Serious incidents such as the Deepwater Horizon oil spill and factory fires in India and Bangladesh highlight why some companies should create a new ‘Chief External Officer’ role, according to new research.

The new position in the C-suite would be part of an upgraded external affairs policy that can help align strategy and improve a firm’s competitive advantage in a world that sees a greater need for nonmarket –social and political - strategies.

The traditional set-up of most firms is to have an established legislative or regulatory affairs function and a separate office for tasks such as community relations and social responsibility.

But in Why your company may need a chief external officer, published in Organizational Dynamics, Sotirios Paroutis, of Warwick Business School together with Jonathan Doh, of Villanova University, Thomas Lawton, of Open University Business School and Tazeeb Rajwani, of Cranfield School of Management, argue that a more balanced approach is needed.

Dr Paroutis said: “We believe most companies underappreciate the challenges emanating from the nonmarket arena and therefore relegate their external affairs function to a lower status than it should be accorded.

“A realistic stance for most companies is a balanced approach to corporate strategy, political activity and social responsibility, which emphasises alignment across these priorities and the functions that are responsible for them.

“Our study shows that by increasing the stature and influence of the external affairs function, firms can achieve more effective strategic actions and policies, ultimately serving to increase their competitive advantage.”

The team of researchers interviewed executives from a range of companies and found that some of them, for example Lufthansa and Tata Consultancy Services (TCS), had developed distinctive and C-level executive roles that engage both political and social contexts in an integrated fashion.

Dr Paroutis added: "In the mid-1990s Thomas Kropp managed Lufthansa’s government and regulatory affairs office in Brussels. Like other major airlines at the time, Lufthansa was under growing pressure to increase fuel efficiency, reduce emissions, and adopt an overall social responsibility and sustainability strategy.

"Mr Kropp was able to keep his company ahead of the game and meet these challenges head on, even sitting on the Association of European Airlines as Chairman a number of times.

"In contrast, other national flag carriers including Alitalia and Iberia failed to recognise or respond rapidly to the new environmental realities.”

A second example of a successful external affairs position was that of Malcolm Lane. Between 2001 and 2013, Mr Lane managed the European external affairs office of TCS, which included promoting TCS’s green agenda while exchanging vital position papers with politicians and legislative bodies.

Dr Paroutis said: "In an interview, Mr Lane explained to us that TCS created this role as a deliberate part of its strategy to respond to social and environmental pressures, and to be proactive as these interests grew.

“Lufthansa and TCS are both unusual examples, however. In most large companies, the development of nonmarket practices is not left to a dedicated individual or function, but instead occurs under the aegis of a broader legal, external affairs or even public relations function. But recent incidents highlight the potential problems of this.

“The BP oil spill disaster is an example where the CEO, who was quoted as saying ‘the environmental impact of this disaster is likely to have been very, very modest’, could have benefited from the targeted advice and experience of a chief external officer.
“Similarly, situations such as the recent tragic fires in Bangladesh and India brought companies such as Gap, H&M and Wal-Mart to centre stage over poor working conditions. These firms were caught flat-footed in their inability to provide coherent responses to criticisms, emanating from a range of governmental and civil society stakeholders, and would have benefitted from such a role.

“In the Lufthansa and Tata cases, this role was elevated to an appropriate level so that the importance of political and social issues commanded sufficient managerial attention and subsequent actions at a strategic level.”

Dr Paroutis warns, however, there is not simply a one-size fits all option for firms looking to adapt a new strategy using a chief external officer.

“The degree to which companies should emphasise political concerns versus social issues - or both - is contingent upon their particular industry, strategies, and product mix,” said Dr Paroutis.

“In the end, the nonmarket environment should not be viewed as separate from the other arenas in which firms compete. Only then can firms successfully respond to and proactively influence the politicians, campaigning groups and organisations that facilitate - or impede - their competitive success.”
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