The relationship between business and politics has been a point of interest for as long as there have been politicians and executives. One team of researchers hopes to shed some light on the relationship. After looking at companies across 22 countries, they find organisations that make political donations experience less risk.
The academics, from the Open University and the universities of Liverpool, Nottingham and Kent, looked at hundreds of companies that had made political donations in their study to investigate how money given to political parties affects corporate outcomes.
Though there is much written about lobbying by companies and how it might mould the regulatory and legal environment in which they operate, there is less about the impact on corporates. To some extent, firms that make political donations are thought to be less risky because many observers assume companies with connections are more likely to be given political help when they hit hard times. But the researchers wanted to know if this was true.
What they found, after a statistical analysis that used various proxies for risk, was that companies that make political donations “exhibit” lower levels of systemic risk. When the numbers were run for “idiosyncratic” risk—risk specific to the companies in the study—the same result emerged: corporates that make donations are less risky.
“Capitalising on a sample of 307 firms from 22 countries from 2002 to 2017,” write the team, “we found that the number of political contributions made is indeed negatively associated with idiosyncratic, systematic and total risk of firms making these contributions.”
Investor perspectives on corporate political donations
There could be a number of reasons explaining low levels of risk in politically connected companies. It’s possible firms making donations have lower costs of capital, and this could make financing cheaper and investors therefore find them less risky. Investors might also consider political donations indicate a higher likelihood of being bailed out, should these companies become embroiled in crisis. Lastly, politically sensitive firms are more likely to make donations and, for the reasons above, then become less risky.
There are other knock-on effects. Companies making donations may come under more scrutiny from press and financial analysts. This could make managers more risk averse: in other words, “alleviate agency problems”.
The research comes at an important time as more business leaders, especially those in large international companies, take a greater role in political issues, such as the environment and social equality. ESG as a governance topic has also become highly politicised, especially in the US, where the right has claimed it is part of the “woke” liberal agenda. Disney’s chief executive, Bob Chapek, recently found himself in conflict with Florida’s Republican governor Ron DeSantis over LGBTQ rights.
The relationship between business and politics in the age of culture wars has never been more fraught. That makes this latest research all the more interesting. A business seeking to reduce its risk profile through closer political ties should tread carefully.