The 4th Stakeholder Framework

Article 9

Second-order business impacts defined

1-2 minute read

CAPSULE SUMMARY – Second-order impacts arise when a business only partially contributes to societal harm, either directly or indirectly. This lack of clear cause and effect creates a massive disincentive to action that we must collectively overcome.

9.1 If you think about a first-order impact as one where cause and effect have been clearly identified, you can think of a second-order impact as the opposite. I will define a second-order business impact as a societal harm where the root cause can be only partially correlated with a company’s behaviors and operations, such that stopping the company’s conduct will result in a partial but not complete elimination of that harm.

9.2 Second-order impacts by this definition are much harder to mitigate because of society’s inability to readily identify solutions that will completely address the root cause. In most instances of second-order impact, the signal will be relatively clear (everyone can see and smell the smoke), but the underlying drivers will be a complex function of multiple factors and entities---none of which individually triggers the harm, but when collectively pooled, become incendiary.

9.3 Three examples of prominent second-order impacts in our recent or current history include:

• Second-order impact example 1: The decimation of the small and local retailers over the last 30 to 40 years which was not entirely caused by, but absolutely accelerated by, the rise of giant retailers like Walmart, Target, Best Buy, Amazon, etc.
  
  

• Second-order impact example 2: The rise of teen depression and loneliness now afflicting society broadly, which can be attributed partially (but not completely) to the rise in mobile phone usage and social media.
  
  

• Second-order impact example 3: The rise in worldwide average temperature as a function of continued carbon emissions—where every emitter contributes, but no single company or even industry segment can reverse the trend on its own.

9.4   If the companies that collectively create second-order impacts all turn a blind eye to their downstream effects, we will be left in the unfortunate position where the society will experience systemic failures that either generate significant ongoing harm or ultimately require government intervention and regulation.

9.5 Alternatively, if we can build an elevated leadership ethos and operating model within our companies that can proactively deal with second-order, partial correlation impacts, we can prevent or mitigate this downstream harm much faster. This should be the goal, but it will require a fundamental shift in how leaders view their responsibilities as stewards of society.