Political Risk Brief

Managing Political Risk: Best Practices

“Companies are not going to leave the United States any more without consequences.” 1

– President-elect Trump, Indianapolis, IN, December 1, 2016

“We can give more tax breaks to corporations that ship jobs overseas or we can start rewarding companies that open new plants and train new workers and create new jobs here in the United States of America.” 2

– President Obama, Charlotte, NC, September 7, 2012


Introduction

The transfer of power from the progressive Barack Obama to the nationalist Donald J. Trump signals that economic interventionism is an enduring feature of American politics.  Despite the obvious contrasts in biography and temperament, these two men share a vision of government as a necessary force for leveraging the private sector to support policy outcomes.  Although each leader articulates different justifications, the nation’s collapsing social capital serves as the underlying force that has produced this consensus.  Popular anxiety has led to political volatility as elected leaders pursue economic intervention to mollify this anxiety and address the underlying crisis rooted in family deterioration.3

With corporations demonized by the Left as victimizers of consumers and by the Right as betrayers of patriotic duty, business leaders operate from a position of considerable weakness in responding to this economic interventionism.  Moreover, the incentives of Washington, DC opinion elites complicate advocacy through political tribalism, reverse capture, tactical bias, and strategy underinvestment.  Reviewing more than 10 years of work with market leaders, Baron Public Affairs, LLC (Baron) offers this guide to the vexing challenge of mitigating political risk in a world increasingly defined by government intervention in the private sector.

The Problem

Two major threats confront businesses in the current political environment: the expansion of the regulatory state and the growth of ideologically-driven activism.  Greater government intervention in private markets has compelled businesses to accept government as a partner.  In the interest of passing legislation or imposing regulation, government makes threats and offers rewards in exchange for corporate compliance.  Market participants inevitably seek to leverage policy to undermine competitors, rather than offer superior value.  This dynamic unleashes a vicious cycle of “crony cannibalism” that politicizes business decisions, resulting in the misallocation of capital and imperiling innovation.  Abetting this new trend are activists who cite behavioral economics to argue that sound public policy should “nudge” consumers toward more beneficial outcomes, rather than allow them to make, what these activists believe are, mistakes.  Conventional corporate government relations empowers the regulatory state and rewards ideological activism by falling victim to:

Political Tribalism – Washington, DC functions as a city of ideological, cultural, and demographic tribes.  Most opinion elites cannot defy the tribes that confer prestige and material prosperity.  For this reason, rather than unreservedly advocate on behalf of corporate clients, many political advisers press clients to cede to regulators’ demands in situations where the advocate and regulator are part of the same tribe.  The loser: clients who could have achieved better terms if not undermined by advocates with at best divided loyalties.  In fact, extracting concessions from corporate clients allows consultants with strong ideological roots to preserve credibility by offering a rationale for working with “Big Business.”

Reverse Capture – Even when not part of the same tribe, advocates depend heavily on consistent access to and approval of regulators and, therefore, often disadvantage clients entering complex and contentious negotiations with government authorities.  Critics of the influence of corporations in the policy-making process regularly decry regulatory capture: regulators supporting the policy positions promoted by the corporations they are charged with regulating.  Experience suggests a far more pervasive and harmful countervailing trend: reverse capture.  Clients come and go, but advocates must maintain good terms with regulators for the sake of future engagements.

Tactical Bias – Service providers such as attorneys, lobbyists, ad-makers, grassroots mobilizers, public relations specialists, and compliance experts typically presume their professional response to a given problem (lawyers seek a legal solution, lobbyists a lobbying solution, etc).  This drives client resources to predetermined categories of spending regardless of the effectiveness of such tactics, or the availability of less-expensive alternatives.  Consequently, clients commonly buy the service the vendors offer, rather than a solution to the problem.

