Speaker 1: I'm Steve Cobrin, Professor of Multinational Management at Wharton School. I'm here with Veet Hanish, who is the Leit-Touche Professor of Management at Wharton and author of Corporate Diplomacy, Building Reputations and Relationships with External Stakeholders. Hello, Veet.

Speaker 2: Hi, Steve.

Speaker 1: Tell us, what is corporate diplomacy?

Speaker 2: Corporate diplomacy is the senior-level capability to build and maintain relationships with external stakeholders, deliver on the greatest needs or the greatest objectives of those stakeholders in a way that delivers shareholder value.

Speaker 1: Great. Why is it important?

Speaker 2: It's important because firms are increasingly looking for growth opportunities and revenue opportunities abroad in emerging markets, frontier markets, foreign markets. And in these foreign markets, they're necessarily interacting with more stakeholders, stakeholders who vary in their economic philosophies, in their ideologies, who have different histories, different language backgrounds, different cultural backgrounds. And so the ability to deliver on the growth opportunities in these emerging markets requires successful interactions with more and more diverse stakeholders.

Speaker 1: Well, if there's more and more diverse stakeholders, how do you tell which are the most important, which you really should be focusing on and deal with?

Speaker 2: You know, there's both a short and a more subtle, longer answer to that. The short answer is the stakeholders who can do you the most financial harm are the most important. But that can give rise to some shortcuts which are really damaging. If we only pay attention to the squeaky wheel, if we only pay attention to the stakeholder who threatens violence, we're really creating perverse incentives. So I think a fuller answer is we want to focus on the stakeholders with whom a productive relationship, a relationship in which we're helping that stakeholder obtain his or her objectives is delivering on shareholder value. So we both need to know how much they can hurt us, how much they can help us, and whether we can build and maintain a long-lasting relationship with them.

Speaker 1: Well, how do you figure that out? How do you determine whether they can help you or hurt you? You've just listed the whole list of stakeholders.

Speaker 2: So it really takes a financial analysis. You have to understand how they impact the bottom line. In what way do they impact revenues or costs? Really doing the financial analysis. And that's where this approach differentiates itself a lot from the corporate sustainability movement or corporate social responsibility movement. It's not about just the moral case. We're really working through step by step and trying to understand where it appears on the P&L statement. What are the costs that could be avoided through a better relationship? What are the revenue gains that could be obtained? And how can the actions we undertake with stakeholders, helping them achieve those objectives, really show up on the balance sheet? And then figuring out what the return is on that.

Speaker 1: Sure. And you must have to engage stakeholders.

Speaker 2: You certainly do. You have to build that relationship with them. So it's not just about talking to them. It's not just about a communication strategy. It's really rolling up your sleeves, working with them to attain their goals. So kind of a simple story of this is if one of the biggest needs is housing, for example. One approach might be bring in some prefab housing from Florida, have some contractors put it up, and then, wow, you've created their homes. But no, you really haven't. Somebody else has. If you can get your country manager, if you can get your CFO to be out there laying mortar, putting up cinder blocks, helping someone build their home using local technology with local contractors, creating local jobs, and working side by side the resident, then you've really started building a relationship with them. And so you want to be in the trenches with them. You want to be part of the action. And you want to be working with them in the attainment of their goals.

Speaker 1: So you're arguing, then, that corporate diplomacy is really a mainline management function. Is that correct?

Speaker 2: Absolutely. It's not something that should be segmented into, well, we have a government affairs team, we have a community affairs team, we have a sustainability team. We're really thinking from a strategic perspective about how to integrate those, and who's more responsible for integration than senior management, whether it be the country manager, the general manager, or the C-suite if we're in a multinational corporation.

Speaker 1: And that brings up an interesting point. How do you integrate corporate diplomacy into the mainstream of the corporation, into management?

Speaker 2: Great question. I think it's another way in which this approach differentiates itself from the CSR movement. We're not deciding what's better, what's right. We're not just focused on what stakeholders care about. We're speaking the language of finance. We're speaking NPV, ROI. We're turning everything into the same decision calculus that senior management already uses. So we're not going to present a parallel analysis or a parallel set of objectives. We're not going to do triple bottom line. We're going to turn everything into, or link everything to the KPIs that the managers are currently tracking. Whatever's on that dashboard that they look at in the morning, whatever the indicators are that they're tracking on a daily basis, we're going to figure out how external stakeholders link into that, and how we can monitor that, how we can improve upon those existing KPIs. If we're thinking about a big investment decision, how do we decide whether we're going to go ahead with $100 million or a billion dollar investment? We're going to work through that same project valuation cash flow model, the one that's already on the books, the one that they already use in the investment committee meetings. We're not going to create a green light, red light, smiley face, frowny face that goes on top of the ROI. We're going to use that same calculation, and we're going to augment it by bringing in the way stakeholders can affect it.

Speaker 1: Great. You note in the book that perceptions matter more than facts. Yes. It's an interesting statement. What do you mean by that?

