Leading to a lack of domestic and supranational governance in key areas, most particularly the global commons that intersect the most with business: the cyber domain (from tech innovation to e-commerce and data privacy) and climate (from emissions to food and water security).

At the same time, these social forces are also reshaping the role of companies in society. ‘My Employer’ has emerged as society’s most trusted entity. Over two-thirds of employees presume that prospective employers will join them in taking action on societal issues, while a quarter would never work for an organisation that does not have a greater purpose or meaningful social impact.

From regulatory compliance to social contracts

Tectonic changes in technology and society and the (contentious) combination of these mean that social movements are stepping up in terms of regulating business. So how are the rules of the game being redefined?

Framing reputation management and compliance in regulatory terms is no longer sufficient. Business needs to be able anticipate and respond to public action, not just the letter of the law – not just to survive, but to create a clear social compact that positively resonates with consumer bases and investors to drive growth.     

Here’s three suggestions to help establish your social contract:

  1. Understand the tenor of the social perceptions and consequences of your business. Regular touchpoints with the likes of ethnographers and social leaders to political, behavioral and climate scientists will help you understand all perspectives of at times sensationalized issues.
  2. Set the tone ­– in a rather interesting experiment, only 30% of participants cooperated for mutual gain in a ‘Wall Street Game’, compared to 70% when it was called the ‘Community Game’. Change the conversation from ‘is it legal’ to ‘is it right’: define ethical principles and guidelines that go beyond a financial purpose – and then live by them.
  3. Give an equal voice to non-financial risks – a misnomer, given these can have significant financial (strategic, operational and reputational) implications. Elevating the likes of social issues, climate change and geopolitics can drive a more sustainable business model – like when a multinational consumer goods company utilised local recruitment and microfinancing to successfully expand into India (rather than the usual wholesaler-to-retailer distribution model).

We cover this and other ways your business can take advantage of opportunities in this politically turbulent world in our latest thinking ‘Growth in a G-Zero World’