How Growing Firms Should Respond to Social and Political Environment

In the unforgettable year of 2020, the company was faced with two or three major events wherein it had to re-caliber its social and political risk approach. Although a passive observant, I got an opportunity to watch these events closely and draw important learnings. While most of the existing academic literature available on the subject would suggest that smaller and mid-size firms are passive recipients in their political and social environment, but the practical exigency of survival in federal democracy like India suggests otherwise. Not only can such firms not afford to isolate themselves from the actions of social and political actors but also they tend to actively influence social and political actors for their benefit.

So, how does a mid-size but growing firm without much political or liaison capital strategize its interaction with the political or social environment so that it can successfully fend off challenges to the business? There can’t be a one size fits all framework but these are some of the steps which such firms can take to hedge their continued and smooth operations against unforeseen political or social risks:-

1. Be Independent: Aligning with a particular political interest group might help you when you have already attained a certain scale. But it doesn’t help while you are still growing and scaling up. Particularly in a federal setup like India or the USA where different parties might be reigning at the provincial and federal level or in different provinces, clear alignment with one group can hurt you.

2. Train Your Managers: Particularly those who deal with risk i.e. collections managers and underwriters should understand political and social dynamics. Usually, B school hires would think that managing political risk is a major concern only for expanding in overseas markets and influencing domestic policymakers, which is not the case exactly. You need to understand the finer nuances of social-political set up at every level.

For example, Public Sector bankers in Haryana learned the hard way that the average ticket size in the state should be much smaller compared to other similarly placed states. Because successive Haryana Governments (which is usually dominated by powerful farming communities) have enacted various soft agricultural credit operations acts, making it hard to recover agricultural credit losses.

3. Make Executive Contacts: Across the three arms of the State: Executive, Legislative and Judicial; mid-size firms with strong executive bureaucracy contacts seem to deal with social-political risk more effectively. Because executive contacts tend to be more stable. On the political side; non-controversial, influential, and not-so-low-profile contacts benefit. It is political and bureaucracy contacts that act as leverage in judicial matters.

4. Partner with networked Organizations: If you are a small/mid-sized growing firm, it is not possible to be part of effective lobbying power in a federated structure. To get access to political contacts in a ‘distributed power structure’, such companies in the USA partnered with various Political Actions Committees (PACs). Because they understand Government and they understand a similar business organization’s mindset.

5. Don’t be a passive recipient: Plan as you scale. You need to react swiftly and proactively to political changes. Such organizations cannot afford to take a dogmatic ‘Limited Government’ or ‘Anti-regulatory’ approach. Such views have been already negated by the great recession.

6. Local know-how is important: Understanding local social setup is important. NBFCs with effective collections functions tend to accommodate local factors in staffing decisions. And it goes a long way in ensuring the organization’s success in a particular region.

This is not a comprehensive toolkit but these simple pointers can help growing organizations to scale up successfully in federal polities like India with a diverse social setup.