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Geopolitics
Taking political risk out of the equation
With half the world going to the polls this year, how do businesses manage political risk? IMD’s David Bach suggests businesses must look beyond the electoral cycle by aligning their interests with those of society.
The history of democracy may be long and (intermittently) proud, but there has never been a year quite as electorally momentous as 2024. By year’s end, more than 60 countries will have staged general elections, as well as elections to the European Parliament across the EU’s 27 member states.
Around half the world’s population is eligible to participate, from the world’s largest polls (voter numbers in India, the EU, and the US total 950 million, 400 million, and 240 million, respectively) to the smallest (6,000 people were entitled to vote in Tuvalu in January).
For businesses that have had to operate amid significant geopolitical uncertainty over the past five years, this year’s elections pose new challenges. Some outcomes feel more predictable than others. No matter where the elections are, however, business leaders are trying to work out how to engage constructively with the political process.
With strict rules on public disclosure of political donations in many countries, business leaders should be conscious of both the optics and legal implications.
Back one candidate or support them all?
One question is whether leaders should endorse a particular candidate or party – and, if so, which criteria they should follow to choose. In the run-up to July’s UK election, for example, more than 100 business leaders signed a letter endorsing the Labour Party’s economic plans.
It’s a risky strategy. There is always the possibility of backing the losing candidate and suffering some form of backlash from the winning party. Moreover, not all key stakeholders will approve of your choice. Employees and customers, for example, may be alienated if the organization offers overt partisan support.
On the related issue of financial support for political parties, there may also be practical considerations. With strict rules on public disclosure of political donations in many countries, business leaders should be conscious of both the optics and legal implications. Nevertheless, financial support can secure access and influence – in some countries, such reciprocation is expected. In India, for example, eight large companies spent Rs 628 crore ($75m) on political donations over the five years leading up to the election this spring.
Counterintuitive though it may feel, the most sensible option may be to spread your financial support equally among the leading parties. That can be seen as supporting the political process, rather than any single party.
That’s not to say businesses should stay out of the fray completely. If it feels commercially appropriate to advocate for a political direction of travel – a shift of economic focus, say, or a move to closer international relationships – leaders should not be afraid to do so, whether that implies a political endorsement or not.
Indeed, in a pluralist society, we could argue that businesses have a responsibility to set out their views on government priorities in areas relevant to their business. Just as, for example, it is not uncommon for academics to give their views on education or research policy via the media, business leaders should be able to contribute to key areas of the national debate.
“Cultivating strong relationships can even work against the business if the new regime tags it as a supporter of its predecessor.”
Taking a balanced approach to policy discussion
But taking a partisan line can be delicate, particularly when electoral campaign rhetoric raises the political temperature, and it can be tempting to be condemnatory of policy (or those that propose it) that runs contrary to your business or personal principles.
In any case, a negative approach is unlikely to yield the desired results, and both political leaders and voters are likely to dismiss it as reflecting vested interests. Moreover, a vituperative attack on a particular policy will inevitably provoke a confrontation that could have ongoing repercussions if the party under attack wins power.
A more sensible approach is to frame the discussion with principles rather than business specifics – why a particular policy might not be the best option for the country, rather than why it would disadvantage your business. It is a natural expectation that business leaders will have a voice on issues such as competitiveness and innovation, for example, and advocacy of a particular policy can be shaped in that context.
It also helps to engage. Where businesses take public positions on policy, a willingness to discuss their views underlines a commitment to openness and debate, as well as the possibility of collaboration and compromise. Discussions with political leaders, particularly where businesses are genuinely prepared to listen to the counter arguments as well as set out their views, can help shape future policy in the long term – even if there is no immediate public change of heart from policymakers.
There is a common misconception that individual relationships are the key to securing favorable political outcomes for business. However, while there may be some ‘pork -barrel’ benefits in building relationships with politicians, individuals can quickly fall from favor and the business will, consequently, lose its access to power. Cultivating strong relationships can even work against the business if the new regime tags it as a supporter of its predecessor.
That is why sensible business leaders work constructively with all sides to build bridges across the political divide, finding common ground, rather than fixating on specific policies. The goal here is to derisk the political process, ensuring the broad business environment will be supportive of your objectives, whatever happens at the ballot box.
“Sometimes it is better to delay big business decisions until it is clear what the political landscape will look like in the medium term.”
Bracing the business for the election result
For all the talk of collaboration and consensus, business leaders can feel under pressure to prepare the company for a particular election result. There may be opportunities that will only be viable if a particular party wins – or risks that will only be present if a particular side loses.
One danger here is that election results can bring surprises. A business that makes decisions predicated on a certain outcome leaves itself vulnerable to an unexpected result. Sometimes it is better to delay big business decisions until it is clear what the political landscape will look like in the medium term. Investment decisions taken without proper attention to political timelines can leave a business as a hostage to fortune.
The bigger picture for businesses is that many investment decisions will apply to a future that goes well beyond the term of the incoming government. That’s why it makes sense to engage with the political environment directly, rather than trying to second-guess it. That requires businesses to understand what matters to every stakeholder – whether that be hiring locally, investing in the local community, or commitment to improved sustainability.
No business will ever be entirely immune from the impacts of political decisions. It is possible, however, for business leaders to nurture the resilience of their organizations by making them an integral element of the local communities they serve and proving their value to a broad range of stakeholders. Managing stakeholder relations in this way will ensure businesses are far less vulnerable to changes in the political landscape.
Every business has both market and nonmarket tools available to it. In the political context, the attention is often on the latter – advocacy, lobbying, and the cultivation of political relationships. But market tools can be just as powerful. Businesses must hire and procure, for example. They may need financing or even a joint-venture partner. The decisions they make in all these areas will result in their projects becoming either more or less valuable to political stakeholders.
“Businesses should feel comfortable publishing details of who they’re working with and, where relevant, what they’re lobbying for and by what means.”
Transparency matters
Importantly, none of this activity should be covert. Businesses should feel comfortable publishing details of who they’re working with and, where relevant, what they’re lobbying for and by what means. Activity that a business feels it should hide from public view almost certainly shouldn’t be taking place in the first place.
This transparency implies that businesses should be ready to discuss where they stand on certain issues, including with their critics. There is nothing wrong with a pharmaceutical company, say, making the case for long-term patent protection, but it should be ready to sit down with a patient group worried about what that might mean for the cost of medicines.
The goal here is to build relationships and a reputation that transcends the political cycle. The job of a business leader is not to predict who will win next week’s election, let alone to try to influence the result. Rather, their objective should be to future-proof the business by aligning its interests with those of the communities and countries in which it operates.
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