Social Contract 2.

0: Institutional Survival in the Network

Era
Jacob Harold and Lee Drutman

Summary: The shift to a new social contract is underway. Businesses,

governments, and civil society face a rapidly-changing world with many
centers of power. Profound technological, demographic, and economic
changes have rewritten the rules of institutional governance and strategy. A
new accountability class has risen that enforces the new rules. In this new
social contact, organizations must adopt four behaviors in exchange for
legitimacy and survival: (1) embrace transparency, (2) track multiple bottom
lines, (3) proactively engage with stakeholders, and (4) collaborate with
other institutions to solve shared problems. Organizations that cannot adapt
will fail.

Section I: The End of Social Contract 1.0 We live in a networked world…

It is impossible to identify a single moment
when the first social contract became
obsolete. Was it in December of 1999, when
the World Trade Organization Conference in
Seattle collapsed beneath the weight of
50,000 protesters? Or was it two years later,
when the World Trade Center collapsed
beneath the weight of airplane fuel and hate?
Or maybe the bankruptcy of General Motors or
Lehman Brothers best marks the transition to
a new age.
But the exact moment does not matter, for
even as these symbols of globalization have
fallen, the interconnectivity of the world has
solidified: the Internet is omnipresent; global
supply chains have swelled; new powers have
risen across the globe. A decade into the
twenty-first century, we see that we are far
from the end of history. We are, instead, at
the beginning of a new chapter of the human
story. The painful and freeing transition to
Social Contract 2.0 has begun.
Social Contract 1.0 had a long run. Forged out
In this world, the measure of
power is connectedness.
--Anne-Marie Slaughter
While all organizations
attempt to create value of one
kind or another…that value is
itself a combination, a “blend”
of economic, environmental
and social factors, and that
maximizing value requires
taking all three elements into
account.
--Jed Emerson and Sheila
Bonini
…a complex, multicultural
landscape filled with
transnational challenges from
terrorism to global warming is
completely unmanageable by
a single authority, whether the
United States or the United
Nations. Globalization resists
centralization of almost any
kind.
--Parag Khanna
of the twin political and industrial revolutions of the late 18th and early 19th
century, Social Contract 1.0 described a (then) radical new world in which
governments were only legitimate to the extent that they democratically
maintained the consent of the governed. This fundamental idea thrived in
different countries and at different times, with variations involving the
church, business, and political parties.

Beneath Social Contract 1.0 was a simple bargain: citizens give up some
rights to a large institution in exchange for security and stability; with John
Locke’s “right to revolt” offering an escape in the case of fundamental
dissatisfaction.

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This bargain will stay with us, but it is no longer enough to explain a complex
world. It assumes a top-down, hierarchical society with relatively few
centers of power. In the era of Social Contract 1.0, almost all communication
was one-to-many: first pamphlets and newspapers, then radio, then
television. Politicians, businesses, and clergy spent much more time selling
and telling than they did listening. Citizens voted with their feet or their
money; they either bought or did not buy products or ideologies. These were
blunt instruments of feedback, well-suited to a world of relatively few
powerful institutions.

But the last few decades have seen sea change upon sea change: rapid
technology growth and shifting demographics have transformed the world,
creating many interdependent nodes of power. This polynodal world is the
shifting ground beneath our feet. This grand change has brought an old
question into stark relief: which institution is responsible for what? It seems
clear that we cannot rely on banks to maintain economic stability or
newspapers to provide political accountability. But who will? To answer
such immense questions, we first must understand the forces that affect all
institutions and all organizations.

These forces operate in different ways in different contexts, and we

acknowledge the limitations of our American perspective. But we see four
forces so powerful that they will transform the rules of institutional behavior
across the globe:

Low cost of information. Every day it gets cheaper to gather, copy, share,
and access information. People can be more informed with less effort.
Consumers have instant access to everything from comparative user reviews
to supply chain data. Citizens compare voting records or corporate pollution
levels. Political leaders can honestly go beyond Gross National Product and
speak of Gross National Happiness: the click of a button reveals a country’s
or company’s carbon emissions, employment numbers, or health outcomes.

