In This Issue
Spring Bridge on Postpandemic Engineering
March 14, 2021 Volume 51 Issue 1

Engineering and Social Responsibility: What the Digital-Industrial Revolution Means for Manufacturing Companies' Social Responsibility

Tuesday, March 30, 2021

Author: Marco Annunziata

In the postpandemic environment, corporations should prioritize elements of social responsibility that are naturally aligned with corporate profitability.

Engineering and Social Responsibility

The digital-industrial revolution, called Industry 4.0, has begun to effect a major transformation of work and daily life: how production is organized; new skills required in the workforce; the interaction between humans and machines, as robotics and artificial intelligence (AI) make continuous strides; and what new products are possible and what they can do (e.g., self-driving vehicles, delivery drones), including their impacts on the environment.

The influences of Industry 4.0 on society promise to be at least as profound as those of the original Industrial Revolution. It is therefore not surprising that this technological revolution has triggered calls to reassess the ethical and social responsibility aspects of manufacturing and other industries.

It also compounds concerns about issues such as climate change and income inequality. Many of these issues have been exacerbated by a confluence of factors in addition to accelerating technological change: deepening globalization, a growing world population, and the push by emerging markets to achieve higher living standards. Studies have assessed the impacts of these factors on employment and wages in specific industries or geographical areas. Some have focused on the effects of innovation such as robotics (Acemoglu and Restrepo 2020); others have documented adverse impacts of globalization, especially competition from China (Autor et al. 2016).

The covid-19 pandemic has exacerbated many of these trends and created a greater sense of urgency. Across the world, lockdowns to contain contagion caused sharp recessions and major job losses, with the attendant economic stress. They also exacerbated inequalities, as some jobs could be performed remotely while others could not, the sectors most severely affected (e.g., hospitality) tend to employ a larger share of lower-skill workers, and the shift to home schooling has proved much more challenging for children from lower-income households and for some groups of adults, especially women (Rothwell and Desai 2020 find that “labor force participation rates are 12 percentage points lower for adults with children in distance learning compared to in-person schooling”).

Better alignment of skill supply and demand
could help reduce income inequality.

Manufacturing companies have been accused of contributing to these problems by focusing exclusively on short-term shareholder-value maximization, and they face mounting pressure to rethink their social responsibility. How can manufacturing companies best help society surmount these challenges?

Social Responsibility Priorities for Manufacturing Companies

Profitability

Profitability is a necessary precondition for survival in the market economy. A corporation’s most basic social responsibility, therefore, is to remain profitable and viable so that it can continue to contribute to economic growth and job creation. Corporate bankruptcies can cause recessions and unemployment and in extreme cases impair the stability of the financial system and/or require governments to come to companies’ rescue, putting taxpayer money at stake. Manufacturing companies should therefore aim first and foremost to remain profitable.

In the postpandemic environment, corporations should prioritize specific elements of social responsibility that are naturally aligned with corporate profitability and where their actions can have the greatest impact.

Human Capital

The first priority is to invest in human capital, stepping up company efforts to maintain and upgrade the skills of their workforce and investing in technologies that can augment workers’ capabilities and allow them to learn faster on the job.

Studies have shown for some time that innovation is having a very asymmetric impact on the demand for different job skills (Autor et al. 2003), and debate on the skills gap has gained increasing prominence, although the academic literature has not yet produced convincing evidence of such a gap (Cappelli 2015 argues against it, for example). The difficulty in settling the issue lies partly in the challenge of agreeing on clear definitions of skills and in the tendency to confuse skills with academic credentials.

But the anecdotal evidence emerging from industry is clear: more and more industries are struggling to find qualified workers, especially as large cohorts of experienced employees retire. Many industrial companies need to replenish their pool of traditional factory-floor skills, while augmenting it with digital skills that can help workers become conversant with the new digital-industrial technologies. Portable and wearable skill--augmenting technologies can help accelerate upskilling and productivity (Abraham and Annunziata 2017), as can connected-worker technology platforms (-Annunziata 2020).

Accelerating innovation drives faster change in the mix of skills required to succeed in the labor market. This change has exposed the inadequacies of traditional education systems, and requires a shift to lifelong learning that calls for a much greater involvement by -corporations—providing more in-house training opportunities, allowing workers greater flexibility to pursue upskilling and retraining outside the workplace, and collaborating more closely with education institutions in the design of curricula and internships (see, e.g., Mathó et al. 2019).

Providing the right skills and helping people maintain and upgrade them throughout their careers will play a crucial role in securing high employment levels and providing more people access to better job opportunities and faster increases in incomes; and by better aligning skill supply and demand it could help reduce income inequality. This represents an extremely important social responsibility that industrial corporations de facto shoulder; tackling it would also help them raise efficiency, productivity, and profitability.

Cybersecurity

As digital-industrial technologies become more widespread with the advancement of smart electricity grids, smart homes, smart cities, and smart factories, cybersecurity risks will increase commensurately. Attacks on critical infrastructure could cripple cities and entire economic systems, undermine human safety in workplaces, in urban environments, and on roads, and cause environmental disasters.

Governments are developing extensive cybersecurity policies, but the responsibility for ensuring the security of new technologies starts with the manufacturing corporations that produce and deploy them. By ensuring the cybersecurity of their products, services, and systems, manufacturing corporations can protect economic resilience as well as human and environmental safety. At the same time, cybersecurity is crucial to the reliability and attractiveness of the products and solutions that manufacturers sell, as well as the resilience of their own operations. This is an important social responsibility that corporations are well positioned to take on and that is naturally aligned with their economic interests.

AI and Robotics

AI and robotics play increasingly important roles in manufacturing companies, a trend that is destined to continue and deepen. Yet these technologies carry new risks and potential unintended consequences. This is especially evident in the case of AI, which in some cases operates like a black box, in the sense that its own developers are unable to fully explain why it reaches certain conclusions or decisions.

