Do Elections Drive Markets?
By Doug Pinkham, Public Affairs Council President | Feb. 8, 2012
It’s often said that Washington is a town that defies logic. And the most common logical fallacy is that “correlation” means the same thing as “causation.” In other words, say many D.C. insiders, when two events occur at the same time, one must be the cause of the other.
That’s why we hear politicians proclaim that rising public cynicism has reduced voter turnout or that negative campaigning has increased partisanship. Each of these variables represents a real trend, but neither assertion is true.
Mixing correlation with causation becomes even more ridiculous when pundits start tying presidential politics to the financial markets. Investor’s Business Daily recently reported that when the stock market increases by 6 percent or more in January of an election year, the challenger beats the incumbent president. Apparently this pattern has held true since 1936. “Indeed, the stock market typically looks ahead and reacts before headlines become reality,” says IBD’s Paul Whitfield, creator of the IBD January Incumbent Barometer. “So there may be more at work than an uncanny streak.”
Tell that to Joe Weisenthal and Jon Terbush of Business Insider, who have traced the rise in the president’s popularity to gains in the S&P 500. Responding to a post in Talking Points Memo that tried to link President Obama’s higher approval rating to specific policy decisions, they suggest the real cause is the improving stock market. And they have visual evidence to back up their claim:
They’re both wrong, says Barry Ritholtz in The Washington Post, who argues that an incumbent’s poll numbers have very little to do with stocks. “Instead of assuming that one is causing the other, we need to look for broader forces that are driving both elements,” he writes.
When the economy is doing better and earnings, hiring and spending are up, voters feel more secure, which helps a sitting president. The opposite is also true: Markets go down not because a challenger is polling well but because economic conditions are weak.
The correlation/causation fallacy is rampant during elections, he notes:
These simple facts never seem to get in the way of the op-ed writers at various journals who seem to favor arguments along these lines: “Worries about possible policy changes are weighing on markets ahead of the year’s presidential elections. Candidate X’s rise in the polls is a risk that is giving the stock market jitters. Stock prices are wobbling, all leading to uncertainty. (And the markets hate uncertainty.)”
Here are some other logic-free observations Ritholtz says we’ll hear regarding politics and markets this year.
Misplaced credit and blame: Presidents get more credit than they deserve for strong economies and good markets, and more blame than they deserve when times are bad. “This is true regardless of which party wins the White House or where the economy is in its cycle.”
The Obama bull market: People who think the markets will respond positively to a pro-business president should ask themselves why stocks didn’t soar throughout George W. Bush’s entire term. (The S&P declined about 37 percent while he was president.) On the other hand, the markets have gained substantially since Obama was sworn in.
Anthropomorphizing markets: Markets don’t prefer one candidate over another, and poll numbers don’t spur short-term rallies. “It is a trick used to frame issues, and it is disingenuous at best,” writes Ritholtz. “Indeed, with these silly claims, pundits manage to combine all of the analytical errors discussed above.”
So why are people sucked in by irrational reasoning? Jonah Lehrer, author of How We Decide, argues that causal explanations are useful because they help us understand the world at a glance. This approach has worked reasonably well for centuries, but in both the natural and social sciences, “the reliance on correlations has entered an age of diminishing returns,” he writes in a recent article in Wired magazine.
First, all of the easy cause-and-effect relationships have been discovered, which means science “is getting harder.” Second, looking for correlations “is a terrible way of dealing with the primary subject of much modern research: those complex networks at the center of life.” There are simply too many variables, and they can’t be isolated.
And yet — in Washington and elsewhere — we continue to see two unrelated trends and conclude that one is causing the other. Perhaps, as the world’s problems have become more complicated, we keep hoping for easy answers. It’s clear the public has an appetite for this sort of thing. That’s why Investor’s Business Daily computes its IBD January Incumbent Barometer and why we see sports bloggers claiming that a president’s reelection chances are related to which team wins the Super Bowl.
But the best illustration of the correlation/causation fallacy came in a recent edition of Bloomberg Businessweek, in which Vali Chandrasekaran paired a series of trends with similar trajectories. Among the many “conclusions” he reached was one tying the number of active Facebook users to the yield on 10-year Greek government bonds:
“Correlation may not imply causation,” he writes, “but it sure can help us insinuate it.”
