July 2011Strategy

Creating the Ties That Grow

Creating the Ties that Grow

In an earlier issue of Wharton@Work, Wharton’s Witold Henisz explained how some companies are reaping outstanding rewards in the world’s riskiest markets. Managing political and social relationships, he stressed, is key to those achievements. Here, he provides a more in-depth look at the relationships at the center of their success.

“When Anglo American, one of the world’s largest mining companies, won the right to develop a copper project in Peru, their mining engineers weren’t immediately dispatched to Michiquillay. Instead, the company sent sociologists and anthropologists, who spent two years getting involved with and learning about the community. They built a political and social model in the country before any drilling or exploration took place. Anglo American understood that it was the connections they made in Peru that would be the critical source of value creation.

“We study mining companies in the Executive Development Program (EDP) because they’re a dramatic example of risk management. Their projects, which are often located in remote areas, cost billions of dollars, and they make major commitments before the first hole is drilled. Securing their investments is incredibly difficult.

“The reason most mines get behind schedule and experience disruptions in operations, as Anglo American is well aware, is because of stakeholder conflicts. Spending a lot of money on geological due diligence is important, but so is spending on powerful stakeholders’ needs and demands, such as community development. The amount you spend on building relationships translates into value, and is something you can actually forecast into a financial valuation model.”

Coalition Building

Knowing and relating with key individuals isn’t enough, says Henisz. You have to understand not only who’s out there and what they want, but how they’re all connected. “Any political game is inherently a coalition game.It’s not just getting the most powerful person on board. We tend to zero everything down, thinking it’s just about getting ‘them’ on our side.”

Henisz continues, “Politics isn’t a handshake; it’s more like a soccer field. There’s a game going on and it’s about who’s working with whom, and who’s fighting with whom. What are some of the structures that are emerging on the playing field? It’s critical when you’re thinking about getting to yes, to not just think about it as you and somebody else, but about building a coalition.”

To do that, says Henisz, you need to look at your relationships in a more holistic way. Understand who has cooperated well in the past, who speaks highly of whom, who is in conflict on other issues. Even if two people appear to be on your side, if they strongly disagree on some other topic, the likelihood that they’ll both work together for you is minimal. You have to understand not just who shares your interests, but who’s likely to work together in a sustained way.

Building Relationships

The coalition phase is one of identification — collecting data and determining who you need on your side. “But,” Henisz asks, “as you’re going out to talk to people to gather more data, are you asking them to come into your offices, or are you going to their homes? Are you giving money, or are you actually sending out some of your senior managers to roll up their sleeves and work with locals digging a ditch or building a house or hospital? It’s one thing to cut a hundred thousand dollar check for the construction of a cinder block schoolroom. But, if three of your engineers are actually there on Saturday morning, pouring and mixing the cement and putting the cinder blocks up, you’ve really created a bond with the parents. You helped build their school.

“Coalitions only work if you’ve convinced people that you’re sincere and genuinely interested in their well-being. That means spending time with them, listening, doing what they think is important, and sharing in some of the symbols and rituals of the community. We look closely at mining companies in EDP because some of them are doing this incredibly well. They understand that if you want your financial model to work, you first have to connect to people.”