One of the key advantages of AI is its speed of reaction. This can be extremely valuable in the industrial context and will enable massive efficiency gains in contexts such as smart factories and smart cities, particularly with more extensive recourse to machine-to-machine interactions and transactions.

But to take full advantage of it, humans will be left out of the loop. Powered by AI, robots will act with an increasing degree of autonomy. Manufacturing companies must understand and anticipate the risks and potential undesired outcomes. These could include worker injuries, product and system failures, economic disruptions, and consequent damage to the public’s confidence in these technologies, which in turn would slow adoption and limit benefits.

At a high level the issue of risks and potential unintended consequences of AI and robotics deployment encompasses the current debate on ethical AI and dystopian fears of AI eventually developing an agenda of its own. Of more immediate importance are risks related to the physical interaction of workers and robots in the workplace or the possible malfunction of AI algorithms. Manufacturing companies have a primary social responsibility to anticipate, monitor, and minimize these risks as they deploy new technologies both in their own operations and in their relations with customers.

Principles for Establishing a Purpose beyond Profit

It is legitimate and may be desirable for manufacturing and other companies to take on additional social responsibilities beyond investing in human capital and cybersecurity. The choice could be guided by the specific sector that the company operates in (e.g., environ-mental responsibility for companies in the plastics industry) or by sensitivity to broader social issues such as opportunities for women and minorities, or immigration.

The responsibility for ensuring the security of
new technologies starts with the manufacturing corporations that produce and deploy them.

A properly defined purpose beyond profit can benefit companies’ performance and bottom lines through several channels: it can improve their ability to attract and retain talent, bolster employees’ motivation and productivity, and in some cases underpin customer loyalty and sales. A recent analysis finds that “firms exhibiting both high purpose and clarity have systematically higher future accounting and stock market performance” (Gartenberg et al. 2019).

To adopt a corporate purpose beyond profit maximization, manufacturing companies should follow three basic principles that can help them define their corporate social responsibility in ways that are transparent, actionable, measurable, and accountable—including in terms of profitability. This in turn would provide better information for consumers, employees, and institutional and individual investors to base their decisions on whether to invest in a company, buy its products, or join its workforce.

Transparency

This principle calls for the company to articulate what additional goal(s) it wants to pursue and why, spelling out whether and under what conditions the pursuit of these goals might conflict with profitability and how the conflict will be resolved. All of this should be clearly formulated in a purpose statement or “governing objective” (Mauboussin and Rappaport 2015) formally approved by the company’s board of directors and transparently communicated to the entire workforce.

Measurability

Well-specified metrics must be established to assess how well the stated goals are being met. This is an extremely important part of the exercise. The metrics should be objectively verifiable, preferably validated by a third party (in much the same way that financial accounts of publicly listed corporations are audited by external agencies). And it should be made explicit why they are considered the right metrics to assess the company’s impact on the stated goals.

Accountability

To make sure that all managers and employees act in pursuit of the stated goals, the company needs to put in place the appropriate incentives and ensure internal accountability. Performance evaluations, promotion criteria, and compensation policies should reflect, among other factors, the extent to which managers and employees pursue the stated goals and how well they succeed. The board of directors should hold the CEO and the rest of the executive team similarly accountable. The company should also establish external accountability by regularly publishing selected metrics that demonstrate its progress toward achievement of the stated goals.

Conclusion

The digital-industrial revolution is changing the role of manufacturing companies in the economy and in society. This change provides an opportunity for companies to rethink their social responsibility and respond proactively to societal concerns. Any broadening of corporate social responsibility should be undertaken in a rigorous, pragmatic, and transparent manner.

It likely makes sense for manufacturing companies to primarily focus on the areas where they can have the greatest impact and that are most closely aligned with their profitability—investment in human capital, cybersecurity, safe deployment of cutting-edge technologies. They can then choose to take on additional goals; these will vary depending on a company’s industry, location, and the particular sensitivities and priorities of its board, management, and workforce. All goals should be transparently identified and communicated, mapped to objective metrics for tracking and disclosing progress, and accompanied by incentive mechanisms that make management, employees, and the company itself accountable for advancing the goals.

References

Abraham M, Annunziata M. 2017. Augmented reality is already improving worker performance. Harvard Business Review, Mar 13.

Acemoglu D, Restrepo P. 2020. Robots and jobs: Evidence from US labor markets. Journal of Political Economy 128(6):2188–244.

Annunziata M. 2020. Parsable’s connected worker technology: The human-centric manufacturing revolution. Forbes, Dec 18.

Autor D, Levy F, Murnane RJ. 2003. The skill content of recent technological change: An empirical exploration. Quarterly Journal of Economics 116(4).

Autor D, Dorn D, Hanson GH. 2016. The China shock: Learning from labor market adjustment to large changes in trade. Annual Review of Economics 8:205–40.

Cappelli P. 2015. Skill gaps, skill shortages and skill mis-matches. Industrial and Labor Relations Review 68(2):251–90.

Gartenberg C, Prat A, Serafeim G. 2019. Corporate purpose and financial performance. Organization Science 30(1):1–18.

Mauboussin M, Rappaport A. 2015. Transparent corporate objectives: A win-win for investors and the companies they invest in. Journal of Applied Corporate Finance 27(2):28–33.

Mathó J, Christon A, Annunziata M. 2019. Opportunity for Higher Education in the Era of the Talent Economy. London: Pearson.

Rothwell J, Desai S. 2020. How misinformation is distorting covid policies and behaviors. Washington: Brookings Institution.

About the Author:Marco Annunziata is cofounder and CEO of Annunziata + Desai Advisors.