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Engaging Government: Why It’s Necessary and How Businesses Should Do It

engaging

By Howard Viney & Paul Baines

How should organizations react to regulatory intervention, especially when its effects could transform their sector’s competitive forces?1,2 What strategic options do organizations seeking to influence government possess? Are different options appropriate under different circumstances and what value can organizations derive from political relationships?   Since the 2008 global economic downturn, government and regulators are increasingly active and more interventionist; through bailouts for endangered industries or taking ownership positions where previously they have been happy for the free market to lead (e.g. banking).  Organizations need to develop a response to a more active government stakeholder; the problem is, how they have responded in the past has often been controversial.

“Deciding how to interact with newly active and interested government actors and regulators provides a distinct and difficult challenge to managers, and understanding and managing that relationship with these stakeholders is challenging and potentially expensive.”

Whether organizations should pursue non-market strategies to support their market strategies,3,4 and what impact this decision has upon organizational performance is of increasing importance.5,6,7 But very often that discussion has been negative, focusing upon engagements frequently portrayed as immoral or illegal.  The catch-all description for this type of behaviour – ‘lobbying’ – has become toxic and organizations lobbying government are viewed with distrust by media and electorates alike. Firms which lobby are assumed to be motivated by self-interest and focused solely upon advancing their organization’s agenda;8 they are inconsiderate of wider interests, potentially damaging the good conduct of business in society.

Deciding how to interact with newly active and interested government actors and regulators provides a distinct and difficult challenge to managers, and understanding and managing that relationship with these stakeholders is challenging and potentially expensive. It can also be particularly damaging for any organization that gets it wrong.  We believe that organizations are entitled to make their case to either governments or regulators, but must avoid getting too close to either as otherwise this can be potentially dangerous.  The ‘evils’ of corporate lobbying offer too good a media story and there can be substantial reputational damage incurred by being seen to be in bed with government.

Recent examples illustrate the difficulties that follow from being seen to be too close to government:

  • Google and the Chinese Government:  Google was present in China from 2000 and set up its Google.cn search engine in 2006. But it agreed to Chinese government constraints on the level of service it would offer to obtain a licence, meaning that some searches would be subject to censorship.  This was widely perceived as Google getting too close to the Chinese Government to achieve its commercial ends, undermining its reputation for democratising access to information.  Google’s subsequent retreat from China was blamed on overactive intervention by Chinese authorities, but could equally be explained by the need to repair potentially serious reputational damage.
  • News Corporation and various UK governments:  The newspapers owned by News Corporation in the UK, including The Sun and The Times, had long been viewed as potential power brokers in UK government elections.  Both Conservative and Labour parties had spent considerable effort getting close to News Corp, while News Corp also focused upon building and sustaining relationships with parties of government to defend its position in the UK media industry.  The phone hacking scandal, which led to the Leveson Inquiry into press standards, continues to highlight perceived inappropriate relationships between media organisations and government that are proving too close for the British public to stomach.
  • The Japanese nuclear industry and various Japanese governments:  The devastating earthquake and tsunami that struck Japan in March 2011 inflicted considerable reputational as well as physical damage.  In the aftermath of the disaster which led to equipment failures, core meltdowns and the release of radiation at the Fukushima operation, Japanese utility TEPCO was accused of exerting undue influence on regulatory oversight bodies, resulting in lax emergency procedures, poor maintenance and underinvestment.  Media coverage suggests that there was an unofficial policy within Japan of prioritising the interests of the nuclear industry over other forms of energy generation.  This shows that, even if successful relationships are forged, the potential problems of such a relationship failing requires re-evaluation.

The above examples show where organisations have suffered strategic difficulties because they adopted a policy of getting close to government.  However, there are many instances where organisations have benefitted tremendously from such a strategy.  One story which emerged from the Wikileaks’ release of US government communications9 shows a strong relationship between Shell Oil and the Nigerian government at every departmental level which proved very useful for Shell when negotiating its exploration rights in that country, and between the Mastercard organisation and the US government which actively intervened in Russia to stop the Russian government from setting up its own credit company and destroying market opportunities for Mastercard.

