Executives attending major political events. Unexpected policy changes. Corporate reports that echo government rhetoric. Companies have subtle and not-so-subtle ways of showing allegiance to a ruling party.
A working paper by Harvard Business School Assistant Professor Jaya Wen examines the political conformity of companies operating in China, the world’s largest autocratic regime. The research finds that corporate language began to increasingly reflect the rhetoric of the Chinese Communist Party in 2015 as companies sought to reduce expropriation risk. However, loyal messaging came with mixed results for companies.
To define a “novel, broadly applicable metric of alignment,” the team collected documents published by the Chinese Communist Party and used machine learning techniques to identify the phrases most associated with the organization. They searched for these phrases within company annual reports to gauge firm alignment with the party.
Compared to regular usage in Mandarin, the 50 phrases selected from the party’s communication corpus included many unusual verbs and names like Xi Jinping, the president and party general secretary since 2013; and Zhao Leji, secretary of the party's Central Commission on Discipline Inspection from 2017 to 2022. Significant phrases also included names of government institutions and policies, such as “party building reform.”
Corporate communication started showing more loyalty to the party in 2015. According to the paper, the trend was more common among companies in strategic sectors, such as energy, telecommunications, finance, and transportation, and among state-owned firms, which the Chinese government owns but allows to operate with some autonomy.
Wen coauthored the paper “Public Displays of Alignment: Firm Speech in Autocratic Regimes,” with Joris Mueller, an assistant professor of economics at the National University of Singapore, and Cheryl Wu, a researcher at Yale University. Zi Yang Kang, an assistant professor at the University of Toronto, recently joined the team, which plans to continue the research. The paper was released in June.
The research found that companies’ rhetorical alignment "correlates negatively" with profitability, even after controlling for political connections and other factors.
However, stronger rhetorical alignment was also associated with better performance on government priorities as well as environmental and social matters, supplier practices, and relationships with employees and shareholders.
A commitment strategy
Why do firms align their language with the government’s? A common answer in China is to prevent government interference, including regulatory punishment and asset expropriation. Consistent with this idea, the authors found that when companies faced a higher risk of punishment after regulatory inspections, firm alignment increased that year and continued for the next 12 months.
However, entanglement also comes with potential costs. The team analyzed how linking firms’ fate to that of the regime makes them vulnerable when government scandals arise. The authors examined the case of Sun Zhengcai, a former party leader once considered a possible successor to Xi Jinping. His path took a sharp turn in mid-2017, when the Central Commission for Discipline Inspection announced it was investigating him for violating the party's discipline principles.
Wen and coauthors found that weekly stock returns for aligned firms decreased compared to other firms as the Sun Zhengcai scandal emerged. This held true even when accounting for ownership and political connections.
One explanation for each of these facts is that rhetorical alignment can be a costly way to signal commitment. It allows firms to tie their fate to the government, sacrificing potential profits in exchange for less unwanted intervention. For the state, it serves as a guarantee that firms will act according to the party’s interests. In this way, the authors write, rhetorical alignment “helps resolve a fundamental commitment problem in autocratic governance: how to sustain private enterprise investment without strong institutional guarantees.”
Have questions or feedback for us? Send us a note to
hbswk@hbs.edu.