Mass information availability compresses feedback loops and accelerates

accountability. Consumers consider fair-trade labels in their purchasing
decisions. Investors use dozens of different schemes to rate corporate social
and environmental performance. Philanthropists face new kinds of
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 SIDEBAR
information about nonprofits’ impact.
Political campaigns mine vast databases to Potential manifestations
segment voters. Countless decisions are
of a social contract in
now made in the context of information
never before available. flux

Low cost of collaboration. Search • Google’s famously

engines make it possible to find like-minded simple guiding moral
people almost instantly. Social networking principle, “Don’t be evil”,
tools allow connection to turn into will collide with the sheer
community. Mobile phones allow that scale of its famously
community to mobilize in real time. Such
simple mission: to

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drops in cost qualitatively shift the character
and potential of community—as seen from organize all of the
Wikipedia to the 2008 Iranian election world’s information.
protests. While this new collaboration is
built upon technological change, such tools • Education will
do not get socially interesting, as the author increasingly move
Clay Shirky says, until they get online. How many non-
technologically boring. elite colleges and
universities can charge
Collaboration is rising not just among
individuals; it is also rising among $30,000 a year in tuition
organizations. An entire infrastructure of when most of MIT’s
associations binds together the interests of curriculum is now
organizations in the political sphere, and available for free
now more than ever, individual association through its
members have more power to shape and
OpenCourseWare
engage the association, rather than
responding to top-down directives. Cross- program?
organizational collaboration is expanding not
• Other powerful but
just within individual categories of
institutions, but also across categories— poorly-understood
whether the World Economic Forum or the institutions like hedge
shifting coalitions that drove and hindered funds and private
US health care reform. foundations will be
dragged from the
Low barriers to entry. A.J. Leibling said
“Freedom of the press is guaranteed only to shadows by new forms of
those who own one.” There is no need to transparency and face
explain how that is no longer true. (What inevitable scrutiny,
better sign that things are changing than criticism, and regulation.
the fact that truisms are no longer true?)
Nowadays, anyone can put up a website and enter the going-viral
sweepstakes. Barriers to entry are also dropping for non-virtual enterprises
as well. An ever-stronger infrastructure for outsourcing leads to modular
supply chains: there’s no need to build a factory when you can find a
Chinese production facility for your product within a few minutes on
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www.alibaba.com.

New institutions not only can enter easily—they can quickly rise to compete
with existing organizations in both the physical and virtual worlds: in politics,
business, and culture. Harvard strategist Michael Porter has outlined in
detail how the competitive dynamics of an industry are fundamentally
determined by its barriers to entry. As those barrier fade, industries—and
communities, and political discourse—can and will be re-imagined. But low
barriers to entry and the ease of collaboration also create a tragedy of the
attention commons. With every new entrant it becomes harder to rise above
the ever-increasing din.

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Rising expectations of a new accountability class. Thousands upon
thousands of people are now employed full-time to hold other institutions
accountable. In addition to time-tested mechanisms like lawsuits, boycotts,
ratings, and advertising, this new “accountability class” also has the
emerging power of new tools like shareholder resolutions, viral marketing
campaigns, user reviews, and coordinated global civil disobedience.
Technology has also empowered an even bigger group of amateur
campaigners, activist investors, whistle-blowers, and bloggers. Big Brother
has been replaced by thousands of observant and trigger-happy cousins.

While many members of the new accountability class are activists with social
and environmental goals, the category is far wider and more complex.
Private equity firms and hedge funds engage in “activist” interventions with
no goal but profit. Politics has long had opposition research, but it has
become its own industry, one enabled and accelerated by easy access to
information. User reviews have decentralized the critic and made everyone
a member of the consumer accountability class.

The new accountability class offers profound advantages in our decentralized

world. With traditional accountability mechanisms (government regulation,
newspaper journalism) weakened, society should count itself lucky to have
robust defenders. But there is a grand irony to the accountability class: it is
itself unaccountable. And the accountability din—perhaps most evident on
cable news—can quickly debase politics and leave behind incapacitating
cynicism.

--

These new structural forces both concentrate and devolve power. They
accelerate change and multiply both threats and opportunities. In the face
of this change, all organizations will remain subject to organizational inertia.
At heart, organizations are little more than bundles of routines and rules, and
routines and rules are sticky. They get codified by habit and language. But
occasionally—like right now—the ground shifts so much that old ways of
doing business (and politics and culture) face a fundamental challenge.

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 Section II: The Polynodal World

The world has witnessed an explosion in the number of centers of power.

