Why doesn’t government affairs play a greater role in business strategy?
By Tommy Goodwin and Craig Fleisher
A few years ago, a McKinsey survey found that governments and regulators were second only to customers in their ability to affect a company’s economic value.
This should come as no shock to government affairs professionals. The potential business impact from government and regulatory intervention is significant. Depending on the industry, it can account for between 30-50 percent of a company’s EBITDA (earnings before interest, tax, depreciation, and amortization). New research from Boston University economist James Bisson takes it a step further and concludes that political activity and regulation accounted for much of the rise in company profits and valuation since 2000.
This speaks to the importance of the nonmarket environment. Stanford professor David P. Baron defined the nonmarket environment as consisting of “the social, political, and legal arrangements that structure interactions among companies and their public.” Not surprisingly, a wide range of nonmarket forces have a major impact on a company’s performance. Laws, regulations, activist movements, demographic shifts, standardization, judicial actions, and social media can each, and in combination, change the scope and trajectory of companies they impact. Dr. Baron argued that these forces require the same high level of attention in business strategy as do market forces.
Sadly, most government relations professionals know that this isn’t the case in their companies. Often nonmarket engagement is not viewed as a core component of business strategy, or worse, something that happens at arm’s length in the far-off Washington, DC, Ottawa, and Brussels offices or outsourced to third parties because “that’s what we’ve always done in these matters.”
But with so much at stake for companies, it leads us both to wonder: why doesn’t government affairs and nonmarket engagement play a greater role in business strategy?
Protecting and creating value: Government affairs and business strategy
On day one of their MBA programs, business school students are taught that company managers have two fundamental roles: (1) protect value and (2) create new value for the business. But think about it… isn’t that exactly what strategic government affairs professionals do?
Unlike widgets or aliens (or pornography!), most people—and especially business executives—know value when they see it. Whether it’s safeguarding intellectual property or pursuing access to new markets, government affairs professionals are simply leveraging the nonmarket environment to achieve core business goals. These can include achieving objectives such as increased freedom to operate, cost avoidance, market opportunity or advantage, leveling the playing field, speed to market, and higher productivity.
Consider the automotive industry for a moment. To level the playing field with local competitors abroad, U.S.-based manufacturers like Ford and General Motors could pursue new production and logistics efficiencies to reduce the costs of their new models. That’s one strategy to achieve the business goal of cost reduction. But so is lobbying for the Trans-Pacific Partnership (TPP), which would eliminate import taxes as high as 70 percent on U.S. automotive exports to TPP countries. Both strategies would reduce the cost of new models sold abroad, but one effectively utilizes government affairs and nonmarket engagement to create transformational market change.
Beyond merely managing a company’s business environment, government affairs professionals can design and execute nonmarket strategies that can tangibly deliver a much greater impact on business goals than their market-focused peers. Nonmarket engagement, whether through government affairs or other adjacent functions including communication, public relations, and corporate social responsibility, allows a company (or any type of organization, for that matter) to leverage its unique set of assets, capabilities and resources to create marketplace advantage by:
- addressing emerging nonmarket-driven opportunities and threats;
- shaping the structure of both existing and new markets, as well its strategic positioning within those markets;
- enhancing its brand and overall reputation; and
- working to find common ground with its external stakeholders.
When aligned, market and nonmarket strategies work in synergy to achieve business goals and drive stakeholder value.
So when Uber expands into a new city, for example, advertising and marketing (a market-based strategy) works alongside removing regulatory barriers to operate (a nonmarket strategy) to drive customer acquisition and profitability. And when the company replicates this process in each new geographic market it enters, it increases and enhances not only the value that Uber brings to a city’s citizens, but to the rest of the company’s stakeholders, as well.
Overcoming preconceptions: government affairs at the table
While many CEOs and business leaders see government relations and nonmarket engagement as critical to company success, the evidence we have witnessed throughout our careers, and still see today, suggests that far more do not. Ginger Graham, then CEO of Guidant (now part of Boston Scientific) once observed of her fellow CEOs, “To many, government is like the weather – an inescapable, often unpleasant fact of life best left to its own mysterious devices.”
But why is that? In a recent Harvard Business Review article, former GE general counsel Ben W. Heineman, Jr. summarized:
“Unfortunately, engaging in the necessary sophisticated work [of nonmarket engagement] across varying political cultures is not a natural act for many companies. Even with strong CEO direction, subordinate business leaders who are crucial to its success may not share the commitment or invest in the expertise or understand the time required. They might not have a realistic view of governmental/political processes or a feel for balancing public and private interests or understand the inherent contingency of policy efforts. Their business school education and their initial experience within narrower company functions (e.g., marketing, manufacturing, or finance) may leave them unprepared.”