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Public Affairs Goes Mainstream
Corporate lobbyists know intuitively that they add value to a company. Now they have proof. According to a recent study by four financial scholars, companies that lobby significantly outperform those that don’t. In fact, say the authors, “lobbying is an important channel through which the firm can strengthen operational results and competitiveness.”
But lobbying is only part of a company’s overall public affairs strategy. Because public affairs seeks to manage all aspects of a firm’s business environment, companies are learning to integrate their government relations, communications and corporate citizenship activities in ways that add even more value.
In a new survey from the Foundation for Public Affairs, 79 percent of business executives say public affairs already plays an increasingly important or very important strategic role in their firms. An additional 14 percent say it is becoming more important. (The Foundation is the research affiliate of the Public Affairs Council.)
Given these data — and the political and economic uncertainty facing the world — it’s no surprise that corporations are increasing the resources devoted to public affairs.
Corporate public affairs departments survived the budget cutbacks of the 2008-2011 timeframe better than did many corporate functions. Forty-four percent of respondents to the Foundation for Public Affairs survey say their budgets have increased over the past three years, while 36 percent say their budgets have remained the same.
Staffing levels also have been remarkably resilient during this time of corporate retrenching. The median number of professional staff in the survey sample is seven (though the headcounts ranged from one to 350 people). Nearly one-half (46 percent) report increases in professional staffing, while 35 percent say the professional staff headcount remained the same. Meanwhile, the administrative staff headcount increased in 23 percent of companies, with 64 percent reporting no change.
In order to be effective, public affairs executives need access to the top levels of the company — and most have it. In the Foundation for Public Affairs survey, nearly one-half say they report directly to the CEO, chairman or president, and another 30 percent report to the company’s general counsel. The rest report to an officer or a business unit head.
Because of this access, public affairs executives have been able to persuade CEOs to become increasingly involved in corporate public affairs activities, from communicating with Congress to endorsing corporate political programs. While CEOs had decreased their involvement in direct federal lobbying in 2008 (when this survey was last conducted), nearly three in four have recently engaged in federal lobbying. Roughly the same number made contributions to the company’s PAC.
What CEOs aren’t doing is spending as much time at trade association meetings. Direct involvement in associations has been on the decline since 2005, when 89 percent of companies said their CEO was active in associations. This year, only 68 percent report their CEO is active.
But this doesn’t mean firms are abandoning trade groups. To the contrary, 38 percent have relied more on trade associations over the past three years, and only 14 percent have relied less on associations. Back in 2008, we noted that companies had greatly reduced their reliance on business associations (such as the U.S. Chamber or the Business Roundtable) for lobbying and issue advocacy. Since that time, the percentage of firms using business groups for these functions has risen — particularly for issue advocacy.
In addition, more than half of respondents say they have increased their use of coalitions over the past year; only 4 percent report a decrease.
Running a public affairs department is not without significant problems, however. When asked to name their greatest challenges, a growing number of executives (63 percent) list the difficult political environment, and 57 percent list insufficient staff resources. The third highest vote-getter (40 percent) is the difficult economic environment — a reason not even mentioned when the survey was conducted in 2008.
Given the amount of publicity generated by changes to the lobbying/ethics laws in recent years, it’s worth noting that only 9 percent consider the complexity of these rules to be a challenge. When asked to comment on emerging issues, only 21 percent point to possible changes to these laws as a major worry.
Despite the assumption (propagated by the media and reform groups) that companies spend a lot of time trying to work around gift bans and registration rules, their focus is on larger issues. Like most Americans, public affairs executives are frustrated with partisan politics, nervous about the economy and wish they had more resources to do their best.
If you’re looking for convincing evidence that public affairs has become a mainstream corporate function, you just found it.
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Copies of the 2011-2012 State of Corporate Public Affairs report are available free of charge to survey participants. Additional copies are available for $100 each. Non-participants may also purchase the report for the same price. For a list of participating companies, click here. For questions about publications, contact Patrick Corcoran at pcorcoran@pac.org or 202.721.0917.
Public Affairs Pulse: Implications for Corporate Public Affairs
Nearly three in four Americans think the level of ethics and honesty in politics has gone down over the past decade. And more than half feel the same way about ethics and honesty in business.
So what are you supposed to do if your job is to deal with politicians on behalf of business?
