That still represents a big change.
For the past 30 years multinationals in developed markets have mostly operated in a benign environment.
Political parties worked within relatively narrow parameters, and pro-business policies, such as the liberalisation of trade and of rules on immigration, rolled forward.Shocks were few. No longer.The political spectrum is widening.In Britain, Jeremy Corbyn, an old-fashioned leftist, controls the Labour Party, which was once the apogee of pro-business leftism.In France, Marine Le Pen, the leader of the National Front, who boasts that she wants to add “Frexit” to “Brexit”, is almost certain to be one of the final two candidates for the French presidency next year.
Unprecedented shocks are almost routine.In 2011 Standard & Poor’s downgraded America’s sovereign-debt rating for the first time.Greece’s default in 2015 to the International Monetary Fund was the first by a rich-world country.Donald Trump upends political convention on a daily basis.Companies need to recognise that many developed countries are becoming high-risk markets that do not compensate for those risks by delivering higher returns.They may need to import risk-management practices that they already apply to emerging markets: making sure not to concentrate their investments in too few countries; developing “emergency response plans” in the event of a sudden crisis; and planning how they will cut their losses and move, or slim, their businesses if a populist seizes power.
Firms are already wary of long-term investments given slow growth.Political risk could reinforce such hesitancy.For the time being they may prefer shorter-term bets.There is evidence that companies are stashing cash in safe securities as they wait to see what “Brexit means Brexit” actually means.In August sterling-denominated money-market funds held ￡180 billion ($240 billion) in assets, up by almost a fifth since the start of the year.Yet if businesses pull back on long-term investments, they may only encourage more instability.
A vicious cycle, of low corporate spending that encourages stagnation that in turn produces popular discontent and more political turmoil, may spin faster.Companies need to supplement prudence with something more proactive.Defusing popular anger at corporate excesses is a business priority as well as a political one.Over the past 30 years companies got into the habit of thinking about things like executive pay in purely market terms.For example, they devoted a great deal of thought to making managers behave like owners rather than employees, by granting stock options.
But public perception matters as much as complex calculations.Firms’ efforts to grapple with such issues can easily backfire.Conclaves of the super-rich meeting together to talk about the ills of inequality reek of aristocrats debating whether to share some crumbs from their tables.The World Economic Forum’s decision to make “responsive leadership” the theme of its next annual meeting in Davos is almost an invitation for ridicule.But that is an argument for thinking harder rather than giving up.By-invitation chinwags do not cut it.
Companies need to be conscious of political—indeed, populist—considerations in their day-to-day operations, from how they set the pay of their executives to who they appoint to their boards to how much they spend on corporate entertainment.The price of freedom to do business in the rich world today is eternal vigilance.