CEOs need to stop outsourcing politics

Business Times

10 hours ago

THE Israel-Iran war. The Trump tariffs. The Oct 7 attacks. The Russian invasion of Ukraine. The Covid-19 pandemic and the inflation that followed. 'Once-in-a-generation events' that could previously be written off as Black Swans are now occurring routinely. Many were caused by government actions, and all resulted in government interventions that are likely to have sweeping economic impacts.
At least since the end of the Cold War, and likely since the end of World War II, few American chief executive officers outside the defence industry have been evaluated on or chosen because of their understanding of politics. Most have delegated their dealings with government and international relations to lobbyists tasked with pushing for lower taxes and deregulation. That's no longer possible. Just as no competent leader would outsource key decisions about finance, strategy or marketing, a successful CEO now needs to be hands-on when it comes to questions of global government and politics.
Perfect case study
The Trump administration's tariffs are a perfect case study in how the business world fails to understand the political one. President Donald Trump campaigned on promises to put a minimum 10 per cent tax on all imports and a 60 per cent tax on imports from China. In fact, supporting tariffs may be Trump's only consistent political position: In 1987 he took out full-page ads in The New York Times demanding high tariffs on imports from Japan. And while Trump didn't impose wide-ranging tariffs in his first administration, it was clear long before his 2025 inauguration that he would be far less constrained and better able to implement his wishes this time around.
So we have a president with a life-long belief in high tariffs, elected on a platform of high tariffs, surrounded by an administration he had handpicked to give him total freedom of action, whose chief economic adviser is an advocate of high tariffs. But when he announced high tariffs, the shock produced some of the biggest stock market drops in American history.
This isn't just about the market. The tariffs prompted China to retaliate by putting export controls on rare earth minerals. Rising tensions between the US and China and the latter's functional monopoly on rare earth minerals were both well-known, but too many American companies were caught off guard. Ford Motor Co, for one, might have stockpiled the materials to guard against the breakdown of the nations' increasingly strained relationship, but instead was forced to shut down a factory.
Political foresight, on the other hand, can pay huge dividends. Apple gained some protection from this international conflict by moving part of its iPhone production from China to India. That's a process it began back in 2015 and accelerated as a safeguard against the continuing deterioration of the relationship between the two countries even before Trump returned to office. A decade later, Apple's leaders and investors are surely grateful it was ahead of the curve.
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It's hard to explain companies' lack of preparation for such shocks as a product of anything other than an American business community trapped in an outdated political paradigm. US business has thrived in an environment where the government has typically shown deference to private sector interests and exercised limited intervention. That paradigm held for so long that it became as much of an unquestioned assumption as the law of gravity. Unlike gravity, though, it was an artifact of its time.
That reality shattered with the 2008 financial crisis, which required the US government to deploy trillions of dollars to bail out the financial sector. The backlash left both major political parties far more open to market interventions – and far less likely to defer to business. Today, the three most popular American politicians currently in office are Senator Bernie Sanders, Senator Elizabeth Warren, and Representative Alexandria Ocasio-Cortez; all support increased regulation, taxes and government spending. (Trump, hardly a libertarian avatar, comes in fourth.)
Adding to the importance of a deep understanding of government and politics is the return of militarised competition between major states. The globalisation that flourished after the fall of the Soviet Union has been rocked by surging competition between the US and China and the hostility between Nato and Russia that culminated in the invasion of Ukraine. Economics and globalism no longer dependably trump national security. Instead, trade barriers, export controls and concerns over the countries' ability to domestically produce defence-critical materials take precedence over free markets and corporate profits.
Adapting to new reality
But the way we train and select American business leaders hasn't kept pace with this new reality. Of the top 10 US business schools, only Harvard Business School and the Stanford Graduate School of Business require MBA candidates to take a course on government and politics. (I teach a required course on the topic for Executive MBA candidates at the Yale School of Management.) According to one analysis, only eight of the 2021 Fortune 500 CEOs had an undergraduate degree in political science; few, if any, have experience in senior political office.
Universities, boards and CEOs all need to adapt to this new reality. Business schools need to make politics just as central to their curriculum as every other mission-critical skill. Even more importantly, boards need political sophistication within their own ranks and to make it a key part of their evaluations of future chief executives. Meanwhile, current CEOs must move up the learning curve fast. The political world isn't waiting on them anymore. BLOOMBERG
The writer writes about corporate management and innovation. He teaches leadership at the Yale School of Management and is the author of Indispensable: When Leaders Really Matter