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Hirschman to the Rescue: How Political Should Companies Be?

Particularly in Europe, there is a widespread tendency among medium-sized companies to shy away from engaging in politics

By: EBR - Posted: Tuesday, May 23, 2023

At the same time, there are those in the European political debate who believe that businesses, almost irrespective of size, are far too dominant in the political process.
At the same time, there are those in the European political debate who believe that businesses, almost irrespective of size, are far too dominant in the political process.

by Marius Kleinheyer*

Particularly in Europe, there is a widespread tendency among medium-sized companies to shy away from engaging in politics. The leaders of those companies do not want to engage in the political process and essentially want to be left alone to pursue their business.

At the same time, there are those in the European political debate who believe that businesses, almost irrespective of size, are far too dominant in the political process.

Transformation and regulation

What then is the proper way for businesses to interact with the political process? That question is of particular significance at the present time.

Many national economies – and hence companies – are faced with fundamental pressures due to the required transformation to reduce CO2 emissions and rely as fast as possible on renewable energy sources.

In such a period, the quality of regulation and the alignment of the need to change with an appropriate timeline matter greatly to companies – as they no doubt do to citizens.

The concept of exit and voice

Perhaps the best guide to answering these questions is still offered by the American economist Albert O. Hirschman.

In his book “Exit, Voice and Loyalty,” published in 1970, he focuses on the – very contemporary – question of what the possible responses by companies should be to the decline of companies and states.

According to Hirschman, many companies, when given a choice, tend to opt for “Exit.” The other principal option – “Voice” plays a smaller role. Yet, as an expression of loyalty, it could be at the core of corporate social responsibility.

Why companies prefer exit to voice

Hirschman classifies the exit option as a genuine economic reaction to unsatisfactory developments. Think of a customer who is not satisfied with a service and then decides to change providers, using market competition to secure his prosperity.

Through his course of action, he communicates an important signal to the market participant who loses him as a customer: The losing provider must do better.

This is the mechanism which drives an economy and, incidentally, is a very elegant way of resolving conflicts without open confrontation. “It is indirect – any recovery on the part of the declining firm comes by courtesy of the Invisible Hand, as an unintended by-product of the customer’s decision to shift.”

Two types of customers

For the mechanism to work, two types of customers are needed: Active, informed, price- or quality-conscious customers – and inert or more generous customers. The active customers signal the defect, while the more inert ones allow the provider the opportunity to catch up.

“Voice” is categorized by Hirschman as a genuine political response. It lacks the straightforwardness of the exit response. Such a form of opposition is direct, concrete, and confrontational. “It implies articulation of one’s critical opinions rather than a private “secret” vote in the anonymity of a supermarket.”

Changing the status quo

“Voice” is defined as any form of dissent to achieve changes in the status quo. This can include a direct complaint to the provider, but also the mobilization of public opinion. “Voice” tends to be more uncomfortable, but ultimately remains an expression of “Loyalty” because the connection to the provider remains.

Hirschman states that economists typically ignore the voice option, or else mistakenly underestimate its importance for economic decisions because of its assignment to the realm of political debate.

Preferring voice to exit

In contrast, it must be stated today that, in the social reality of Western industrial societies, “Voice” has become not only an important power factor, but also an economic factor since the 1970s at the latest.

“Voice” is thus today more than just the residual variable of “Exit.” As the probability of success of using the voice option increases, it is also more often preferred to the exit option. If the voice option is chosen (even though the exit option is possible), this is an expression of loyalty.

Companies are not political actors

Companies are not political actors. In a globalized world, the quality of the regulatory environment is comparable to the product quality of a market provider.

If a potentially harmful product is offered, it is legitimate to avoid the damage by “Exit.” “Voice” in this situation is the much riskier and ultimately then irresponsible choice.

Loyalty as the core of corporate social responsibility

But before the situation arises in which “Exit” becomes the only remaining choice, it is worth asking what responsibility companies themselves bear for this situation.

Could they have contributed to a better situation through their “Voice”? Is “Voice” even part of their social responsibility?

Agile companies have the choice

Precisely because it tends to be the informed and agile companies that have the choice between “Exit” and “Voice,” they have a special responsibility. After all, they have special knowledge that gives them a particularly qualified “Voice.”

As Hirschman states: “As a result of loyalty, these potentially most influential customers and members will stay on longer than they would ordinarily, in the hope or, rather, reasoned expectation that improvement or reform can be achieved from within.”

“Thus loyalty, far from being irrational, can serve the socially useful purpose of preventing deterioration from becoming cumulative, as it so often does when there is no barrier to exit.” This is the link to corporate social responsibility.

The dialectics of corporate social responsibility

In the modern business environment, it is widely assumed that corporate social responsibility (CSR) must induce companies primarily to do something “good” for society, often because of possible reputational gains.

However, this understanding of CSR bears a danger: Such a concept of responsibility neglects a fundamental reality: Companies must also articulate clearly what it takes for them to keep operating successfully.

If they shy away from such clear talk, they may very well end up doing society a disservice – if and when their very existence is in peril, along with the jobs and prosperity they aim to provide.

Conclusion

A company is living up to its social responsibility if it does not refrain from speaking uncomfortable truths simply to avoid conflicts.

However, before the company makes use of its exit option, it would be desirable for society to have it choose the voice option. This must happen at an early stage and serve the abstract understanding of the necessary framework conditions. As a result, this would mean a more determined involvement in political processes on the part of many companies.

The exit option remains legitimate and useful even with this approach. If companies leave, this is an important signal for politicians.

*Senior Research Analyst at the Flossbach von Storch Research Institute in Cologne, Germany
**first published in: Theglobalist.com

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