The value of Government relations

With almost a third of private sector earnings subject to government or regulatory intervention, many firms are poorly equipped to manage this risk to their bottom line.

That’s a key message from McKinsey’s annual surveys of corporate executives, which have found that half of all respondents rate external affairs as a top priority for their CEOs, but state their companies lack the capability to do this well.

Those same executives rated government and regulators as second only to customers in their ability to affect their companies’ economic value. In the energy, health and financial services sectors, government and regulators were rated as even more critical to business value than customers.

Given there is so much revenue at risk, one might assume companies would approach government relations or external affairs as carefully, and as strategically, as they do other business functions. Yet many businesses under-invest in government relations.

Managing government relations

There is a significant gap between stated intentions and action. Seventy per cent of executives said their companies shouldengage regularly with government and regulators, but less than half actually did so. And only 20 per cent of executives reported frequent success at influencing government policy and regulatory decisions.

Digging deeper, McKinsey found those who take a proactive, collaborative approach to dealing with government and regulators managed to influence government policy to mitigate risk or create value 34 per cent of the time. Those who seldom engaged or took an adversarial approach succeeded less than half as often.

While many executives were aware that frequent, collaborative and proactive engagement yielded the best results in terms of business value, fewer than 40 per cent indicated their companies could effectively implement such an approach to external affairs. Strikingly, fewer than 30 per cent felt their organisations had the set-up and talent necessary to understand their own businesses and capture or add value from engaging with government and regulators.

This is where specialists with a wide offering in not just government relations, but strategic communications, stakeholder engagement and reputation management add real value to businesses’ bottom lines over the long term.

The proof is in the pudding. Respondents who took a strategic approach to government relations that aligned with their long-term objectives and was integrated with other business planning and activity were three times more effective than those who didn’t.