That’s the challenge facing corporate public affairs professionals as they try to manage public policy issues when trust is at a record low. The Council’s study on American attitudes about business shows the public is surprisingly supportive of major companies but has deep concerns about executive pay, corporate power and political influence.
The Public Affairs Pulse — a nonpartisan survey of 1,753 adults commissioned by the Public Affairs Council and conducted by Princeton Survey Research Associates International — ranks CEOs’ honesty and ethics just behind those of public officials in Washington and just ahead of those of state/local government officials. All three categories receive low scores. The highest scores for ethics are given to small business owners.
A Silver Lining
The good news is that six in 10 Americans have a favorable view of major companies. And nearly three-quarters say companies do a good job of providing useful products and services. Much of this support comes from younger citizens.
Yet three-quarters of the public (77 percent) endorse the opinion that there is too much power in the hands of a few large companies. And three-quarters think companies do a poor job of reining in executive pay.
It’s no surprise that lobbying and lobbyists have a negative reputation in the public’s eyes. In the survey, 55 percent say they think more unfavorably of a company that hires lobbyists to represent the firm.
It is a surprise, however, that most people are supportive of specific lobbying activities.
‘Lobby’ Isn’t a Dirty Word
When presented with five reasons for lobbying, a majority say each action is acceptable. They include advocacy to:
- Protect jobs;
- Open new markets;
- Create a level playing field;
- Reduce business costs; and
- Secure government funding or grants.
While “lobbying” as a noun sounds sinister to most people, “lobby” as a verb represents freedom of speech and opportunity. Americans understand the value of being an advocate in a democratic society.
Political Involvement Concerns
What the public is more concerned about is corporate efforts to get directly involved in elections. Sixty-three percent say they would have a less favorable opinion of a company that pays for ads to support a candidate.
In addition, 59 percent say they would have a less favorable opinion of a company that starts a political action committee. Forty-one percent would object to companies paying for ads to promote a specific public policy issue.
What It Means in Practice
Does this mean companies should abstain from political involvement? Of course not. In fact, in a survey from the Foundation for Public Affairs, PACs are rated the second most important corporate political strategy, next to direct lobbying.
It’s also worth noting that PACs are an example of campaign finance reform that works. They are heavily regulated, and contribution limits are low. At a time when many Americans are concerned about the impact of independent expenditures on elections, PACs should look downright wholesome. But that doesn’t mean the public will agree.
In this tough environment, corporate public affairs executives would be wise to assume that employees, customers and other stakeholders are as skeptical as the general public. If you haven’t discussed your public affairs priorities and practices with employees in years, now would be a good time to provide an update.
Leading companies are nonpartisan, state their commitment to ethical behavior, emphasize the strategic importance of public policy engagement and are transparent about their reasons for getting involved in politics. That’s a formula for earning trust.
For a full summary of results from the Public Affairs Pulse, along with analysis and video, click here.
Public Opinions of Business May Surprise You
Do people think corporations are too powerful? Certainly. Do they think CEOs make too much money? Absolutely.
But those two opinions don't provide a complete picture of American attitudes toward business. Nor do they reflect the high expectations the public has for companies to improve the quality of life in the U.S.
Now consider these facts: More than six in 10 Americans have a favorable view of major companies. And nearly three-quarters say companies are doing a good job of providing useful products and services. Those are just two of the conclusions reported in the Public Affairs Pulse survey, an annual poll commissioned by the Public Affairs Council and conducted by Princeton Survey Research Associates International.
Here's another surprise: Despite the visibility of young activists in the Occupy Wall Street Movement, guess which generation has the most favorable opinion of major companies? Seventy-one percent of members of "Gen Y" (age 18-34) have a favorable opinion, and the Gen X group (age 35-46) has similar views. The most negative attitudes about Big Business come from Baby Boomers (age 47-65) and older Americans — but even a majority of those groups still are favorable.
The Public Affairs Pulse analyzes a host of business-related attitudes, many of which have never been examined in major public polls. Among these are opinions about non-management corporate employees, business's role in providing public services, crisis communication and the acceptability of lobbying. The survey is based on telephone interviews with 1,753 adults age 18 or older living in the continental U.S. The interviews were conducted Aug. 10 through Sept. 8.