“Getting the right balance when crafting a non-market strategy is vital. Becoming too close to government runs the risk of being portrayed as unscrupulous; not getting close enough means losing your legitimate rights to argue your corporate case.”

As the above examples illustrate, getting the right balance when crafting a non-market strategy is vital.  Becoming too close to government runs the risk of being portrayed as unscrupulous; not getting close enough means losing your legitimate rights to argue your corporate case.

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In this article, we discuss the options available to organizations attempting to determine the sort of government relationship they seek to develop.  We discuss a variety of options available – what they aim to do, the resources they need to call upon to achieve their objectives, whether or not they can expect their peers to share the burden of interacting with government and so on.  This discussion is based upon a framework suggesting five levels of relationship engagement10 available to organizations in their interactions with oversight bodies.

The Different Levels of Relationship Engagement
Our work suggests it is possible to rationally analyze the Corporate Political Activity (CPA)11 of organizations based upon the intended outcome of their engagement with government or regulatory authorities. We offer a series of different ‘levels of relationship engagements,’ which correspond with differing strategic intentions. Furthermore, we can associate a number of characteristic activities with each of these levels of relationship engagement and equate particular sets of behaviour to those levels of intended outcomes, developing a generic classification of CPA from a strategic management perspective. This creates the possibility that organizations can assess the extent of the relationship engagement in which they should engage, based upon a realistic understanding of whether the resources committed to this activity will contribute to the achievement of organizational competitive advantage or add value to their conventional strategies.

Figure 1 proposes a five level relationship engagement classification system, where each level corresponds to a type of CPA. Figures 2 and 3 illustrate that we believe it appropriate to divide the classification system into two to reflect a distinct hierarchy within our conceptualization of CPA. The top three levels (5, 4 and 3 in Figure 2) are strategic, while the bottom two levels (2 and 1 in Figure 3) are tactical. We do not consider our relationship engagement taxonomy to be sequential. Rather, we assume organizations adopt a level of relationship engagement appropriate to their needs and anticipate the possibility that some firms may enact different levels of relationship engagement as and when their operational context requires it. Some firms may pursue different levels of relationship engagement simultaneously in response to particular demands. However, it is equally possible that others will determine a constant level for relationship engagement, which they pursue consistently over time, and testing of the motivations for differing choices will be a theme of our continuing research.

The remainder of the paper explains the strategic rationale for each level of relationship engagement and offers illustrative examples.

Level 5 Engagement – Influence and Co-create
The key characteristic of Level 5 engagement is that organizations act to achieve very strong influence upon the shape of proposed or potential legislation, regulation or policy, which requires the most intense application of resources. Based upon our assessment of relationship engagement in practice, it may take two possible forms:

• Formal co-creation, where the organization is essentially a partner of legislative, regulatory or policy making bodies, or

• By providing inspiration, where the organization creates an awareness of, or a desire for, legislation, regulation or policy.

Inspirational Level 5 behaviour is more common than co-creation, although as our examples demonstrate, co-creation is possible. This is a consequence of the characteristics of representative democracy and the concerns which exist when sectional interests like those of a company or pressure group establish any kind of influence over the legislative or oversight process, creating an extreme form of the concept of regulatory capture.12

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Level 5 engagement is invariably controversial, whether it is co-created or inspired by sectional interests. For example, in 1997 Formula One president and CEO Bernie Ecclestone exerted influence over the UK government’s implementation of a European Union directive instituting a ban on tobacco sponsorship in sport from 2003. Ecclestone allegedly persuaded the UK government to exempt Formula One from the restrictions placed upon other sports by emphasizing the importance of Formula One, most of whose teams are headquartered in the UK, in terms of jobs, prestige and R&D expertise. The success of Ecclestone’s achievements became tainted by the suggestion that his influence was achieved through a £1m donation made to the UK Labour Party (which it subsequently returned, although the exemption for Formula One was secured from 2003 until 2006, allowing it three years to find lucrative new sponsors).

“Co-creation is more likely to be considered when an industry is large and strategic or new and innovative, where expertise is specialized, rare and expensive to develop.”

