Social, Cultural & Environmental Risks in Business

Instructor: David Whitsett

David has taught computer applications, computer fundamentals, computer networking, and marketing at the college level. He has a MBA in marketing.

Cultural differences, social issues, and environmental problems due to an unintended accident or bad corporate behavior can all be problems for a business. In this lesson, we'll examine these types of business risks.

Business Risk Pitfalls

An oil company's drilling platform in the Gulf of Mexico is damaged by a hurricane and sprouts a leak. A major clothing manufacturer finds out one of its trading partners is using underage child labor. A marketing firm opens a call center in a foreign country, but quickly offends the workforce by ignoring an important religious holiday.

There are many types of business risks, and the larger the business, the more risk exposure it has on multiple fronts. If you have a multinational company, there can be cultural differences due to your footprint. With a larger workforce, there are more chances for social risk such as labor unrest. And companies with multiple locations have increased risk of environmental issues just because there's more facilities to keep track of.

Companies can even be affected indirectly by risk issues that occur to trading partners within their supply chain. For example, if one of your suppliers has a labor strike and doesn't send your supplies, it can affect your ability to manufacture product.

Let's take a look at some social, cultural, and environmental risks that a business may face and how they can impact operations, and potentially, the business's reputation.

Social Risk

Social risk for a business includes actions that affect the communities around them. Examples include labor issues, human rights violations within the workforce, and corruption by company officials. Public health issues can also be a concern as they can impact absenteeism and worker morale.

Political uncertainty can be a social risk if the company doesn't have a good understanding of the local power structure and who the power brokers are. Land use is another politically-related stumbling block. For example, a business trying to open a new location can run into zoning issues with the local community planning board.

Companies that have problems with social risk face political backlash, public outcry, and a damaged legal standing, and may not be sustainable in the long term.

Cultural Risk

As businesses become multinational through opening foreign locations or doing business in foreign countries via the Internet, cultural issues can become more prevalent. Cultural risk has to do primarily with cultural differences between a business and its employees, customers, and local environment. Here are some cultural risks to consider:

  • Failing to adapt your business model to the local market.
  • Failing to recognize regional differences in cultures.
  • Failing to adapt your management practices across different cultures.
  • Misunderstanding of local legal and ethical issues.
  • Mishandling employee diversity.

Cultural problems can cause weak market share, missed opportunities, legal challenges, and damage to your reputation.

Environmental Risk

With environmental risk, an ounce of prevention is worth a pound of cure. It's much easier to prevent an environmental catastrophe than to clean one up - just ask the oil companies. Environmental problems can cause reputational, regulatory, and financial concerns. The top four environmental issues that businesses face:

  • Waste - Manufacturing creates waste and not all by-products can be recycled.
  • Sustainable replenishment of raw materials - Using things such as wood in your process means responsible replenishment is going to be an issue.
  • Emissions - Mitigating air and water emission problems can be very expensive.
  • Accidents and spills

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