Perhaps this helps to explain the following paradox: while half of McKinsey survey respondents said that managing external affairs ranks as one of the top-three priorities on their CEOs agendas, many companies cling to the outdated notion that government affairs and nonmarket engagement is a non-core business function, often left to contracted lobbying and public affairs firms.
This fails to account for the benefits of regularly engaging with governments, regulators, and other nonmarket stakeholders, regardless of immediate interest. Since nonmarket issues have the potential to be either beneficial or harmful to companies, companies need government affairs and nonmarket engagement leaders at the table with the CEO and business-unit leaders to provide subject-matter expertise, drive understanding of potential implications of nonmarket action, and create desirable policy proposals and responses.
Moreover, government affairs professionals are uniquely situated and qualified to straddle the market and nonmarket environments: serving as the trusted advisor scanning the nonmarket environment for business opportunities and threats, while also keeping a finger on the pulse of the market environment to determine the significance and urgency of emerging nonmarket issues to the company.
Breaking down silos: government affairs as a strategic business advisor
To play a greater role in business strategy, government affairs professionals must successfully navigate the external nonmarket environment, while working effectively across the organization to get—and keep—the respect and attention of senior management. How, you ask? To position government affairs internally as a strategic business advisor, consider these proven tactics:
- Leverage internal strategy development and strategic planning processes. McKinsey found that 67% of companies who influence policy “successfully” and manage reputation “very effectively” used strategic planning processes to align their external-affairs agendas with overall strategy, compared to 22% of all others. Government affairs professionals should take advantage of these opportunities to: (1) influence business goals and objectives using and analyzing nonmarket data, insights, trends, and intelligence and (2) create synergy between market strategies and nonmarket strategies, both laterally and vertically within the organization.
- Create, maintain, and regularly review a prioritized agenda of issues. While many companies develop an annual nonmarket engagement agenda—which generally includes offensive and defensive policies tied to business goals—far fewer prioritize and routinely update them on an ongoing basis. As Heineman recommends in his HBR piece, government affairs professionals should take the lead internally in securing CEO and other business leader involvement for making initial prioritization decisions on key nonmarket issues, as well as holding regular reviews “to oversee whether milestones are being met for formulation, enactment, and implementation,” confirm issue prioritization, and identify emerging nonmarket opportunities and threats for monitoring going forward.
- Orchestrate and integrate market-nonmarket activities across the organization. Without deep connections throughout the enterprise, government affairs professionals can’t effectively engage in their issues management, lobbying, and outreach work on the company’s behalf. Around the world, there are examples of government affairs bridging the market and nonmarket environments in their companies by serving as “brokers of intelligence” between business units, holding policy roundtables with functional groups across the organization, and cultivating cross-functional teams of business experts to support policy engagement. Government affairs professionals should explore replicating these best practices within their organizations, where appropriate, to establish a critical internal role for themselves: the centralized hub of market-nonmarket integration.
Taken together, these tactics have the potential to successfully position government affairs professionals as the go-to source for strategic nonmarket engagement within organizations. And as companies better understand the need to stretch the competitive playing field beyond the market through nonmarket engagement, government affairs leaders at the intersection of the market and nonmarket environments will not only play a greater role in business strategy… they will drive it in their companies going forward!
About the Authors:
Thomas F. (Tommy) Goodwin is a NILE member and Government Relations Manager for the Project Management Institute (PMI). He has nearly 20 years of experience leading federal and international government relations efforts, issue campaigns, and advocacy strategy work for leading corporations and associations. Additionally, he served as a research fellow at the Harvard Business School focused on the political and legal environment in which business operates. He holds a B.B.A. from The George Washington University, an M.B.A. from Auburn University, and executive certificates from Stanford University, the University of North Carolina at Chapel Hill, and Georgetown University. Email: firstname.lastname@example.org.
Dr. Craig S. Fleisher is a NILE member and co-editor/author of the SAGE Handbook of International Corporate and Public Affairs (2017), Handbook of Public Affairs (SAGE, 2005), and Assessing, Managing and Maximizing Public Affairs Performance (Public Affairs Council, 1997). He was president of a Canadian public affairs (PA) association, served on PA boards in 5 countries as well as on the Dean’s Advisory Board for the Graduate School of Political Management at George Washington University, and continues to teach executives about PA in the graduate EMScom program at the Universita della Svizzera Italiana (USI) in Lugano, Switzerland. Email: email@example.com.