Defining a New Social Contract: The Role of Business in Democracy

CIPE Insight | Andrew Wilson

Much of the world is increasingly concerned about inequality, climate change, and widespread political dysfunction. Over the past year, problems have been magnified by the COVID-19 pandemic, also prompting new questions about whether the liberal democratic order established after World War II has run its course. If ideologies must change or evolve, leaders in societies across the globe will need to build a new consensus, essentially a new social contract, regarding collective values, accepted behaviors, modern norms, and related institutions, as well as the role of civil society and the private sector.

Social contracts are informal mechanisms, often generated at the local level but understood throughout society. Social contracts represent tacit agreements between the rich and poor, the powerful and the powerless, the government and those governed. Social contracts are how we live in peace in our countries within legal frameworks, but just as importantly, through informal mechanisms like the norms and common expectations that guide our day-to-day activities.

Meeting the Moment

By their nature, social contracts are somewhat free flowing. While often formalized or legalized somehow, they mirror the rights, responsibilities, opportunities and protections that society at large agrees to provide. Social contracts often form or change amid crises and response periods, such as the tumultuous years between World Wars I and II. That period included a severe global flu pandemic, the Wall Street Crash that ushered in the Great Depression, and the development of many new government, citizen-led support programs and collective thought. In the moment, such as the coronavirus pandemic now, it may be hard to know for sure that we have arrived at a new social contract and whether it is yielding positive results and cohesion than can overcome the current discontent and clashes. The most important tenets, benefits, and implications may only be clear in hindsight.

Social contracts represent tacit agreements between the rich and poor, the powerful and the powerless, the government and those governed.

Similarly, when social contracts fail to meet the expectations of a good number of citizens, heightened levels of populism, racism, and class conflict tell us a re-think is required. Trust in political, social, and economic institutions often suffers, and as a result, the ability to re-formulate the social contract becomes even more challenging.  At such points, leadership must emerge from all corners of society to shape the dialogue. Relying on political consensus alone does not sustain a solution, behaviors and expectations must adjust in all institutions.

History shows us that democracies are successful, in part, because they have a dynamic ability to modify social contracts by providing real time feedback on their successes and failures, and a wide variety of platforms on which a social contract dialogue can occur.  Free media, active civil society, business associations and labor all play a role in encouraging social dialogue and reform.  Authoritarian states which lack these mechanisms rely on political power to enforce a top-down vision for social cohesion. They lack or spurn feedback mechanisms and the political will to identify and address failures, resulting in a more brittle political and social dynamic.

Keeping Pace with Change

As our institutions underpin our social consensus, they require a re-think and a re-tooling to keep pace with change. The complex new global environment in which we live enables and often demands faster reaction time than in the past, although all parts of the world are never growing at the same pace. In recent decades, the sweeping power of technology-driven globalization has increasingly surpassed the ability of current institutions to anticipate possible outcomes and govern accordingly.

For example, workers in many advanced economies once counted on having lifelong jobs with a single employer, complete with a range of social benefits. A multitude of advancements and industrial relocation have eliminated traditional sources of job security and our social institutions seem to have failed to guarantee the prospects for meaningful employment or professional growth in many cases. Additionally, the face of the global labor force has changed significantly to include more women and other marginalized groups seeking expanded rights to work and own businesses. Positive movement on issues such as gender equity and human rights, trade policies, digital economy opportunities, and climate change require global consensus, which can come into conflict with local interests and norms.

History shows us that democracies are successful, in part, because they have a dynamic ability to modify social contracts by providing real time feedback on their successes and failures, and a wide variety of platforms on which a social contract dialogue can occur.

The formation of a new social contract must fold in all of the aforementioned developments and concepts, as well as bind East and West, North and South. This must include addressing a growing competition between democratic values and authoritarian autocracy. Thus, the development of a new social contract is not just the responsibility of national governments. This will require more effective mechanisms to balance local and diverse interests with global norms. Civil society and the private sector must play a more expanded role, lending their expertise and resources.

If we accept that we now live in an expanded world of stakeholders and influencers, then we should also acknowledge that various groups have different experiences and needs. An iterative process that gives voice to all and seeks common interests should eventually lead to an equilibrium that we recognize as a new social contract. This would require that local institutions not only respond to the needs of their communities, but also to the growing demands and standards associated with global issues and institutions (intergovernmental, economic, technological, and nongovernmental). That includes private enterprise, which through its activities provides the growth and employment that finance social cohesion.

Role of Business in the New Social Contract

As the economic engine, what should business collectively be recommending and asking for as the requirements of a new social contract? Before answering that question, two assumptions should guide our thoughts:

First, let us recognize that business is not a monolith. Firms come in many shapes, sizes, and sectors. They have very different attitudes regarding return on investment and values. Companies are as much a product of their local business environment as any other group, and as such, have differing priorities. However, globalization has helped lay bare both new commonalities and challenges faced by all private enterprises. If we do not address these properly, the potentially constructive role business must play in a new social contract may elude us.

Second, we should also be ready to accept that the experience of globalization has been largely positive for much of humanity. In addition to increasing the scale and reach of information flows and products, globalization has underscored the importance of well-governed, competitive markets. There is nothing wrong with questioning and improving the global economy to deliver better outcomes to more people, but we should not throw the baby out with the bathwater when working to build a better world.