High Expectations for Companies
"Many Americans want major companies to be full, active partners in taking on the big problems that have traditionally been the province of government action," says the survey report. For obvious reasons, nine in 10 want big companies involved in improving the economy and creating jobs. But there is also majority support for business involvement in:
- Providing community services such as food banks, free clinics and job training for the poor (80 percent);
- Providing relief for disasters like floods, tornadoes and earthquakes (76 percent);
- Improving health care (73 percent);
- Improving education (72 percent); and
- Improving roads, bridges and mass transit (56 percent).
What's more, in four of these five cases, most Americans expressed strong support for business involvement. Yet despite the dollars and volunteer hours many companies currently invest in corporate citizenship endeavors, 57 percent of respondents say major companies are generally not doing a good job "contributing to their communities." Only 35 percent say they are doing well on that front.
While many Americans are uneasy about companies getting involved in politics, they are supportive of specific lobbying activities. It's true that more than half (55 percent) think unfavorably of a firm that hires lobbyists. But when presented with five specific lobbying activities, a majority says such actions are acceptable.
Support for Advocacy
Lobbying to protect jobs at the company, for example, is acceptable to 85 percent of Americans. Advocacy to open new markets, create a level playing field with competitors or reduce business costs also receive high scores. Even lobbying to secure government funding or grants is considered acceptable by 50 percent of respondents; only 45 percent disagree.
The survey also investigates public reaction to corporate disasters. When faced with a crisis of its own making, a company has a limited number of options. Should it put its executives in front of the TV cameras immediately? Or should it keep quiet until the lawyers say it's safe to speak?
Presented with seven possible actions, the right strategy is clearly "Do something!" Moving quickly to pay any costs to those affected would help "a lot" to make people think the firm is responding properly. Only 8 percent say it would not help at all. Other high-scoring steps include: having top executives answer questions about what happened, firing executives and other employees responsible for the crisis, paying for ads explaining the company's actions to fix the problem and having top executives make a public apology.
A quick and thoughtful response also pays dividends down the road. When Americans are asked what the most important factor is in deciding whether to buy a company's products or services after a major disaster, the company's honesty and responsiveness in dealing with the crisis is the choice of 67 percent. Only 15 percent say the company's long-term reputation determines whether they decide to become a customer again.
Now for the Bad News
Some of the survey's results are positive for corporations, but others, not surprisingly, are negative.
There's no question, for example, that executive compensation issues have struck a nerve with the public. A large majority of Americans (76 percent) think companies are not doing a good job of keeping executive pay within reasonable bounds. The public's mood gets even worse when bonuses are brought into the conversation. Asked if giving top executives large bonuses when a company is doing well would make them feel more favorable toward that firm, only 16 percent said "yes," while 49 percent said "no."
But what happens if executives receive large bonuses when the company is not doing well? Nearly nine in 10 (87 percent) say such actions would make them think more unfavorably of a company.
For corporations that often claim in their sales materials that they "put customers first," here's a reality check. Most Americans think major companies routinely put the interests of CEOs first, followed by the interests of stockholders. When asked whom companies should put first, employees are at the top of the list — and top executives are at the bottom.
If you're ready to blame liberal Democrats for those trends, think again. Conservatives, moderates and liberals all agree that corporate priorities are upside down. Tea party supporters are even more likely than other groups to say companies should focus on employees first and top executives last.
The survey also zeroes in on the one-quarter of the public who can be called "activists," based on their various civic and political activities. Since members of this group typically express their opinions more forcefully and more frequently than others, they have a louder voice in public policy. Despite the diversity of their personal and political profiles, they mirror the general public's overall views of major companies: 62 percent are favorable. What sets activists apart is their higher level of distrust for certain types of companies, especially banks, pharmaceutical firms and energy companies.
Most important, when an activist is upset with a major company, he or she is twice as likely as a non-activist to post negative comments about the company on the Internet and three times as likely to contact a government agency or official to complain.
For a full summary of results from the Public Affairs Pulse, visit the Council's special website at pac.org/pulse.
Are We Headed for a ‘Corporate Spring’?
It's hard not to laugh at the Occupy Wall Street campaign, the bizarre group of protesters who recently shut down the Brooklyn Bridge and, dressed as corporate zombies, staggered past the New York Stock Exchange, chanting, "How to fix the deficit: End the war, tax the rich!"