More countries than ever are independent and influential. More companies
have a global footprint. New types of powerful institutions have emerged:
hedge funds, search engine companies, blogs, and international advocacy
networks.

This transformation is nowhere more obvious than in international relations.

The overwhelmingly bipolar relations among nation-states that
characterized the Cold War have, over the course of two decades, all but
dissolved. The United States remains an unquestioned hegemon, but its

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primacy is threatened in every realm of global relations. The EU has—in a
miracle inconceivable 60 years ago—settled into a role as a diverse but
coherent center of power. The BRIC nations—Brazil, Russia, India, China—
compose half the world’s population, control immense natural resources, and
increasingly project economic, political, and cultural power. Japan remains a
mighty economy, despite its lost decade. A tier of mid-level powers—
Indonesia, Canada, South Africa, Egypt, Saudi Arabia, Mexico, Australia,
South Korea—have stepped into critical roles in the global discourse.

But even to speak of nations is increasingly meaningless. Capital flows are

not particularly concerned with geographic boundaries. The corporate
giants of the Global North—whether ExxonMobil, Nestlé, or Samsung—have
become authentically global institutions, with production and markets on
every continent and political relationships to match. Only a third of the 100
hundred largest revenue-generating organizations are national governments,
the rest are multinational corporations. And does it even make sense to
think of Honda as a Japanese company when it employs 27,000 people in 50
U.S. states? Is Apple still an American company when all of its products are
manufactured in East Asia?

Filling in the gaping holes between business and government is an exploding

civil society of organizations that advance the interests or beliefs of freely
associated members. In the US alone there 1.6 million nonprofits that
employ 12.5 million people and 87,000 foundations that control more than
$600 billion in barely-constrained capital. In every case, the growth rates of
these institutions exceed comparable ones in business or government.
Similar institutions thrive throughout the globe. These nonprofits and
foundations use their great strengths—flexibility and moral authority—to
place ever-greater demands on both governments and corporations. No
significant conversation can happen without them.

Top-down global institutions like the United Nations, the World Bank, and the
International Monetary Fund wield great power, but too often find their
operations clogged and inflexible. They are often limited by the difficulty that
their national representatives have in reaching consensus. In their place,
more adaptable and diffuse global networks that dynamically bring
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together much more diverse stakeholders are filling the gap. The World
Economic Forum has become a critical locus of power and decision-making—
and draws its strength from the fact that its participants come from all
sectors. While UN-sponsored multinational climate talks stall, the $8 trillion
Investors Network on Climate Risk organizes massive flows of capital to
tackle climate change and the $1.1 billion ClimateWorks Foundation
facilitates carbon-reduction efforts around the world. The list goes on: the $3
billion Global Fund for AIDS, Malaria, and Tuberculosis is the dominant player
in confronting infectious disease; Transparency International has become a
key platform in the battle to improve governance; the Forest Stewardship
Council has worked across business, government, and civil society to
transform the multi-billion dollar market for forest products.

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The existence of so many centers of power changes the rules of engagement
for all institutions. First, the entry of every new power center reduces the
relative power of existing institutions. Second, it complicates
governance by bringing in more and different mechanisms of
accountability. Third, this destabilizing context complicates strategy—
compromising business models and threatening decades-old assumptions.
We have inexorably moved from a few independent centers of power to
countless interdependent centers of power.

Section III: The Bargain of Social Contract 2.0

What is a leader to do? Proliferating power centers, new entrants, and the
growing accountability class all complicate governance and strategy. We
cannot predict the consequences of such a shift in the world order. But, we
can posit the behaviors that are more likely to succeed in this wild and
dynamic polynodal world. These behaviors increase the likelihood of
surviving—and thriving—for two reasons. First, these behaviors help
maintain legitimacy. With the rise of the accountability class and multi-
dimensional accountability, institutions will face attacks on their very right to
exist without these behaviors. Ask any bank after the Great Recession; they
will explain. Second, these behaviors enhance flexibility, adaptability and
thus organizational resilience. In a complex and changing context,
organizations’ very structure must facilitate constant interface with the
outside world. Ask any newspaper after Craigslist; they will explain.

