Managing Political Risks

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.

Closing thoughts

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.

 

References

Political Risk Management: A Strategic Perspective Witold J. Henisz and Bennet A. Zelner

Advertisements

13 comments on “Managing Political Risks

  1. Quite topical. Political risks per se are blamed on the uncontrollable outside factors of political parties. It is assumed risks are controllable in countries like US or UK than in places like India. If one looks at the risk factors in US over a period of 10 years more than $5 billion had been spent on campaign donations and lobbying. The expenses are justified for in return the companies obtain tax concessions or contracts awarded, nationally & internationally. In India instead there is a direct payment to the parties through the selected individuals. The result could be the same.

    Either of the place there are private gains and public loss. Public loss could be easily attributed but the effect of the private gains have lot more significance. In case of US private gains are openly accepted with individuals sharing the profits among themselves like AIG bonus. Whereas in India it is considered illegal.

    Private gains being what they are the risks involved are more for those who do not indulge in bribing than those who do. That means a large number of companies who strive to get their ethics formulae in process suffer immensely by being deprived of contracts that are taken away from their hands in a jiffy by those who have no ethics to talk about. This risk is the most significant risk in the long run. Private gains are distributed and chapter 11 or wind up process that follow end in public loss only. Who are the real risk takers – the rest in industry with ethical values?

    In one side there needs a protection for such industries who follow ethics and in the other political parties must be prevented from indulging in indiscriminate contracts being awarded. This is the crux of the industry~Government problem. How to find a solution?

    Industry must forge together to certify themselves with sustainability of values label that I recommend – UNGC. UNCAC is a component part, i.e. Principle 10 of UNGC. Then move through FICCI or CII making the government to entertain only those companies that are UNGC – certified companies, like ISO certification. This would prevent government contracts being awarded to non-UNGC companies. SInce UNCAC is mandatory for both, there will be neither private gains nor public loss. Political risks are controllable.

    • Jayaraman,

      You are quite right that in India corruption plays a significant role in political risks. Actually if one discusses political risks, in Indian mindset it means one has to pay bribes.

      However, in the last year the difference in being ethical and unethical can be seen by doing a comparison of Bharti Airtel and Reliance Infocom. Bharti has grown because its name does not appear in the scam tainted companies, whereas Reliance share prices have crashed and there has been no signficant market growth. So ethics matter in the long run.

      I would disagree that a certificate on ethics will help. In India if you wish to get a BS certfied tag for information security, there are a number of bodies which will issue you, and they will not no whether the work is relating to call centers, business processes or both. So collecting certificates doesn’t help in my view. There has to be a mindset change and an ethical culture has to be demonstrated by the organization. Which is a big task, I am sure we will reach somewhere.

      Sonia

  2. I have been promoting the idea of establishing IESB – International Ethical Standards Board in order to bring in a uniform methodology to measure ethical standards and certify UNGC the 10 principles. This is necessary lest we would be continuing to disparage the certificates that almost many do come out with.

    Corporate India has to come out of the corruption tag they now live with. There needs a concerted attempt towards this goal. It is indeed possible for India to do on account of social values embedded in “Industry ~ Government” initiatives for many years. Corporate America is lost and can never get the hang of sustainability of values.

    Bharti I am not sure how it all started. As Rockefeller said: :I made all millions in the most honourable manner, except the first one million.” However there is an inevitable need for Corporate India to buck up and be measured. You may look at the conclusion remarks of my last blog: http://wp.me/p18MVb-bL Certification is an absolute necessary in order to differentiate between the shenanigans and sustainable valued companies. It is true the recent EiU and KPMG on Corporate Social responsibility arrived at the decision after surveying 558 companies that “deciding how to measure is more difficult than deciding what to measure.” Meaning western management schools have no idea how to measure.

    I should appreciate your critical analysis of western management thoughts particularly on CSR, Sustainability, Social values vis-a-vis certifying themselves in abundance, that in my study lack substance. If Corporate India corrects itself on corruption issue, that they are capable, then they can outclass the rest of the world.

    • Jayaraman,

      I liked your idea on ISEB, though I must say that I haven’t done detailed analysis of it. However, on the face of it, having global standards for ethics and an indepedent reporting on maintaining the same, similar to an audit report, sounds like a good idea to me. It makes being ehtical compulsory, and that will ensure transperancy and less corruption. Again here I agree that establishing standards to measure is going to be difficult.

      For Bharti, I agree that the beginnings were not so great, however I am impressed that they are now attempting to clean up their act. My view is that even if it is a late relization, it is better than not having one at all.

      Please feel free to send me stuff to read to up. I would love to share some of my radical thoughts 🙂 .

      Kind regards,

      Sonia

  3. Thanks. In fact IASB/IFRS is the only org on a global level setting standards on one area – fiscal standards. I have a lot of respect for it as well the professionals of the affiliated institutes. No other profession including medical has any such org. However IASB/IFRS has a number of drawbacks that can never be addressed in management areas given the ethical nature of decision making, that IESB is capable of. Measuring Ethical standards therefore becomes most crucial without which IESB has no start. I am preparing a white paper on the subject and I will surely send it over to you. I appreciate your interest.

  4. Pingback: Risks of Doing Business in India « Sonia Jaspal's RiskBoard

  5. Pingback: 10 Steps for Restructuring Risk Management Function « Sonia Jaspal's RiskBoard

  6. Pingback: Calculate the Political Risks for Andhra Pradesh « Sonia Jaspal's RiskBoard

  7. Pingback: Death Clean up

  8. Pingback: India Country Risks in 2012 « Sonia Jaspal's RiskBoard

  9. Pingback: robbie-williams-latest-news

  10. Pingback: free online tv shows canada

  11. Pingback: Lessons from Rahul Gandhi’s Failure in Uttar Pradesh Elections « Sonia Jaspal's RiskBoard

Comments are closed.