But there was something familiar in the media interviews. "We want a voice, and our voice has slowly been degraded over time," a St. Louis man told USA Today. An unemployed woman from Connecticut said in The Wall Street Journal that too many people have been dismissive of the protests. "The only way to do it is to show them, to make them open their eyes."
Substitute the word "government" for "corporation" in the signs and slogans, give them a wardrobe change and a few gray hairs, and they'd look a lot like the early tea party demonstrators.
There are major differences, of course, beginning with the fact that conservative politicians ran to the front of the tea party line to promote their causes. Many liberal politicians have been skittish about being associated with the folks sleeping in a Manhattan park since Sept. 17. While the tea party founders actually organized protests, the group behind the Wall Street demonstrations decided to bring people together first and then figure out its demands later.
But the anger and desire to take back power from the powerful is the same. And, as the demonstrations spread to Chicago, Boston, Los Angeles and other cities, major unions like the AFL-CIO and advocacy groups like MoveOn.org are now on board. The mainstream media — no doubt ready to make the same tea party comparison — will surely follow, especially as we enter an election year. The politicians won't be far behind.
Meanwhile, across the globe, larger-scale protests of another type have been taking place, Forbes notes in a must-read cover story called "Social Power and the Coming Corporate Revolution." Ordinary people, using Facebook and Twitter, have helped to topple dictators in Tunisia, Egypt and Libya — and have created instability in Syria. These actions are truly remarkable for the speed with which they brought about change. They also speak of the basic human urge to be heard and respected.
So how does the Arab Spring relate to the Occupy Wall Street crowd?
"This social might is now moving toward your company," David Kirkpatrick writes in the Forbes article. "We have entered the age of empowered individuals, who use potent new technologies and harness social media to organize themselves." Neither governments nor companies are prepared to deal with social power.
"The elites — or managers in companies — no longer control the conversation. This is how insurrections start," Mark Benioff, CEO of Salesforce.com, a cloud computing company, told Forbes. "This isn't just about Arab Spring. This is about Corporate Spring."
While email was the catalyst for early online activism, Facebook, with its 750 million active users in every country in the world, has become an even more potent tool for spreading opinions. Once like-minded people start saying the same thing — whether it's about favorite movies or corporate greed — these "memes" quickly become part of our common belief system.
Some companies have learned this lesson the hard way. When rugby fans in New Zealand learned they were paying more for Adidas team jerseys than fans in the U.S. and elsewhere, they launched a massive online protest that resulted in customers returning Adidas clothing to stores. When a social media campaign in the Netherlands protested executive bonuses at Amsterdam-based ING, large numbers of people threatened to close their accounts with the bank. According to Forbes, ING's CEO finally decided to waive his $1.8 million bonus and ordered company directors to follow suit.
In a bad economy, it shouldn't be surprising that large, profitable companies have become targets for protesters enraged by corporate scandals and high unemployment. These types of demonstrations have gone on for years; the difference now is that inexpensive tools are available to enlist the help of a sympathetic public.
In this new world, writes Kirkpatrick, executives and their companies will need to demonstrate authenticity, fairness, transparency and good faith:
If they don't, customers and employees may come to distrust them, to potentially disastrous effect. Customers who don't like a product can quickly broadcast their disapproval. Prospective employees don't have to take your word for what life is like at your company — they can find out from people who already work there. And longtime loyal employees now have more options to launch their own, more fleet-footed startups, which could become your fiercest competitors in the future.
Clearly, the best way to manage these changes is to realize you can't manage them. "And pragmatically," says Kirkpatrick, "social power can help keep your company vital. Newly armed customer and employee activists can become the source of creativity, innovation and new ideas to take your company forward." More and more companies, particularly those with high-profile brands, are becoming true believers.
He notes that Gatorade operates a full-time social media command center where it monitors and participates in conversations on Facebook, Twitter, blogs and elsewhere. Ford uses social media to help it design cars and communicate effectively with young consumers.
But learning to be humble and open can be difficult for executives who are used to touting their successes and downplaying their failures. This requires a new way of thinking. "Trust is built by sharing vulnerability," John Hagel, co-chairman of The Deloitte Center for the Edge, said in the Forbes article. "The more you expose and share your problems, the more successful you become. It's not about the top executive dictating what needs to be done and when, it's about providing individuals with the power to connect."
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