The wrong influence: the risks of mixing business with politics

A new study based on evidence from China finds businesses engaging in lobbying and other forms of political influence should consider the priorities of different stakeholders

Earlier this week, the NSW government announced its intention to introduce new laws around lobbying to guard against “corruption and undue influence”, following evidence that some lobbyists were conducting meetings with politicians in secret. Indeed, the past few years have seen increasing demand for transparency and scrutiny of corporate lobbying and its impact on certain policies, such as Australia's action on climate change.

While lobbying is often more commonly associated with the US (where it is a right protected by the First Amendment), businesses in Australia also have a significant influence on legislation and regulation, with evidence showing the impact of fossil fuel, tobacco and gambling industries’ on government policies over the years. At the same time, lobbying is a vital part of the democratic process around the world as it provides access to government legislatures that no single individual could hope to achieve.

When businesses engage with external stakeholders, such as the public, media, government and activist groups, it is often called a ‘nonmarket strategy’, which aims to create an environment from which the business can benefit. So, for example, companies that lobby for legislation to lower trade barriers are doing so to get a competitive edge. It is no secret that specific industries such as pharmaceuticals, insurance and manufacturing companies spend a lot on lobbying, but do these nonmarket activities always benefit the business?

According to the findings of a new study, the impact of corporate nonmarket strategies can backfire on business: while it may assist firms with undertaking strategic competitive actions, it can, at the same time, hurt the efficacy of such measures. The paper, The interface of market and nonmarket strategies: Political ties and strategic competitive actions, co-authored by Dr Weiting Zheng, Senior Lecturer in the School of Management and Governance at UNSW Business School, focuses on corporate political connections as a critical nonmarket strategy. It investigates how political connections have influenced firms’ strategic competitive actions (e.g., product diversification, alliances, mergers and acquisitions and international expansions) and the risks associated with political influence.

How does business influence politics and vice versa?

After assembling a dataset tracking Chinese TV manufacturers over ten years, during which the industry experienced substantial deregulation and competitive pressures, Dr Zheng’s study uncovered three key findings:

• First, on average, politically connected firms took more competitive actions, supporting the idea that political ties can facilitate market-based actions when the institutional infrastructure is underdeveloped.
• But this relationship was only observed for political ties to the central (i.e., the federal or national) government but not for links to local (i.e., state, or provincial) governments.
• Finally, while competitive actions taken by nationally connected firms lead to superior corporate performance, those by locally connected firms are associated with poorer performance, again highlighting how political actors with different interests may influence corporate strategy and performance in different ways.

Read more: Climate change and shareholder activism: what should boards do?

In a nutshell, the academics observed that companies with ties to central government exhibited stronger performances overall, while firms with ties to local government performed worse. So, whether the political ties are beneficial for the business depends on whom the firm is connected to and whether the specific political interests align with that of the business, explains Dr Zheng.

“In China and many other countries worldwide, businesses often establish relationships with the government to seek political access and resources,” she says. “These benefits are particularly instrumental for firms in economies characterised by opportunities for business growth, underdeveloped market infrastructure, and strong government intervention.”

In these markets, businesses can leverage political connections as a “substitute for under-developed market intermediaries to support competitive market actions”, explains Dr Zheng. This means that companies can look to politicians to overcome barriers like underdeveloped, illiquid capital markets, scarcity of management talent, little dissemination of information, and limited protection of private property, to give their business a competitive edge.

Risky business: political influence is a global phenomenon

But these findings suggest potential risks for businesses when they attempt to combine market strategy with these nonmarket strategies (for example, forming ties to local governments in China) to pursue competitive advantage. While the study examines businesses and the political environment in China, Dr Zheng says the insights can easily apply here in Australia and other countries.

“There can be tension… especially when the interests of external stakeholders are not fully aligned with business imperatives. Moreover, as the nonmarket strategy involves interactions with different social and political actors, whether and to what extent businesses can benefit from or are constrained by their nonmarket interactions depend on the interests of specific stakeholders,” she says.

“Political connections are a global phenomenon. Even in Australia, research reveals that a considerable proportion of Australia’s richest people amass their wealth via political connections in industries including property, mining, banking, superannuation and finance – all heavily regulated industries,” she continues. “Multiple cross-country studies demonstrate the benefits firms obtain from their political connections, yet we know so much less about the ‘dark side’ of political connections.”

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Businesses and political influence to create ‘stakeholder capitalism’

What would fair and ethical influence look like in a country like Australia? Purpose over profit, or ‘stakeholder capitalism’, describes business practices that strive to achieve more than profits and a high stock price. The term “stakeholder capitalism” is everywhere, says Dr Zheng. This is seeing corporations increasingly orient themselves to meet the needs of various stakeholders: customers, employees, government, the community, and society as a whole.

“What is less considered, however, is how such stakeholder orientation influences the value creation of businesses, the fundamental goal of a corporation. This is a particularly tricky question when different stakeholders influence the firm with distinct values, priorities, and goals,” she says.

So even stakeholder capitalism is not an easy business; it involves balancing different interests and priorities, which creates its own set of risks, she says. So how can companies balance the diverse interests and priorities of stakeholder capitalism? “More research is needed to foster a well-balanced approach to interacting with stakeholders, resulting in a win-win for both businesses and society,” says Dr Zheng.

Dr Weiting Zheng is a Senior Lecturer in the School of Management and Governance at UNSW Business School.  Her current research projects focus on topics related to corporate political strategy in emerging markets, the role of the state in influencing firm behaviour, and managing diverse stakeholder relationships. For more information, please contact Dr Zheng directly.