Practically Engaging the Firm’s Externalities to Reduce Risk

While meeting with 10 partners from one of the world’s leading consulting firms, I engaged in a conversation where I spoke about how foreign firms in China would seemingly do all they could to look away from obvious risk, and then find themselves in crisis mode when things went south.

JCI and Apple were my two examples.  Particularly as BOTH believed (and fought for) they were within legal parameters.  Netierh considered that legally responsible or not, they were going to be help accountable by an external stakeholder.

Which is where today’s MarketWatch article China’s green policy, forex hit European buyers highlights once again how firms are continuing to take on bad risk in the face of certain change:

There was a time when buyers from across Europe would flock to China to buy up everything from stone tiling to children’s clothing, fueling a booming trade between the two economies.

But Beijing’s push to clean up its polluting industrial base, along with rising labor costs and unfavorable foreign-exchange rates, is altering the nature of China’s role in global trade, and with European buyers in particular.

It is a situation I have been seeing a lot of recently, and what is surprising about it is simply how easily the executives of a firm will chose to ignore the gravitational forces that exist.  That, because they have chosen to source in areas that have low environmental standards, and thus participate in a process whereby they are effectively externalizing the environmental degradation of the process, they are actually increasing their risks of supply chain shocks and business continuity over the long term.

Given the fact that standards are only going to continue to rise, particularly as the environmental and social conditions deteriorate around certain areas of the economy, firms need to begin really understanding their exposure to the issue, the stakeholders that are involved, and whether or not they should play an active role in minimizing their risks.

This is in many ways the foundation for making responsible leadership decisions, even when the metric is one of profit maximization.

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