Why corporations must care about politics

Recent events in France, Europe, and the United States have sent shockwaves through the business world. As evidenced by the significant fluctuations in the French stock index CAC40 following the results of the European elections, it is clear that politics can have immediate economic consequences, as seen in the shifts in expected returns and associated economic losses. This reflects the broader implications of politics on corporate strategies and operational conditions. Similarly, the debt markets are affected by varying risk premiums that lenders demand in response to political changes.

While many companies profess to be apolitical, strong incentives exist for them to support specific political choices, especially those that promise the most favorable outcomes for their interests. A stable and supportive political environment can spur growth and investment, whereas political instability can lead to disruptions, heightened risks, and financial setbacks. This topic has been extensively studied in management sciences, and this article provides real-life illustrations of several key theoretical perspectives and covers practical implications.

Business implications of political decisions

The usual train of thoughts regarding the consequences of political decisions on business life focuses mostly on taxes and regulations. These translate directly into a reduction of profits and lead executives around the world to approach them cautiously. Nonetheless, there is more than meet the eye and the complex relationship between companies and the State cannot be summed up to taxation.

Companies such as weapons manufacturers are a great example of this. Lockheed Martin, Raytheon or Northrop Grumman rely nearly exclusively on government purchases for their income generation. They are dependent on the Pentagon’s procurement programs and on federal authorisations for exports. For example, Raytheon derived 45% of its 2022 Group sales from contracts with the US Government, its largest customer, and rightly lists government contracting and regulation as major risks to its business in its annual report.

Unsurprisingly, these companies are also among the biggest spenders on lobbying activities in Washington DC. According to Open Secrets, Raytheon spent more than 11 million USD in 2023, employing 83 lobbyists. Such companies embody a form of dependency of some industrial sectors towards political decisions.

Public purchases are an obvious link between these companies and the government, but other industries such as pharmaceuticals or telecommunications heavily rely on public regulation for their business operations and engage with regulators on a permanent basis. It is thus noteworthy that Meta has become one of the top spenders in terms of lobbying in recent years amid controversies on election interferences and content moderation.

In France, the utility company EDF, that manages a significant nuclear reactor fleet to produce electricity, has to comply with injunctions from a complex nexus of political and administrative institutions. The State is the sole shareholder but has a schizophrenic relation to the company, torn between financial, industrial and environmental objectives. The Energy Regulation Commission tries to ensure the company does not benefit from a monopolistic position in power transportation and distribution. The Nuclear Safety Authority monitors the nuclear fleet… EDF dedicates significant time and resources to engage with these parties and the complexity of aligning divergent points of view lead to prolonged decision-making and policy hesitation. The consequences of shifts in regulation become major risks to business continuity. For example, five full pages of its annual report are dedicated to discussing “Market regulation, political and legal risks”.

Practical Implications for Business

Direct Political Engagement

Given the stakes, companies engage directly with public authorities. Corporate political activity encompasses the strategies and actions companies employ to influence political decisions and achieve favorable outcomes (see Hillman et al.). This includes lobbying, political contributions, and involvement in political action committees, particularly in the United States.

Corporations engage in lobbying to secure favorable regulations, defend against adverse legislation, and gain competitive advantages. Effective engagement necessitates a deep understanding of the political landscape and the ability to navigate complex relationships and regulatory environments. Once companies reach a certain critical mass, they may establish dedicated public policy teams or outsource these activities to external lobbying firms to avoid direct associations with their influence strategies. Alternatively, companies can collaborate at the industry level to promote collective interests.

Given the sensitivity of lobbying, several frameworks (e.g. OECD guidelines) govern how it interacts with public decision-making processes. The European Parliament, for instance, enforces stringent transparency rules for lobbyists.

Defensive Strategies

Political risk management involves identifying, assessing, and mitigating risks associated with political changes and instability. Political risks may include war, expropriation, nationalization, restrictions on repatriation of earnings, regulatory changes, and civil unrest, all of which can disrupt operations, increase costs, and reduce profitability.

Management theories such as Contingency Theory, which posits that there is no one-size-fits-all organizational strategy and that approaches should align with the external environment, emphasize the importance of political risk management. Companies must develop strategies adaptable to different political contexts, which may involve diversifying investments across regions, fostering robust relationships with local governments, and devising contingency plans for political disruptions. This could lead firms to diversify their supply chains and develop diversified portfolios across geographies and industries. Internal risk departments often create complex hedging strategies using political risk insurance (PRI) and financial products to manage their exposure. National export agencies like BPI France, Coface, UK Export Finance, and Exportkreditgarantien provide PRI policies to support domestic companies investing abroad.

For a company as significant as EDF, developing defensive strategies and directly engaging with public authorities are combined to form a comprehensive risk management strategy.

The intersection of business and politics is complex. Corporations must be attuned to political dynamics because they directly impact their operations, access to resources, and societal standing. However, companies do not possess the same legitimacy as citizens in the public sphere, and their involvement is often viewed skeptically by other stakeholders. Therefore, they must tread carefully, balancing efforts to influence political outcomes with preparedness for various scenarios. It is worth noting that these considerations primarily concern large multinational corporations. Smaller firms often lack the resources to proactively engage with these issues, typically addressing political matters on a reactive basis. This is where trade chambers and other professional bodies play a critical role, providing both information and representation in political decision-making processes.