Last Friday, results of five state elections were declared. In two of these states, West Bengal and Tamil Naidu the political landscape will change tremendously. Mamata Banerjee’s Trinamool Congress won West Bengal elections and Jayalalithaa’s AIADMK won Tamil Naidu. Besides, both the states favoring parties led by woman, the victories are significant. Mamata Banerjee ousted the Left party CPI(M) after 34 years and Jayalalitha knocked off the 2G telecom scam tainted DMK party. West Bengal voted for progress and Tamil Naidu against corruption.
The election results coverage got me thinking. In a large country like India political risks change state wise and these risks not only impact multinational companies but Indian organizations also. For example, Tata Nano project in Singur faced the political backlash when farmers protested against forceful takeover of 400 acres of agricultural land for the project by West Bengal government. Trinamool party supported the farmers, played hardball and Ratan Tata took a decision to shift the project from West Bengal to Gujarat. One states loss was another states gain. West Bengal now is a financial mess. CPI(M) has left the state with Rs 2 lakh crore debt. To succeed as chief minister, Mamata Banerjee has to woo back industrialists and multinational investments to West Bengal. Will the corporate world play ball and take the risk of setting up business in West Bengal. Politicians are fickle, they change stance seeing the direction of the wind, can they be relied upon?
When political changes can severely affect business, a questions that begs an answer is – how do organizations manage political risks?
In my view, political risks fall under the category of external strategic risks and organizations generally do some analysis about them at the time of investment. Insurers treat political risks as part of risk mitigation, by analyzing the countrywide risks and insuring the organization from negative impact. In my view, this strategy does not explore the golden opportunities accessible by leveraging political risks. Political risks if managed proactively can add tremendous business value. So let us discuss the various aspects of political risks.
The research paper “Political Risk Management: A Strategic Perspective” written by Witold J. Henisz and Bennet A. Zelner describes political risks faced by organizations as – “Individual firms confront different sources of policy uncertainty and political influence depending on factors such as their size, nationality, familiarity with the local environment, partner status, technological leadership and network of global stakeholders”. I like the definition at it encompasses all aspects of political risks.
1. Boundaries of Ethical Lobbying
Governments and business generally are hand-in-glove but their relationship can change from trust worthy partners to arch enemies quite fast. For example, in the 2G-telecom scam case, DMK party person A. Raja favored Reliance, Tata and other telecom companies by waiving rules for allocating bandwidth. Niira Radia tapes disclosed that there was a lot of lobbying from corporate sector for appointment of A. Raja as telecom minister. However, with the CAG report mentioning fraudulent activities, things have gone sour. Telecom heads are being grilled by CBI and some are presently behind bars. This is a case were political relationships were used in an unethical manner to add business value. Hence, one of the major questions for managing political risks is – where is the thin line between ethical and unethical behavior and how does one stay within ethical boundaries to manage political risks?
This case clearly illustrates that participating in corruption, bribes and crony capitalism does not add business value to an organization. Political risks need to be managed while respecting ethical norms and legal laws. Flouting laws and government regulations because some businesspersons believe they are good buddies with the politicians doesn’t help their case in the long run.
2. Fluctuating relationships
Business lobbies with government and political parties to get favorable policies and benefits. In India the various industry forums – NASSCOM, FICCI, CII etc. provide a good base to organizations to have a bargaining power with government. However, the government may not listen to their requests or change its opinion at any time. For example, last year SKS Microfinance change in CEO got the focus on Micro Finance Institutions (MFI). The laws were immediately changed to protect the farmers in Andra Pradesh. Cases of farmer suicide had increased as a few MFIs were doing collections by threatening farmers and their families.
A few companies mis-management has resulted in the whole industry paying a heavy price. Within six months, the whole industry cash flows were impacted. An industry, which was considered a cash cow, is struggling to maintain liquidity. Again, a situation where the start of the relationship was good as government needed micro finance companies in rural areas. However, because of their exploitative procedures the industry has painted itself in a corner. The industry as a whole lost its bargaining power.
Lesson here is that relationships need to be managed on a continuous basis. A sense of entitlement and privilege of organizations can damage the long-term relationships with government bodies. Organizations need to master the art of tight rope walking to add business value. It is never plain sailing with government, so don’t let your guard down.
3. Foreign investments and relationships with multinationals
Everyone wants their place under the sun, and multinationals more so. They want a slice of the emerging markets from strategic growth perspective. But, the fear is always there that they are biting more than they chew. In India, states chief ministers clamor to get multinationals to invest in their states. The offer sops in the form of cheaper land, tax-breaks, easy licensing schemes etc. The courting period of state government and multinationals is sweet, it is hard to believe that things can go wrong. However, state governments being infidel lovers, loose interest after the investments are made in their state by the multinationals.
The corruption factor also has to be dealt with. It is not unheard that politicians to grant licenses recommend local partners (including their relatives), demand equity and other perks. Secondly, after the technology is transferred to the country especially in manufacturing sector, the multinationals loose bargaining power. The challenges for multinationals are to ensure that state governments deliver on the promises, continue with policies, which are favorable for foreign investments and allow free market economy to work. To do so the multinationals can use their respective embassy business relationship managers, local industry lobbies, their own country’s business lobbies and government. Lastly, multinationals should sign watertight agreements with government bodies so that the organization is not shortchanged.
Managing political risks is equivalent to walking on a landmine. Anything can erupt without much notice. It is a tough task to prepare after considering the political, economic and social uncertainties in the environment. Lessons can be learnt from some odd cases.