Social Contract 2.

0: Institutional Survival in the Era of

Networks
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 forever rewritten the rules of institutional governance and
strategy. A new accountability class has risen that enforces the new rules.
In this new social contact, institutions 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. Institutions who
cannot adapt will fail.

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

On or about January 1st, 2000, the first social
contract became obsolete. In retrospect we
see that that 2000 was more than just the
turning of the millennium—it also marked a
turning point in the very structure of our
society. In December of 1999, the World
Trade Organization Conference in Seattle
collapsed beneath the weight of 50,000
protesters. Two years later, the World Trade
Center collapsed beneath the weight of
airplane fuel and hate. Even as symbols of
globalization fell, the interconnectivity of the
world was made permanent: the Internet
became mainstream, global supply chains
swelled, new powers rose across the globe. A
decade later we now see that 2000 was not,
as some predicted, the end of history. It was
the beginning of a new chapter of the human
story. The painful and freeing transition to
Social Contract 2.0 had begun.
Social Contract 1.0 had a long run. Forged out
of the twin political and industrial revolutions
of the late 18th and early 19th century, Social
Contract 1.0 described a (then) radical new
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

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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.

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.

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 speak of Gross National Happiness
instead of Gross National Product. The click of a button reveals a country’s
or company’s carbon emissions, employment numbers, or health impact.

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 its famously simple
community to mobilize in real time. Such
mission: to organize all
drops in cost qualitatively shift the character
and potential of community—as seen from of the world’s
Wikipedia to the 2008 Iranian election information.
protests. While this new collaboration is
built upon technological change, such tools • Education will
do not get socially interesting, as Clay Shirky increasingly move
has said, until they get technologically online. How many
boring. colleges and universities
can charge $30,000 a
Collaboration is rising not just among
individuals, it is also rising among year in tuition when
institutions. An entire infrastructure of most of MIT’s curriculum
associations binds together the interests of is now available for free
organizations in the political sphere, and through its
now more than ever, individual association OpenCourseWare
members have more power to shape and
program?
engage the association, rather than
responding to top-down directives. Cross- • Other powerful but
institutional collaboration is expanding not
poorly-understood
just within individual categories of
institutions, but also across categories—for institutions like hedge
example, in the World Economic Forum. funds and private
foundations will be
Low barriers to entry. A.J. Leibling said dragged from the
“Freedom of the press is guaranteed only to
shadows by new forms of
those who own one.” There is no need to
explain how that is no longer true. (What transparency and face
better sign that things are changing than inevitable scrutiny,
the fact that truisms are no longer true?) criticism, and regulation.
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 the
factory when you can find a Chinese production facility for your product on
www.alibaba.com within a few minutes.
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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. 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 gets harder to rise above the ever-
increasing din.

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, they also have 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 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 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 institutions will remain subject to organizational inertia. At
heart, institutions 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
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. 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. Does it still make sense
to think of Honda as a Japanese company when it employees 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 non-profits that
employ 12.5 million people and 87,000 foundations that control more than
$700 billion in free capital. In every case, the growth rates of these
institutions exceed comparable ones in business or government. Similar
institutions thrive throughout the globe. These non-profits and foundations
use their great strengths—flexibility and moral authority—to place ever-
greater demands on both governments and corporations. No meaningful
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 bring together much
more diverse stakeholders are filling the gap. The World Economic Forum
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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 works
across business, government, and civil society to transform the market for
forest products.

The existence of so many centers of power changes the rules of engagement

for all institutions. First, the entry of each 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? Ever-more 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 success
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. 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.

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, 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 information.
Collaboration requires that institutions understand what other institutions are
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doing. There will continue to be good reasons for institutions to not share
some types of information (military intelligence, patient data, some
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. Bottom line: if institutions expect the benefits of access to
others’ information, they must 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 management systems. The maxim says “what gets
measured gets managed”; it is even more powerful when what gets
managed gets shared. 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 institutions 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 institution 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
world, where contexts shift rapidly, proactive engagement is the only way to
get feedback, uncover trends, and ultimately to build the collaboration and
find the innovations necessary to survive. Bottom line: engage with your
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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.

Collaboration may be formal partnerships, or simply learning from the

success 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 institutions, 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
for the capabilities or 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 no widening gyre. Our social
order rises to match the challenges of our time.