Strategy Underinvestment – Retaining vendors offering programmatic services, irrespective of the client’s need, leads to a lack of consideration of service effectiveness.  Essential steps, such as information gathering, are treated as a cost, not a profit center, and so vendors limit their time on them.  This bias corrupts strategy formation, undermining outcomes and distorting spending decisions toward ultimately futile actions.

Principles of Effective Public Affairs

To avoid these dangers, advocacy should be disciplined by three crucial principles designed to remove conflicts of interests, counter the information deficit that disadvantages clients in making strategy decisions, and ensure clients benefit from advisers dedicated to serving as truthful champions:

Tactical Neutrality – An adviser should not have preference for any tactical service, nor accept finder’s fees or commissions of any kind when recommending vendor-driven solutions. This tactical neutrality aligns the adviser’s incentives with the best interests of clients and preserves the integrity of objective, fact-based strategy development and implementation.

Deep Learning – To understand their own vulnerabilities, companies should undertake a concerted effort to know the historical context, policy processes, and, arguably most importantly, climate of ideas in the given policy area.  Ideas are formed and disseminated by networks of people, and a systematic review of relevant literature ensures both a comprehensive knowledge base of the range of analytical perspectives, as well as the individuals and networks shaping thought on the issue. Correctly done, “political ethnography” yields unparalleled understanding.

Critical Empathy – Combining in equal measures support for the client and objectivity, advisers must both deeply desire the client’s success and be willing to identify flaws.  A political counselor must be both defender and critic for the sole purpose of providing the best possible advice.

Solutions

Baron has designed analytical methodologies that incorporate these essential principles and applies them to correct for the structural deficiencies of conventional government relations.

Political Risk Assessment – Before choosing tactics, clients should undertake a rigorous process to formulate solutions.  Following consultations with the client and a structured review of open-source material, a political adviser should engage in the aforementioned political ethnography, aggregating targeted insights from opinion leaders selected to model the decision-making universe.  Identifying internal client weaknesses and providing mechanisms for reducing exposure represent some of the most urgent tasks of the process.  The Political Risk Assessment culminates in a specific plan that details the measures needed to manage risk and advance the core business objectives, including concrete guidance on the personnel, budget, and timeline required to execute both strategy and tactics.

Influencer Analytics – Influencer Analytics means identifying and examining the individuals who drive the public debate.  This methodology enables clients to better define relevant forces, intellectual trends, and effective advocacy programs independent of existing biases and without diluting messaging to appeal to constituencies convenient to certain advisers.  Influencer Analytics reveals and prioritizes genuine centers of influence, rather than the popular or convenient.

Campaign Management – The developer of strategy and planner of issue campaigns should not have a financial stake in the tactical programs selected for the implementation phase.  This safeguard ensures that the core functions of campaign management – implementing tactical blueprints, building and advising coalitions, supporting government relations, and guiding public relations and strategic communications – remain uncorrupted by financial incentives contrary to the interests of clients to achieve the desired outcome at the lowest possible cost.

Conclusion

The Trump Administration has continued aggressive government intervention into private markets.  Corporate leaders who seek policy certainty and reduced meddling by the public sector almost certainly will be disappointed.  By understanding the specific characteristics of this decision-making environment and correcting for the vulnerabilities of conventional government relations, companies can succeed despite the formidable challenges.

1  “Donald Trump’s full speech at the Carrier factory,” The Washington Post, December 1, 2016, https://www.washingtonpost.com/video/politics/donald-trumps-full-speech-at-the-carrier-factory/2016/12/01/74c49bdc-b808-11e6-939c-91749443c5e5_video.html.

2  “President Obama’s full speech at the 2012 Democratic National Convention,” The Washington Post, September 7, 2012, https://www.washingtonpost.com/politics/president-obamas-full-speech-at-the-2012-democratic-national-convention/2012/09/06/f5023538-f869-11e1-a073-78d05495927c_video.html.

3  To learn more, see “The Era of U.S. Political Volatility,” Baron Public Affairs, LLC, November, 2016, https://www.baronpublicaffairsllc.com/library/.