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Businesses Should Steer Clear of ‘Crony Capitalism’

Mid-market firms must have policies in place to ensure they are neither promoting nor bearing the brunt of governmental favoritism.

In the 1990 movie Pretty Woman, Edward, a businessman who specializes in buying companies and breaking them up, stalls a competitor’s government contract with a single phone call to a senator, who promises to keep the program tied up in red tape for months. Although a work of fiction, the scene depicts an all-too-real situation that happens all the time in the legislature, where favoritism determines which initiatives are pushed through and which are not.

Fast forward to today. The primary defeat of U.S. House Majority Leader Eric Cantor, who was a friend to Wall Street and mega-corporations, and the near-fall of Mississippi Sen. Thad Cochran, have underscored this increasingly thorny position. Opponents of so-called “crony capitalism” are making waves, causing conservatives to attempt to curb the power of the business establishment within the Republican Party.

“Having solid vendor policies in place along with strong oversight will ensure that chiefs and their companies don’t find themselves on the wrong side of this issue.”

Of course, CEOs and business leaders are monitoring this trend for a number of reasons. Some leaders want to ensure their own companies’ privileges and perks under an economic system that always has been rigged in various ways, while others are fighting just to have an equal chance.

Going forward, there will be much to watch as the fall campaign season unfolds and crony capitalism plays out in crucial arenas such as the Republicans’ bid to gain a majority in the U.S. Senate. As a result, business chiefs may want to re-evaluate how they and their enterprises are aligned politically as crony capitalism comes under greater threat.

The poster child for anti-crony capitalism has been the criticism pointed at the U.S. Export-Import Bank, a vital line of support for small businesses and large manufacturers alike that helps them bid for contracts abroad by guaranteeing loans to overseas customers and providing working capital to the domestic enterprise. Many conservatives would like to see it eliminated, and Cantor’s victorious opponent in the Virginia primary, David Brat, a Tea Party-inspired economics professor, campaigned on that point.

The 2008 financial bailout, although six years behind us, is another issue that still sticks in conservatives’ craw as a clear show of crony capitalism and the protections provided to companies and entire industries that would be penalized in a truly free market. How the Obama administration and Republican leaders provided banks with a soft financial landing after helping to spark the global financial meltdown was an issue in the near-defeat of Sen. Cochran by Chris McDaniel, a populist conservative.

CEOs need to protect themselves by remaining neutral. Having solid vendor policies in place along with strong oversight will ensure that chiefs and their companies don’t find themselves on the wrong side of this issue.

About Dale Buss

Dale Buss
Dale Buss is a long-time contributor to Chief Executive, Forbes, The Wall Street Journal and other top-flight business publications. He lives in Michigan.