Speaker 2: Too often, I think, when we're confronted with an allegation of a human rights abuse, an environmental spill, unfair treatment of workers, we respond with the facts. We respond with, no, here are policies. No, here's what the scientists tell us. Here's what really happened. But nobody makes a political or social judgment about whether you're behaving appropriately or how they feel about you based on the facts. They do it based on emotion, based on gut, based, you know, if you think about how you go into the ballot box, when we go in and we decide who we're going to vote for, we're not pulling the lever based on a net present value calculation of our future lifetime earnings under a Republican or Democrat or Socialist or Conservative. We're doing something more subtle. We're thinking about who we trust, who we have more confidence in, and I'm arguing that stakeholders are doing the same thing. And so if we're going to shape the way they feel about us, we can't just stop at are you better off or are you worse off? What are the facts about what really happened? We have to assess how they trust us, whether they trust us, and we have to try to build that trust.

Speaker 1: Does that relate to a social license to operate?

Speaker 2: Is that? Exactly. Social license to operate is a broader construct than just are you better off or worse off. It's looking at a more holistic perspective of how we perceive a company. The social license to operate is the perception by a stakeholder that you're behaving in an appropriate manner, that you're acting in a way they perceive as fair or just. And what you're trying to do is build up not just whether they perceive you're helping them or hurting them financially or materially, but are you behaving appropriately? Do you deserve their trust? And that takes more than just thinking about the facts. It takes more than just thinking about the financial benefits. It requires thinking about the relationship. How do you know when you have it? And who gives it to you? Well, each stakeholder gives it to you. So the social license to operate is granted by each stakeholder at a moment in time, and it can be withdrawn by any stakeholder at a moment in time. So this really focuses the attention on an ongoing process. It's not just the design and the implementation of the entry strategy. It's everything you do every day. Who you hire, who you partner, who you contract with, where you build, how you build. All those things on a day-in, day-out basis affect each stakeholder's degree of social license or the degree to which they grant you the social license. You have to monitor that in real time. You have to watch it in real time. You have to adapt to change in real time. And so it's something that's an ongoing management function, not just something at the time of entry, not just something at the time of crisis, something that senior management should be focused on on an ongoing basis.

Speaker 1: Corporate diplomacy sounds very complex. You have lots of stakeholders to manage lots of issues, perhaps different in every country in which you operate. Absolutely. Are there tools that can help you sort all of this out?

Speaker 2: Well, there are tools, and the book covers quite a few of them. Stakeholder mapping tools. So how do you visualize the stakeholder landscape? You know, if you think about what oil, gas, and mining companies do in terms of due diligence on geology, how much do they do in terms of due diligence on the political space? So there are a number of tools regarding how we take all the complex information on who the stakeholders are, what they want, how they're connected, and create visuals that can actually guide strategy. We also talk about scenario analysis for financial valuation. So how do we actually calculate the NPV or the ROI of stakeholder engagement? And then we talk through tools about how we build up trust and frameworks that help think about trust and trust-building, tools that relate to communications, and tools that relate to creating an organizational culture, an organizational mindset that supports stakeholder engagement, as well as learning tools that create a more supportive learning environment or adaptive environment. So there's six sets of tools or frameworks which together build up this framework of corporate diplomacy.

Speaker 1: And you go into these six sets of tools in detail in your book, Corporate Diplomacy?

Speaker 2: I do. We provide examples of each, both tools, examples of the use of the tools, firms that have used them. The other thing I try to draw is parallels from different sectors. I draw lessons from the front lines of corporate diplomacy, the front lines of the mining and oil and gas companies that I've referred to, also providers of infrastructure services like wireless communications, transportation infrastructure, also sustainable tourism, another industry that's ironically on the front lines in very touchy environmental spaces or political spaces, but also the military, counterinsurgency campaigns, lessons from the development agencies. So a diverse set of sectors who have struggled with corporate diplomacy challenges. And I look at how common use of these tools is across these six sectors and then say, well, these are tools that managers can use who are going into these sectors for the first

Speaker 1: time. That sounds comprehensive. Let me ask you, what are the critical takeaways that you would suggest to managers who are either corporate diplomats or should be corporate diplomats?

Speaker 2: Well, one of the lessons I draw from looking at the front lines and looking at the experience of best practices is many of the firms I survey in the book have written off a hundred million dollars or a billion dollars of losses because they've mismanaged their relationships with external stakeholders. And as a result, they've reflected, they've built new tools, new capacities, they've tried to become better corporate diplomats. So they've learned from their mistakes. I guess one of the takeaways from the book is that it's possible to learn from someone else's mistakes. You don't have to wait until you write off a hundred million dollars or a billion dollars to invest in this capacity. You can learn from the firms that were there first, that were on the front lines, that lost and learned. So why not learn from someone else's mistakes, learn from best practice, and that's what I try to pull together in the book.

Speaker 1: Great. And again, the book is Corporate Diplomacy.

Speaker 2: Yes, Corporate Diplomacy, Building Reputations and Relationships with External Stakeholders.

Speaker 1: Thank you, Veit. Thanks, Steve. Thank you.