Fred L. Smith, Jr.
Ivan G. Osorio
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f business is to addressits conicts with an
expanding government, it
must ensure that its external
relations departments are well
managed. To do so, corporatemanagers must manage the border conicts within therm. Specically, they need to overcome the principal/agent (P/A) problem, which for too long has exposed business to political predation. Let me explain.The principal—the CEO—must resolve the tensions between the organizational goals and the incentives of the various subgroups within the rm, coordinating thevarious activities of his employees—the agents—toensure sustainable protability. Good managers craftincentives, directives, and an organizational culture toensure this result.The classic example of the P/A problem withina rm occurs between themarketing and productiondepartments. The marketingdepartment may well seek a product variety to maximizesales, while the productiondepartment may favor productuniformity to reduce setupcosts—both worthwhile goalsthat must be reconciled.The CEO can address suchinternal conicts by makingexplicit rules, adjusting the
rewards of the departments,
or allowing them to bargain.Effective managers devise anarray of techniques to align the inherent biases of their subunits to achieve overall protability. Managementand MBA training programs teach business studentshow to employ these skills within the rm.However, addressing this problem in the politicalsphere is much more difcult. Today, as government policies increasingly affect the bottom line, meetingthat challenge is crucial. The skills needed to negotiatethe regulatory state are complex and not easilyacquired. Not surprisingly, rms often recruit personnel tohandle this task from the same government agencies or congressional committees that create and oversee theselaws. Those individuals are often unfamiliar with theactivities or culture of the rm.Government affairs units within most rms actually benet from greater government intervention in theeconomy. They have grown steadily as governmentregulations have increased. Thus, while such agentswill seek to reduce the costs of new regulatory programs to their rm, they have no direct interest inthe repeal of such policies.Moreover, corporate government affairs ofcers arelikely to retain cultural links to their former colleagues.They also regularly engage with groups—NGOs,regulators, legislators—that have even less sympathyfor the rm—or for the market generally.As a result, the rm’s government affairs subunitmanagers can easily succumb to the temptation to “gonative.” Retaining their old biases, they may defendtheir employer, but are less likely to frame that defensein moral or public interest grounds.Business literature scarcely touches this topic.The managers of thesedepartments often presume
that they represent the
moral conscience of therm, concerned with valuesrather than money. Under the rubric of feel-goodterms such as “corporatesocial responsibility,”
or “diversity,” they pursueefforts that contribute nothingto the rm’s protability.Yet wealth creation and
innovation are also moral
concerns.To strengthen public support for the market onwhich they depend, businesses must address their political principal/agent problem. Departmentmanagers must learn how their decisions impact thecore protability of the rm. Agents and principalsalike must resist the seductive nature of the political process. Incentives for agents to direct corporateresources to activities not directly relevant to the rm’s protability should be charted carefully.If business fails this test, it will continue to steadilyshift power from the wealth-producing elements of themarket to the wealth-redistributing elements of politics.That would mean not only less productive rms, buta poorer world, too. Business has the capacity to meetthis challenge. It should not hesitate.
Te Political Principal/Agent Problem
By Fred L. Smith, Jr.
>>FrOM tHe President
… while [corporate government aairs] agentswill seek to reduce the costso new regulatory programsto their frm, they have nodirect interest in the repeal o such policies.