(Illustration by iStock/sesame)
In an authoritarian country, companies often benefit from their connections to the party in power. But if the country turns toward democracy, firms tied to the former rulers might want to obscure these ties. One way they do this is through philanthropy, a new study shows, drawing on examples from Taiwan’s 2014 Sunflower Movement protests against the ruling party.
“Our article reveals a strategy that firms adopt to survive democratic transitions and thus contributes to research on how firms use non-market strategies to adapt to institutional changes,” the authors write, noting that their findings show how “strategic corporate social responsibility (CSR) can substitute for corporate political activity or compensate for its limitations.”
The authors—Yishu Cai, a PhD student of management at the Chinese University of Hong Kong; Lori Qingyuan Yue, an associate professor of management at Columbia University’s business school; Fangwen Lin, a PhD candidate in strategy at the National University of Singapore; Shipeng Yan, an assistant professor of management and strategy at the University of Hong Kong; and Haibin Yang, a professor of management at the Chinese University of Hong Kong—spotlight the influence of mass protests against a regime in alarming firms that affiliation with the government will be bad for business.
The 2014 protest movement against Taiwan’s Kuomintang (KMT) government threatened to shake not just the longtime ruling party, which dated back to the Nationalist Chinese takeover of the island nation after the mainland’s 1949 revolution, but also the standing of local companies that had long operated under government favor. But it took another two years for the party to lose power in the legislature, the culmination of many years of democratic transition.
The stakes were high: The movement called attention to what protesters called “corruption and collusion between the regime and connected firms,” Cai says. Firms connected to the KMT, many of which had benefited from lucrative government contracts that nonallied firms were not awarded, were at risk of retaliation if the opposition party came to power. These executives had to operate in uncertain conditions during the protests, without driving the embattled KMT leaders to accuse them of disloyalty.
To explain this dynamic, the authors developed the concept of transition risk. If firms wanted to mitigate their public affiliation with the ruling party but not risk alienating incumbent leaders, they had another option: philanthropy. Choosing to support public welfare would endear them to the public, or at least not further endanger their reputations. This sort of publicity would also be politically anodyne, and it would have the added effect of favoring lower-income and disadvantaged groups, which would help neutralize some of the spillover from their KMT connections if the longtime rulers did in fact fall in the face of the protests.
“It’s a strategic calculation that drives the donation,” Cai says.
The researchers looked at 1,267 publicly traded firms in Taiwan every quarter from 2012 to 2015, encompassing the time period of the Sunflower Movement, which started early in 2014. They excluded both financial-services firms and state-owned enterprises and controlled for whether a firm already had a history of making the relevant philanthropic donations, whether it was involved in any corruption cases with KMT officials, and other complications.
“The key insight of our paper is that democratic transition is a lengthy process,” Cai says. “Rather than constantly shifting loyalty between political parties and betting on the ever-changing political landscape, we suggest that firms are better off building strong ties with civil society—the rise of civil society is a crucial trend in turbulent democratic transitions.”
The researchers found that the KMT-allied firms they studied donated to public-
welfare causes but did not sever their ties to the KMT, nor did they start giving money to support the pro-democracy movement.
“This study is especially interesting for what it says about firm hedging strategies,” says Mark Mizruchi, a professor of sociology, management, and organizations at the University of Michigan. “By making philanthropic contributions rather than giving directly to the pro-democracy movement, the firms allowed themselves to preserve credible deniability should the movement fail.”
Find the full study: “CSR as Hedging Against Institutional Transition Risk: Corporate Philanthropy After the Sunflower Movement in Taiwan” by Yishu Cai, Lori Qingyuan Yue, Fangwen Lin, Shipeng Yan, and Haibin Yang, Administrative Science Quarterly, forthcoming
Read more stories by Chana R. Schoenberger.