Alessandro Di Bona and Malte Busch, Centre for Business in Society

Firms are facing growing uncertainty from a range of sources including the recent EU referendum in Britain, financial crises, and political upheavals, which is imposing enormous pressure on their national and international operations. Correspondingly, there is an increasing institutional influence being exerted by political institutions such as governments, and civil society institutions such as non-governmental organisations, as well as the media or trade unions. The development of the European Union and its institutions and government interventions resulting from the 2008 international economic crisis are examples of this increasing institutional influence. These events show that institutions are not static; they are dynamic; they change. If companies want to be successful in managing today’s challenges and adapt to these changes, it is imperative that they have a strong understanding of the institutional environments in which they operate and are able to relate and interact with them. In this blog post, we outline two key concepts for understanding firms’ activities and capabilities to cope with uncertainty.

The two concepts corporate social responsibility (CSR) and corporate political activity (CPA) provide tools that can support companies – especially multi-national enterprises (MNEs), which have greater resources at their disposal – to improve their interaction with institutions. Briefly defined by the European Commission in 2011, CSR is the “responsibility of enterprises for their impacts on society”, whereas CPA can be defined as “corporate attempts to shape government policy in ways favourable to the firm”.[1]

CSR and CPA have been historically – and still are to some extent – considered as two distinct areas. However, both concepts are firmly linked by a firm’s attentive consideration of the institutional environment. It is highly important that companies recognise this linkage as it can contribute towards facing external risks more effectively as well as towards the successful development of competitive advantage. Therefore, the efficient adoption of these perspectives could constitute key success factors in relating to and interacting with institutions.

As part of our research, we have identified several features stemming from CSR and CPA related concepts that can facilitate the understanding of, and the interaction with institutional actors. These fields of research may offer the appropriate theoretical platforms and lenses that can assist in tackling these issues. For example, a thorough stakeholder orientation that takes into account how a company affects its stakeholders economically, socially and environmentally can be drawn from CSR. Additionally, CSR can ensure that stakeholder’s needs and expectations are thoroughly and effectively understood by engaging in a systematic dialogue. Therefore, effective CSR is not detached from the interests of institutions and stakeholders. Consequently, CSR as a tool that contributes successfully to the interaction with institutions only works if a company integrates its CSR strategy in the overall corporate strategies and aligns it to the company’s objectives.

A firm’s CPA should similarly correspond with its strategic vision rather than execute measures that are unlinked from the company’s business. An example of a company that acknowledged this early is Lufthansa. In the mid-90s, it was one of the first European airlines that understood that government intervention and regulatory agencies’ actions could have an enormous effect on the company on different levels. As supranational European institutions such as the European Commission and the European Parliament developed, and their policy outputs and regulations began to pervade different sectors, the German airline was efficiently operating an office in Brussels, with the clear aim to monitor and influence the new regulatory source.[2] This could be interpreted as Lufthansa seeking to establish “first-mover advantage” amongst carriers.

In recent decades, various academic efforts have been made to investigate the influence of the institutional environment on companies’ business activities. Douglass North, one of the key theorists of institutional economics, proposed the idea that businesses are embedded in the different institutional environments they operate in, and that it is this interplay between companies and their environments that contributes to the development of market opportunities.[3] Despite the relevance of these academic contributions, managers still fail to adopt CSR and CPA competently leading to the formulation of ineffective strategies. General Electric’s failed acquisition of Honeywell International in 2001 and British Airways’ lost alliance with American Airlines in the late 90’s are clear illustrations of failures. In these practical examples lies the need for the research being undertaken within the Centre for Business in Society (CBiS) at Coventry University, as well as our personal motivation to provide more clarity regarding the relationships between companies and institutions.

Concluding, our research seeks to explore, understand and highlight how companies may work more successfully when interacting with institutions and stakeholders. We strongly believe that an in-depth appreciation of the two concepts CSR and CPA aligned with the engagement of their tools and their integration in the global corporate strategies could significantly improve the development of efficient relationships between private and public actors.

References:

[1] Baysinger, B.D. (1984) ‘Domain Maintenance as an Objective of Business Political Activity: An Expanded Typology ‘. Academy of Management Review, 9(2), pp. 248-258

[2] Lawton, T. C., Doh, J. P., and Rajwani T. (2014). Aligning for advantage: Competitive strategies for the political and social arenas. Oxford University Press, Oxford, UK

^[3] North, D. (2001). Institutions, institutional change, and economic performance. Cambridge University Press, Cambridge, UK

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