A key driver in further discussions will be how profits and benefits are viewed. Profit and gain can take many forms, including efficiencies and innovations. How we arrive at profits and use them to solve problems is at the heart of a social consensus. Historically the fiduciary responsibility of company leaders has been solely to the owners of the company. Today more corporations are pledging to embrace ESG principles (Environmental, Social, and Governance) to provide better opportunities at home and in emerging economies and frontier markets. Despite continued debate by some that ESG efforts diminish financial returns and that potential risk-reward measurements are difficult, most experts agree that ESG matters merit more attention than ever from companies. The CEO of investment giant BlackRock even calls it the “new standard for investing.”

Driving the New Paradigm

With all of this in mind, and understanding that private enterprise is at the heart of growth and must be a partner in resolving the challenges our world faces, there are several ideals, values, and efforts that should drive the paradigm for commerce:

  • FAIRNESS AND OPPORTUNITY: Values of fairness and opportunity should govern our approach to markets. If prosperity is to reach all corners of society, all must have an equal shot at creating it. Business environments must favor fair competition. Economic entry needs to be accessible. Economic governance needs to be effective, but that isn’t enough. Education, workforce preparation, and infrastructure promote economic development and drive public investment. Cronyism, protectionism, and misuse of the state-owned sector are brakes on development, as evidenced in the threat to society posed by what CIPE calls “corrosive capital.”
  • ANTI-CORRUPTION AND ACCOUNTABILITY: Corruption must be seen as a global threat to progress. Corruption undermines the rule of law, competition, and public welfare. Improving transparency and fighting corruption is crucial to establishing the rule of law, enhancing business environments, and ensuring that democracy is inclusive. From petty bribes to kleptocracy, corruption is a disease that undermines the ability of states to reform, fair competition to exist, and ethical investment to flow. Authoritarian states use corruption to extend their interests, and they block governance reforms that undermine these corrupt networks. Business must be a partner with government and civil society in efforts to create environments that counter corruption and reward honesty.
  • ETHICS AND SUSTAINABILITY: We should encourage business, investment, and consumer environments that reward ethical and sustainable business practice. The role of the private sector as a partner in the UN Sustainable Development Goals attainment is recognized, and many firms are stepping up their own commitments to sustainability based on business principles of risk management. However, corrupt and poor rule of law environments sustain markets in which poor practice is incentivized. The business community must become a champion for ethical and sustainable practices, and market conditions need to support these efforts. Both governments and consumers have a supportive role to play by ensuring a competitive and consumer environment that rewards good practice. CIPE defines constructive capital as investments that are transparent, accountable, and market-oriented. It reinforces democratic and ethical values.
  • INCREASED ACCESSIBILITY: Globalization must be more accessible. Digital technology is the great leveler in business. Small- and medium-business now has access to global markets, but our institutions have not kept pace. Local organizations must invest in infrastructure, digital literacy, digital identity, and cashless payment. At local and global levels, we must create a consensus on data management, digital freedom, and e-commerce regulation. Addressing non-tariff barriers, exclusionary industrial policies, and promoting trade facilitation reforms are also necessary to improving SME access to global trade. WTO reform should also be encouraged to deliver greater access for all market participants and promote a fairer and more competitive trading system. Meanwhile, women make up the bulk of the SMEs and the informal sector. Their equal participation in the economy could increase global GDP by $26 trillion, according to a 2015 McKinsey Report.
  • NEW APPROACHES: New models for public-private partnership and dialogue are required. The relationship between the state, business, civil society and citizens must be examined. Credible reform needs to be based on transparent dialogue and partnership between these stakeholder groups. Government must become more open, accessible, and responsive, business must be prepared to be an articulate and constructive contributor to consensus, and citizens must be empowered to participate in dialogue through civil society and democratic engagement. CIPE is helping chambers of commerce and other business organizations play a key role as interlocutors, information and service providers, and community leaders towards the new social contract.

The Need for Trust and Leadership

What stands in the way of this vision? Trust and leadership.

Trust, or more precisely the lack of trust prevalent in many societies, is manifested on two levels. Opinion surveys indicate that faith in governments and institutions (including business) to deliver change, or do so in a timely fashion, is eroding. Building a new social contract will require rebuilding trust. Experts in trust tell us that accountability, transparency, communication, and confidence building are necessary building blocks. The process requires thoughtful leadership to recognize the nature of our disfunction, and to take the first steps toward rebuilding trust.

In democracies, political leadership is traditionally a lagging participant in social change, but is powerful once mobilized. Early leadership on social consensus comes from the grassroots: from civil society, labor, and business. It is amplified through media, and finally picked up upon by politicians. If business is looking for leadership to help build a new social contract, then business must claim its role in leadership, and do so in a way that can inspire trust.

Chambers and associations are traditional venues for dialogue, but themselves often require modernization to respond to evolving private sector and societal needs. They must strive to better represent the diversity present within the private sector, and to move beyond their comfort levels when responding to issues of inequality, opportunity, education, and basic needs. CIPE’s Business Integrity Guidebook provides a roadmap for ethical corporate behavior that can pay off by shaping a new social contract.

The bottom line: relationships between the business community and other civil society groups must expand from dialogue to partnership. And, the ability to convene powerful interests should be extended to include those whose voices sometimes struggle to be heard but are largely affected. If the private sector is to be viewed as a leader and innovator in the push for positive change or progress, the overall business agenda for a social contract must include re-building institutions and practices that afford sustainable growth and wider opportunity.

Published Date: February 22, 2021