Corporate Political Investment 101

This upcoming Indonesia presidential election presents the issues of corporate political investment. For instance, many Islamic-based media and blogs accuse that one of the candidates, Joko Widodo, is prepared by catholic-Chinese group to be the next president for the sake of business interest. Similar condition is also faced by another candidate: Prabowo Subianto, where there are anonymous bloggers argued that gigantic corporation and corruption case-linked corporation are supporting him for the sake of penalty-free or legal suit-free. In short, whether it is right or gossip, there is an accusation of corporate involvement in the presidential election, which is well-known as corporate political investment.

What is corporate political investment? Does it true exist? How will it affect the election? What are the benefits of political investment for firms? This writing is corporate political investment 101 (for beginner) which introduces the corporate political investment by exploring its definition, its effects on politics and presidential campaign, and its cost-benefit for corporation.

Political investment is not a brand new story. The example is the case of James Riady and US presidential campaign in 1996. James Riady was indicated, pleaded guilty to campaign violation, and had to pay 8.6million dollar. In China, more of China’s wealthiest people choose to involve in Communist Party politics. Wall Street Journal reported that 160 of China’s 1,024 richest people, with a collective family net worth of $221 billion, hold important role in the party. The recent Ukraine case has also strong association between political ties and corporate interest of Germany corporations and its government. While Angela Merkel tried to give sanction over Russia due to their dispute against Ukraine, corporations persuaded her to postpone it. The reason is simple and straightforward: German businesses and politicians have worked hand-in-hand to improve ties with Russia for decades for obtaining access to the giant market to the east. As a result, Germany became Russia’s most important Western business partner.

Political investment is not always about giving money directly and explicitly to politician. It can be referred to the activity of a corporation by taking high-level political leaders such as congressman, senator, relatives of president as the board member or top management. This investment is not always about number of money inflowing to the politician’s pocket during or after the campaign. Giving money to politician is considered as bribery, and it violates the regulation. Further, the amount of money given to politician is limited to certain number as it is regulated by law.

There are many benefits of this political investment for corporations, such as inducing firm’s performance, financing channeling, crisis first-aid, etc. In terms of performance, many research papers found that politically connected corporation experienced a good performance if the supported candidate won the election. An empirical research from Taiwan documented that politically connected corporations tended to have higher abnormal returns before the fall of status quo (Kuomintang Party) in 2004. However, after the 2004 election, this pattern of stock returns was reversed, where the politically connected corporation which pros to status quo dropped resulting negative abnormal return, meanwhile, corporation that attached to opposition (Taiwan Democratic Progresive Party) gained abnormal returns. Similar condition also found in Indonesia in the era of the falling regime of Soeharto. Professor Christian Leuz from Wharton School and Professor Felix Oberholzer-Gee from Harvard business school found that those corporation that closely related to Soeharto had enjoyed good performance before 1998, but underperformed and faced financial distress under the new regime and subsequently increased their foreign debt as the source of financing.

There are also studies showing the benefit of political investment in terms of financing ease. For instance, study in Brazil shows that corporations do not only experience higher stock prices, but also substantially increased their bank financing and channeling afterward. This implies politically connected corporation would have ease-to-finance facilities as the result of the investment during the election.

Political investment also associates with corporation survival during crisis. Heather Mitchell from RMIT Australia shows that Malaysian politically invested corporation suffered more during the crisis but benefited more when capital controls were introduced during the 1997 Asian currency crisis and imposition of capital controls. Another study documented also politically connected corporations were significantly more likely to be bailed out than similar non-connected corporations. Interestingly, politically invested corporation were disproportionately more likely to be bailed out when the International Monetary Fund or the World Bank provides financial assistance to the corporate’s home government.

Relate back to Indonesia presidential campaign, corporate political investment is more to ethical issue rather than legal issue. Peter Gourevitch, a Professor of Political Science from University of California, argued that the ties between corporate and politic might not up to the regulatory change. With a good monitor and control, political investment only gains the cronyism capital and all financing ease. It will be also valuable and worth to target companies that have political connection as it will add value to your stock investment.

So, if you are a global investor willing to make investment in a specific corporation, in a specific country, it is very important to figure out if the corporation is politically connected. Those politically-invested corporations might give you abnormal return, low cost of capital, and crisis prudent condition. However, you also have to take into account the corruption factor at the country level because it will be less transparency at the corporation level too. This may lead you to an even higher impact on future uncertainty.

How ethic’s political investment? Based on the code of conduct of good corporate governance, Political investment violates the principle of “integrity and ethical behavior” meaning that corporation has to be free of interest in choosing corporate officers and board members. As the one who formulate the regulation is politician, it will be very hard to find a country that would forbid political investment. Therefore, instead of accusing the presidential candidate about political investment, it will be more interesting to dig further about this matter from both Prabowo and Jokowi. Just to see whether they oppose it or support it.