Managers have hitherto had three ways to shield their businesses from political upheavals. The first was to get rid of borders and establish the free flow of people and goods. The push for globalization that came with EU integration, the introduction of the WTO and numerous other free trade agreements permitted management to limit their exposure to state influence in business decisions and give them a free pass.

Alas, populist movements in Europe and the election of Donald Trump in the United States have signaled a halt to further globalization and even reintroduced protectionist policies, as can be seen in effect between the USA and China. Gone is the era when globalization was a silver bullet for corporations seeking to free themselves from political interference.

The second way corporations sought protection was through political risk insurance. All countries utilize state-sponsored institutions such as the Exim Bank in the US or Coface in France that cover the political risk. This way, if something happens in a third country (expropriation, currency fluctuations…) the investment/cost is covered by the political risk insurance. 

The problem is that this political risk insurance does not cover domestic political risk and ethical questions. When Sabadell bank had to decide whether to move its headquarters out of Catalonia in 2017 because of the referendum or should Airbus move out of the UK because of Brexit, there is no political risk insurance to insulate against that. It is up to every corporation to assess the political, social and/or reputational risk and make the correct decision.

The third way corporations could injure themselves was to leverage the political capital of the company or resort to corruption and bribery in order to mitigate the risk. For political capital, the company would use its network through lobbying in pursuing its interests on either local or international level. As for corruption and bribery, even if unethical, this was often the easiest way to secure a positive decision from political decision-makers. Naturally this approach comes with a risk. 

A good example is that of BNP Paribas, the biggest French bank that enjoys a huge political capital in France, that had to pay a record fine of US$8.9 billion to the US because of its activities in Sudan, Cuba and Iran. As we have seen in Malaysia, being close to the former Prime Minister Najib Razak was once politically expedient but very quickly became toxic once he was accused of embezzlement of the 1MDB fund.

All considered, businesses cannot count anymore on multilateral agreements, or their own countries for protection. They have to assess by themselves the level of political risk and come up with their own policies and strategies.

What are some effective policies and strategies available to businesses? 

The first and most unlikely option is to behave like a state and seek complete autonomy from state interference. In the past, both the British East India Company and Dutch East India Company used to behave like states. They established their own currencies and their own armies. These days, some of companies have a turnover far higher than the GDP of some countries. They may also employ more people than entire populations of some countries. 

So they might be justified in asking why a country like Monaco, with Gross Domestic Product (GDP) of US$6.5 billion and 30,645 inhabitants is member of the United Nations and Walmart with revenues of $500 billion and 2,300,000 employees is not. For companies, the Westphalian model, which gives preeminence to states is passé and companies should also be considered actors in international relations. However, as mentioned, this is an unlikely possibility.

The second possibility for companies is to organize clubs or unions in order to defend their interests. States have clubs like the United Nations, OPEC and the G7 and no one calls into question their legitimacy, so why can’t companies have them? An interesting proposal comes from Jean-Sebastien Jacques, the CEO of Rio Tinto, one of the biggest companies in the mining world. He proposed building a United Nations of the mining world, because it is increasingly difficult to negotiate concessions individually and be at mercy of countries that change their minds about the natural resources they control. It is potentially much more efficient to negotiate collectively with countries. This scenario is more likely because it does not affect the sovereignty of states with private armies and currencies. However, companies would quickly be accused of building cartels and public opinion would view such a move negatively.

The most likely scenario is for businesses to negotiate a trade-off with a state. If businesses are more involved in the social provision of the state through Corporate Social Responsibility the company can ask something in return. This could be the basic acceptance that the private business is an integral part of the society and that the state should be pro-business by minimizing regulation and barriers. 

The real trade-off would be the invitation from the government to companies to be partners in designing policies that would be the most efficient and beneficial for all stakeholders. In order to have a balanced approach and mutual benefit, it is impossible to ask companies to actively contribute to the common good and receive nothing in return for that effort.

***

The writer is a professor of international marketing and geopolitics at ESSEC Business School Asia Pacific, Singapore.

Popular

To my horror, it’s just a movie!

RI, Australia strengthen partnership on taxing crypto assets

Pentagon chief congratulates Prabowo on being elected President