Co-creation is often extremely controversial in a representative democracy. However, it is often difficult to draw a distinction between inspirational Level 5 engagement and co-creation. For example, the decision by the UK government to propose a third runway at Heathrow airport was taken after consistent lobbying in favour of this policy by BAA, the airport operating company, and the various major airlines, all of whom would benefit financially from the additional traffic arising from such a policy decision. This is inspirational relationship engagement following our previous argument. However, without BAA’s active involvement and participation, the proposal was not feasible and BAA was seen as a partner in that decision, since abandoned by the Conservative-Liberal coalition government in the UK.

The key motivation for Level 5 engagement is that if it were not undertaken, emerging legislation, regulation or policy would either not appear or would appear in a substantially different format. Government’s willingness to ‘partner’ with organisations will also vary depending upon a number of factors. Co-creation is more likely to be considered when an industry is large and strategic or new and innovative, where expertise is specialized, rare and expensive to develop (or scarce/non-existent in government).  Organizations in the life sciences industries, for example, often possess knowledge and expertise considerably in advance of government or regulatory understanding and this creates the potential for Level 5 engagement that may be absent elsewhere.

Level 4 – Inform and Advise
Level 4 engagement also has two forms. It may either be:

1. Solicited, and hence part of a formal consultative process, or

2. Unsolicited, but within the boundaries of a consultative system.

At this level of engagement the broad principles of the legislation, regulation or policy are already established. However, for various reasons, such as establishing legitimacy or the acquisition of a mandate, the legislating body seeks the opinion of influential stakeholders. Here, the oversight body recognizes deficiencies in its access to information, or the political expediency of giving the impression of a deficiency, and invites contributions from influential bodies to satisfy the information (or credibility) gap. For instance, hearings are held by committees of the European Parliament to ascertain expert opinion. Commercial organizations or trade bodies send representatives to such committees to engage with, and attempt to shape, the evolution of legislation or policy. During the UK House of Lords’ European Union Committee’s scrutiny of the EU’s Directive on Alternative Investment Fund Managers, evidence was provided by industry groups including the Alternative Investment Management Association (AIMA) and The Confederation of British Industry (CBI) alongside banks such as Deutchse Bank and HSBC Group, providing a range of industry perspectives on the proposed directive.13

Key characteristics include providing assistance to the legislative process and therefore gaining a route to decision-makers where an organization’s case can be heard and evaluated, opening up the possibility of influencing the decision making process.  Organisations call upon scarce resources at their disposal, notably knowledge and information, to contribute towards the development of more informed legislation or regulation.

Level 3 – Revise or Challenge
The emphasis of Level 3 engagement changes from information and persuasion towards confrontation and argumentation, and is probably the most commonly used by organizations. The preceding levels seek early access to the policy process; Level 3 comes later, where decisions on legislation, regulation or policy have already been taken but where the robustness of that legislation, regulation or policy has yet to be established.  Level 3 engagement takes two forms:

1. Rhetorical, where challenges to the implementation of new legislation, regulation or policy are made in the public arena, or

2. Legal, where challenges to the implementation of new legislation, regulation or policy are tested by formal legal opinion.

Level 3 engagement is about a sectional interest applying pressure and is frequently evident in delicate stages of the political cycle, such as annual budgeting. For example, the UK’s 2009 budgetary process witnessed a number of rhetorical challenges. In one such challenge the British Retail Consortium (BRC), the UK retailer’s trade group, actively campaigned through a variety of media against a planned increase of 5% in uniform business rates due in April 2009. In the face of this rhetoric, the Chancellor reportedly backed down, instead spreading the planned increase over the following three years.14

“Various legitimate methods are available but perhaps the most significant is the development of collaborative action through the formation of interest group alliances to pursue a common goal.”

Meetings with ministers to make an industry’s case can be augmented by briefing opposition parties on their argument to allow them to score political points. For example, in 2010, Alfed – the UK’s Aluminium Federation – met with the UK Government’s Department for Business, Innovation and Skills (BIS) to discuss Alfed’s member’s interests. Prior to the meeting, supportive comments from an opposition spokesman made a very similar case to Alfed’s suggesting it had provided a briefing to the opposition spokesman as part of its Level 3 engagement.

