Political risk is changing. It is becoming more immediate, more pronounced, more fluid and more decentralized. These changes are in various ways changing the nature of global business. For one, not that long ago the primary concern with political risk was mitigating it. Corporations were instructed to stay out of politics, and sophisticated strategies were developed to help them do so. Now, businesses are increasingly expected to assume positions on the affairs of the day. Past notions of business in society are being upended as a new playbook is introduced.
Putting politics back in
President Trump’s executive order on immigration—and the reaction of many American corporates and consumers to it—has brought this trend to light. As the ride-sharing app, Uber, found itself embroiled in a consumer boycott for sending drivers to New York’s John F. Kennedy Airport during a taxi-driver strike against the order, its main competitor, Lyft, surged on its announcement of $1 million in donations to the American Civil Liberties Union. Starbucks’ plans to hire 10,000 refugee workers was met with the #BoycottStarbucks campaign. CEOs from Silicon Valley, Ford, Coca-Cola and even Goldman Sachs have also weighed in.
More and more, consumers want businesses to engage in political speech (indeed, to endorse their viewpoint), and have little problem punishing them when they don’t — or don’t do so to their liking. More and more, too, CEOs are scrutinized for their decisions to engage with or criticize the government. And the bigger the brand, the greater the expectation to take sides.
This growing tendency to view corporations as de facto political actors extends beyond corporate social responsibility (though is not entirely divorced from it). It also extends beyond notions of ‘doing well by doing good’ and social enterprise. Neither philosophies fully capture the way in which politics now disrupts everything. Neither, too, equips corporations to capture opportunities or protect operations in the face of government actions or radical shifts in consumer sentiment.
Your company needs a domestic and foreign policy.
Corporate approaches to political risk generally involve short-term regulatory, legal, operational and financial analyses, with often cursory glances at national or regional risk reports. Responses to Trump’s executive order show that such strategies no longer suffice in an environment that is complex, splintered and unpredictable—outside the U.S. as much as in.
Political risk strategies have to evolve to keep pace. Critically, corporations must learn how to not only sidestep politics, but how to effectively engage with it: to in a way be political.
At minimum, four elements underpin a meaningful political risk strategy:
- Corporate domestic and foreign policy: In the era of the tweet and social networks, response time has narrowed from days to seconds. To engage effectively, corporations must form their own positions on various domestic and global issues and understand when it is strategically advantageous to voice them and when not. Scenario planning is a valuable tool. More than that, companies must anticipate the positions of their competitors and their likely responses to capitalize on them. Quoting from Sun Tzu’s The Art of War, “If you know the enemy and know yourself, you need not fear the result of a hundred battles.”
- Long-termism: Long-termism is often debated with reference to business and investment decision-making. Yet it is also key to successful political risk management. Inasmuch as companies need to be prepared for rapid-fire responses, political events also have to be smartly contextualized and understood. Last October, anti-government protestors in Ethiopia attacked assets owned by Nigerian billionaire Aliko Dangote and torched foreign-owned agro-businesses. The attacks were portrayed as ‘anti-foreign,’ when in fact they targeted the ruling party’s contentious policy of expropriating ethnic lands for investment. While many investors were caught off-guard, most Ethiopia observers had long seen this coming. Long-termism means looking back to identify patterns and understand histories as much as it means looking forward. When the focus is only short-term, too, firms are likely to overlook trends and disruptors that may affect their operations more than one-off events.
- Purpose: Potently executing policy stances requires a strong sense of corporate purpose. This goes to the heart of strategy. A company’s purpose is, as Greg Ellis, former CEO of REA Group, put it, its “philosophical heartbeat”—the ‘why’ of its existence. A clear appreciation of what a company does for its consumers and its employees is essential in order for it to formulate and articulate where it stands on the issues of the day.
- Strategic partnerships: Who you know is, today, often more valuable than what you know. Corporations must cast their nets widely and forge relations with a variety of private- and public-sector actors who can strengthen their position. Companies, too, need to be aware of rapid shifts in these relations and be prepared to respond accordingly. Chinese oil companies in Venezuela that had spent the last decade building strategic alliances with the ruling Partido Socialista Unido de Venezuela are now scrambling to court the opposition as Venezuela teeters on the brink and state-owned oil company PDVSA faces default. While there is little that the Chinese could have done to prevent the Venezuelan crisis, the experience demonstrates the perils of associating too closely with just one stakeholder.
The best offense
Before, the best political risk offense was a good defense. Today, the best offense is the best offense. Political risk is not new, but it’s now more messy, faster and more intrinsic to business operations than ever before. Consumers today additionally expect companies to generate positive social and political returns (however defined), breaking with traditionally held notions of firms as purely profit-maximizing entities.
Success in this changing environment requires holistic, integrated and pre-emptive strategies. It requires companies to endogenize politics rather than treating it as external. Former Chicago Bears coach Mike Ditka is famed for saying, “If you’re not in the parade, you watch the parade.” If companies are not smartly playing politics, politics will play them.