First, successful institutions will default to transparency. The low

costs of storing, copying, and distributing information mean that a single
disenchanted individual can now share massive amounts of information with
the world with a few mouse clicks. And, if organizations somehow are
successful in keeping information hidden, someone from the new
accountability class will either demand it; or, worse, they will make
something up. As a general rule (the only enduring rule is that all rules have
exceptions), organizations will be better-served in the long term to share

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information. Collaboration requires that organizations understand what
other organizations are doing.

There will continue to be good reasons for institutions to not share some
types of information (military intelligence, patient data, certain competitive
secrets). But in most cases there is no good reason not to share.
Transparency may have started as a moral imperative, but it has in many
cases become a practical aid to results. Porous strategies facilitate
collaboration and increase legitimacy—and can attract consumers, voters,
and stakeholders. The maxim says “what gets measured gets managed”; it
is even more powerful when what gets managed gets shared. Bottom line: if
institutions expect the benefits of access to others’ information, they must

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provide access to their own.

Second, successful institutions will track multiple bottom lines.

Gone are the days when a business executive could simply focus on
quarterly earnings and expect to be left alone. Companies are now asked to
track and manage multiple metrics—from carbon footprint to net job creation
to lobbying expenditures. Nonprofits cannot be content with a low overhead
ratio; donors demand evidence of lasting results. National governments
cannot merely track GDP growth; multi-dimensional quality of life measures
are the only way to paint a complete picture of the success of a city, state, or
nation. At its best, this information will go beyond the “soft” transparency of
reporting (i.e. tell the world so they’ll get off your back). Information is most
powerful when it is the “hard” transparency that comes when an institution
opens up its internal financial and operational systems—numbers that get to
the essence of an organization’s social, environmental, and economic
impact. Bottom line: social and environmental issues are now central to
decision-making, so institutions must know their status and impact.

Third, successful institutions will proactively engage with

stakeholders. In this new social contract every institution reports to
multiple stakeholders. National governments may be directly responsive to
voters, but they must engage with individuals and organizations inside—and
outside—of their borders. A corporate CEO may formally report to her board
of directors—but she increasingly has to pay attention to groups
representing customers, shareholders, employees, vendors, and advocates.
In nonprofit organizations the “buyer” (donor) is not the “customer” (final
beneficiary)—but both must be served if the organization hopes to succeed.
Outside stakeholders have been empowered with more available information
and new technology tools to facilitate collaboration. This power gives them
leverage, which only enhances the connections across the networked
accountability of Social Contract 2.0.

It is expensive for an organization to proactively engage stakeholders during

planning, execution, and evaluation. It takes time, money, and attention.
But it is cheaper than doing so reactively or retroactively. In a polynodal
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world, where contexts shift rapidly, proactive engagement is the only way to
get feedback, uncover trends, and ultimately to build collaboration and find
the innovations necessary to survive. Bottom line: engage with your
stakeholders before they engage with you.

Fourth, successful institutions will collaborate to solve shared

problems. Wicked problems like climate change simply cannot be
addressed by only one sector. Meaningful progress requires the flexibility of
civil society, the mandate of government, and the scalability of business. In
any one issue, sub-sectors will be called upon in different ways—whether
foundations to provide flexible capital or the media to enrich the public’s
understanding.

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Collaboration may be formal partnerships, or simply learning from the
successes or failures of other institutions. In a changing context, institutions
experiment. Universities use tools from business to monetize intellectual
property from faculty research. Nonprofits increasingly look to earned-
income strategies to increase their social or environmental impact—with a
universe of microfinance, social enterprise, and program-related investing
offering a new set of tools for both bleeding hearts and Wall Street. The
business world trumpets techniques of intrinsic employee motivation
pioneered by nonprofits. Institutions will not survive without drawing lessons
from others.

As a society, we need institutions to collaborate to solve our big problems.

As organizations, we need to collaborate to survive in a world too complex
for any one set of competencies. Bottom line: the world is changing too
quickly to rely on the capabilities and frameworks of any one institution.

--

This is the implicit, emerging bargain of Social Contract 2.0: institutions will
survive and thrive if and only if they engage in the above four behaviors.
Those that do will have the legitimacy, flexibility, and resilience. Those that
do not will burn out or fade away.

The great issues of the 21st century demand humanity’s full attention and
effort. While the transition to Social Contract 2.0 is and will continue to be
painful, these four behaviors offer us a shared path forward.

Things may fall apart, but Social Contract 2.0 is not mere anarchy loosed
upon the world. Our social order rises to match the challenges of our time.