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What Political Risk Now Means for Companies

Political risk used to be something that managers with an eye on emerging markets worried about, but no longer; companies now need to think differently and embrace the opportunities it presents

For large multinationals, political uncertainty used to be a risk normally limited to emerging market expansion, but events of the past 18 months mean that senior executives must now consider it in US and European markets too.

Recent surprises (notably the Brexit win, Donald Trump’s presidential victory, and the unprecedented French election runoff between two outsider candidates) have spurred companies to consider what rapid policy shifts mean for their operations. Concerns like whether they’ll need to move or build new facilities, change their supply networks, or hire locally.

But in the aftermath of big elections, bitter splits among a country’s electorate have also led to a type of political uncertainty that is unique to democratic nations. Companies must prepare for – and indeed make use of – a new activism among the people who buy their products, those who make their products, and those who determine rules and government policy that shape a company’s regulatory environment.

Politicized Consumers

A contentious US election that served up two unpopular major candidates has generated an increased political awareness among consumers there. Managers should be prepared to have US customers “vote with their wallets,” organize, or lash out on social media when they perceive businesses pursuing a partisan agenda they don’t agree with.

The Harris Poll recently showed that Republicans have a more positive view of Chick-fil-A and Hobby Lobby, which got involved in conservative causes, while Democrats see Target in a better light. As Nordstrom and L.L. Bean discovered, being the subject of a presidential tweet (whether favorable or unfavorable) can net both boycott threats and calls for supportive shopping sprees.

A YouGov survey this year found that 59% of Americans say they are willing to boycott a company if they disagree with its position (pdf). Additionally, 62% say that the number of people boycotting today has increased over the past 10 years. A Google trends analysis provides supporting evidence (see chart 1).

Before 2015, spikes in web searches for boycotts revolved almost entirely around actions against nations. Now, business enterprises, such as Target, are the target. Donald Trump’s election has even spurred a collective boycott of dozens of companies under the #GrabYourWallet umbrella. In this environment, before taking a public political stance, compa­nies should:

  • Make sure it aligns with the company’s values.
  • Pay attention to their customers’ values.
  • Understand the mechanics of activism.
  • Consider the political views of potential customers for new products or markets.

Chart 1: US Google searches for “boycott”  Source: CEB analysis; Google trends (www.google.com/trends)


Employee Pressure

In some cases, it’s the employees who are pressing companies to take positions. Since the US election, staff members at Oracle and IBM have gathered hundreds of signatures on petitions (and made headlines), urging their top management to get involved in diversity, immigration, the US administration’s travel ban, and other social policy concerns.

Audit, risk, and compliance executives told CEB earlier this year that a perceived corporate position on hot-button issues could lead to challenges in engaging and retaining employees as well as the consumer base. CEB tends to call it a “meteor risk” because it could inflict significant damage so quickly.

Keeping political differences from damaging colleagues’ ability to work together is critical. To maintain equilibrium, HR business partners should give staff a safe space to vent, and leaders should emphasize the company’s commitment to its core values and to employees.

It’s also important to communicate clearly and empathetically. As Peter Cheese, chief executive of UK HR organization CIPD, advised shortly after the Brexit referendum, “That means sharing what we know and sharing what we don’t know. A little humility doesn’t go amiss in that regard.”

When traveling in rough waters, the best way to avoid queasiness is to focus on the horizon. In a time of political volatility, that means emphasizing to your employees what is most important — customers, competitors, market dynamics, evolving industry trends, and sources of growth.

Voters

Will the sea change last? Will new countries get on board? Or will governments change course again? The electorate is the major mechanism of change in democracies. Fortunately, open societies offer a wealth of political and market data to predict the chances of a major policy reversal, including polling to determine:

  • Whether the country is going in the right or wrong direction.
  • Anti-trade sentiment.
  • Anti-immigration sentiment.
  • Public opinion of business.
  • Public trust in institutions.
  • Political polarization and fragmentation.

In an interview, Robert Whitcomb, senior editor of the Journal of Political Risk, told CEB that the question, “Are people hopeful?” is the most important in gauging voter attitudes. If voters view government, institutions, and business as corrupt, it doesn’t matter what the reality is. The more frustrated the electorate feels, the greater chance there is for radical shifts.

And the electorate is certainly frustrated. An Edelman survey released at the beginning of the year shows that the population in 14 nations has lost faith overall that institutions, such as government, the media, business, and NGOs, work well. Every one of the countries where trust had eroded is an advanced economy and a democracy.

At the same time, people want and expect businesses to take the lead on economic and social issues. In the same poll, 75% of respondents agree that companies can both increase profits and improve conditions at large. By carefully tapping into consumer desires for a greater corporate role in society, managers could generate both trust and engagement in their company and brand.

 

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