Volume 1 April 2007

China in international imbalances
Yu Yongding

International trade and poverty: cause or cure?
L. Alan Winters

Making the boom pay
John Freebairn

Reforming Australian industrial relations
Joe Isaac

Minimum wages and inequality
Andrew Leigh

Does the Fair Pay Commission decision matter?
Mark Wooden

The corporate political environment and big business response
Geoff Allen

Stock return predictability in rational markets
Bruce D. Grundy

Passive profits from accounting indicators
John D. Lyon

A 'Battle of Ideas'
Tom Elliott

On painting one's life picture
Peter Yates

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By Geoff Allen

In the early 1970s, Professor Neil Jacoby of the business school at UCLA was searching for an adequate theory of the firm to describe behaviour as he saw it. Two major theories had succeeded each other in academic discussion.

One was the classical market model, which was built on assumptions of owner entrepreneurs responding to markets to maximise profits in the interests of owners in a competitive environment. The other was the managerial model, which emerged through the 1940s and 1950s on the observation of widespread separation of ownership and control and the perceived power of professional managers – free of effective control of stockholders in an environment only loosely constrained by competition.

His proposed new model was:

... the explicit recognition that corporate behaviour responds to political forces, public opinion, and governmental pressures. Whereas both classical and managerial theory ignored the impact of political forces, the social environment theory analyses corporate behaviour as a response to both market and non-market forces because both affect the firm’s costs, revenues and profits.¹

Emerging pressures and responses

Since the 1970s many factors have combined to make these social and political pressures more significant for corporate management. These include the growth in participative democracy, distrust of traditional institutions, a more sophisticated and critical media, a growth in the role and status of interest groups, and the privatisation of former government monopoly businesses, requiring new forms of regulation.

The new and more challenging environment which emerged in the 1970s led to a rise in corporate political activism. Business leaders came to apply concepts and tools of corporate political management as they evolved in a small number of US business schools, and some consultancies.

One was issues management – a structured process for the early identification, evaluation and strategic management of social and political issues critical to the firm.

While issues management was normally seen as defensive and directed at managing hostile agendas, some creative business people used its concepts to set their own agendas and manage those agendas through to desired outcomes, including the achievement of competitive advantage. An obvious example of competitive use of issues analysis was Shell’s early focus on lead in petrol, leading to investment in research that gave a substantial break over other companies for a useful period.

The rapid expansion of multinational companies saw parallel growth in academic publishing on international political risk. Much of this was in search of methodologies to bring down to manageable elements: risk analysis; a maze of facts and judgements concerning the stability of regulatory and political systems; and the complex web of hidden political and social relationships surrounding host government actors.

Academic attention given to stakeholder theory focused mainly on theoretical and ideological discussion on the role of the corporation in society. However, attention shifted to the nature of engagement with external stakeholders, and in particular those with social or political agendas. There has been a tendency to move from a confrontationist orientation to initially seeking alignment between influential stakeholders’ real concerns and interests, and so remove barriers to corporate growth.

Related to this have been the findings of risk communication, for example that anxious and upset communities will come at issues from a different perspective than the cold arguments of businesses’ economic and scientific paradigms. It has also demonstrated that listening respectfully to concerned stakeholders not only provides useful information, but is a pre-condition for meaningful communication and influence.

Another pervasive and recent shift has been from ‘cheque over the fence’ philanthropy to the use of corporate social investment for deeper strategic purposes. This acknowledges the business case for social investment and the general concept of enlightened self-interest. Using social investment to build relationships with business-sensitive stakeholders, including critical NGOs and foreign governments in the developing world, has been one useful application.

There has also been a recent burst of attention on business reputation, its determinants, and attempts to assess its non-tangible value. Such values include being employer of choice, neighbour of choice, investment of choice, business partner or licensee of choice, having enhanced access to political decision makers, and receiving the benefit of doubt in relation to regulatory intervention.

Most of the determinants of reputation relate to the economic and technical aspects of a business including, for example, its products, financial management and treatment of customers. However, a lot also has to do with how a business is aligned with social and political values, and this is frequently put at risk by insensitive management.