Level 3 engagement is often a response to failed higher level relationship engagement but recognises that opportunities to shape how that legislation is interpreted remain. It’s most recognizable as lobbying, where organizations seek to exploit opportunities to question or challenge to shape legislation, regulation or policy in their favour. Various legitimate methods are available but perhaps the most significant is the development of collaborative action through the formation of interest group alliances to pursue a common goal.

Level 2 – Manage Implications
We have suggested that organizations may seek to pursue different levels of engagement simultaneously. For example, tobacco firms will have attempted to influence legislative programs aimed at introducing a smoking ban in a variety of ways but principally by seeking to provide information and advice in consultative processes (Level 4) and then by testing and challenging regulations as they emerge (Level 3). However, organizations might prepare Level 2 engagement as an insurance policy against other initiatives failing.  This is especially the case in the face of seemingly unstoppable global regulatory action such as increasingly banning smoking in public places. In advance of the UK smoking ban introduction, public house operator Punch Taverns stated: “Our key message is that the smoking ban is an opportunity for our pubs to attract new customers, such as non-smokers and families, but also to retain existing customers by raising standards, introducing new offers and investing in solutions for those who do smoke”15 – a clear Level 2 message. Punch Taverns did not oppose the smoking ban as fiercely as some, instead accepting its inevitability. It sought to understand the policy’s implications, and manage those implications in its favour; Level 2 engagement therefore seeks to project a positive interpretation of legislative change.

Level 1 – Manage perceptions
When attempts to engage at strategic levels have failed or been missed, and organizations fundamentally disagree with the government policy being implemented, they may use advertising and other marketing communications to illustrate their opposition or alternatively to be seen to be doing what they believe is the ‘right thing’.  At Level 1, attention is focused upon the management of perceptions of the implications of change.

For example, when poster advertising of tobacco products became illegal in Britain in 2003, Gallaher spent £2.5m in advance of the ban on a campaign featuring an advert with an overweight lady opera-singer wearing a purple dress.16 The implication being: ‘it isn’t over ’til the fat lady sings’, indicating their opposition to the ban. Prior to the ban, British American Tobacco, Japan Tobacco and Philip Morris jointly spent £2.4m on anti-smoking adverts aimed at the under 16 age group in a last ditch attempt to persuade regulators from imposing a full ban on advertising – a failed Level 3 approach.

Organisations should recognise that nonmarket strategies can complement their more traditional strategies but that they need to allocate sufficient energies into deciding which non-market strategies to pursue.”

Concluding Remarks
Given the poor reputation of much ‘lobbying’ practice, there is an urgent need to re-envision a set of processes to aid organizations in legitimately seeking to influence government. Our five levels of relationship engagement model is designed to help organizations map out how they might seek to influence government, in what ways and for what purposes. Organisations should be proactive rather than reactive when engaging regulators and government actors. Organisations expend considerable effort in crafting appropriate market strategies; they should treat non-market strategy in the same way.

Our classification system shows the wide range of options available to organisations.  These options can map against the different stages in the evolution of any piece of legislation or against the regulatory process. We believe, therefore, that organisations should recognise that non-market strategies can complement their more traditional strategies but that organizations need to allocate sufficient energies into deciding which non-market strategies to pursue. To neglect non-market strategies in the current environment may otherwise lead to considerable reputation damage and even corporate failure.

About the Authors
Dr Howard Viney
is Senior Lecturer in Strategic Management at the Open University Business School, and teaches on the OUBS MBA programme.  He also works as a Programme Director for the Centre for Management Development at London Business School.

Dr Paul Baines is Reader in Marketing and Director, MSc in Management, Cranfield School of Management. He is Managing Editor, Europe, of the Journal of Political Marketing. His latest political books include: ‘Political Marketing’ (Sage Publications, 2011) and, with Sir Robert Worcester and Roger Mortimore, ‘Explaining Cameron’s Coalition’ (Biteback, 2011).

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