The ecology movement has focused community and consequent corporate attention on ‘sustainability’, a concept subsequently broadened to include such issues as community impacts, employment conditions and human rights through the whole supply chain. Last year, 70 per cent of Australia’s major companies published reports on sustainability or the triple bottom line.²

Tapping socio-political opportunities

There have been a number of examples of business collectively responding to challenges in the social and political environment by proactive adaptation of the concepts and techniques of political activism. These include: reframing issues of ‘protection’ and ‘free trade’ to ‘competitiveness’; centralised versus decentralised wage fixation; enterprise industrial relations; keeping business constituencies together; and winning stakeholder support with agenda-setting advocacy for business friendly reform.

But it is socio-political vulnerability and opportunity at the corporate level which I believe is the main game. A glance at the Financial Review on only a random couple of days in 2006 shows how persuasive these issues are and how significant their impacts on corporate performance.

The attitudes of utilities and infrastructure regulators emerge across a range of issues: consumer pricing and competitor access to company railways, entry to the highly regulated aged and child care markets, sugar levies for food and beverages, issues around subsidies for ethanol in petrol and greenhouse emissions, government to government negotiations over live cattle exports, bilateral and multilateral trade negotiations affecting major interests, media rules which have shaped the industry and locked companies into limited structures and technologies, opportunities afforded by business regulation reform arising from Council of Australian Governments, negotiations over criteria for market entry with provincial governments in China, access to new airline routes, the politics of the sale of Telstra equities, liquor and gaming mandates – the list goes on.

Of course, these higher profile issues are in addition to the daily grind of negotiating market entry with a myriad of complex political environments around the world, working through regulatory risk assessment and approvals for new products or major investments, dealing with local communities on traffic or noise, and so on. All the while, the world watches suspiciously and demands ever increasing obeyance to community sentiment.

The capacity to deal with these high profile issues, including managing them better than competitors, has become a key factor in competitive advantage.

Australian companies have adapted to these challenges in a variety of ways. Most of the top 100 or so invest in specialist support. One of the best kept management secrets has been the emergence over the past 15 years of a new coterie of public affairs executives acting as ‘strategist’ and ‘corporate coach’ in these areas.

A majority of executives who head this function are direct reports to the CEO, are members of the senior executive committee, and make regular presentations on issues to their company boards. Where fully matured, the function typically has a specialist staff for public policy and government relations, media, community relations and internal communications, and would have oversight of corporate brand and community investment programs.

CEO of BHP, John Prescott, said of his public affairs team:

In essence, they are the acknowledged authority on the social and political environments and their effect on our business. As such they are playing an increasing role in planning, issues management, and the creative use of public policy to further company goals.

Yet it is fundamental that dealing with social, political and industrial issues is integrated into the normal line management role, and becomes part of a company’s culture. Most of the expensive problems for business – and lost opportunities in this area – arise from a lack of sophistication in line management. Accordingly, performance here is fast having to become a core function of general managers; and in an increasing number of companies it is now an element in assessment of individual performance.

Theory and practice

One challenge for management researchers and educators is to develop coherent theories for corporate social and political engagement, and to congeal this fledgling discipline into a fully formed academic discipline.

While frameworks are developed around issues management, stakeholder engagement, ideological theories of the firm, political risk analysis, risk communication and so on, a lack of an integrating grand theory should not deter us from deeper academic analysis of these issues and integration into the training we give business executives.

Professor Duane Windsor of Rice University argues there is no overarching theory here, but an intersection of a range of disciplines. These, he suggests, might include:

• Business in societies and business ethics (including corporate citizenship and social responsibility, corporate social performance theory and stakeholder management);
• Communications theory;
• Ecological systems (including appreciation of corporate and stakeholder impacts on natural ecological systems and the issues generated by them);
• Economics (including collective action, public choice theory, transaction cost theory and game theory);
• Organisational sociology;
• Political science; and
• Strategic management (including agency theory, behavioural theory of the firm and integrated strategic management theory).

I do not believe it is enough to cobble together isolated specialists in these disciplines to teach in this field. To be useful to business this needs to be integrated in a holistic way and examined from the mindset of management and corporate strategy.

¹ Neil H. Jacoby, 1974, 'The Corporation as Social Activist', in S Prakash Sethi (Ed), The Unstable Ground: Corporate Social Policy in a Dynamic Society, Wiley: New York

² Centre for Corporate Public Affairs, 2006 Public Affairs Survey, Corporate Public Affairs Newsletter, Vol 16, No 2

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