Placing a premium on high ethical standards and reputation distinguishes companies with smallest losses from competitors
Most companies are losing an inordinate amount of money in their operations in emerging markets, a recent report by FTI Consulting shows. An overwhelming majority of companies surveyed — 83 percent — have averaged more than $1 billion in losses in emerging markets since 2010, most frequently driven by regulatory compliance challenges, incidents of bribery and fraud, and reputation issues. These losses are expected to continue to mount unless companies adopt several strategies that will allow them to mitigate the risks inherent in doing business in international markets.
‘The average number of loss-making events experienced by each responding company from 2010 through 2014 was four (just under one a year), and the average loss per company was $1.38 billion over that time,’ the report, titled What companies do right (and wrong) in emerging markets, says. The average loss was $260 million a year, or 0.7 percent of average annual revenues, while the average cost per incident is estimated to be $325 million. FTI Consulting polled 150 executives from multinational companies in North America and Europe across a wide range of industries.
The report finds that 99 percent of incidents that caused corporate losses in emerging markets were due to regulatory, bribery and fraud or reputation issues. Most frequently companies ran into regulatory problems, but incidents of bribery and fraud were the most expensive to deal with. Many companies find themselves handling two of the three major causes in the same incident, as exposure to bribery and fraud or regulatory investigations and fines often leads to reputation damage.
‘When companies attempt to do business overseas, they essentially become political as well as economic actors,’ says Jackson Dunn, senior managing director in the strategic communications segment at FTI Consulting. ‘The company's investment inevitably affects the local economy, and that has spillover effects in the political community. This places companies at reputation risk, which they frequently fail to understand or acknowledge.’
To deal with the three major risks, companies that have had the most success ‘play by the rules, both local and international, and, thereby, furiously guard their reputation,’ the report says. ‘They make compliance a strategic priority at the highest corporate levels and provide the resources to execute on the ground….They combine a deep understanding of the political and business cultures of the environments in which they operate with a stout refusal to cut corners. These companies develop response plans to deal with incidents before they arise, and these plans are continuously updated and aggressively communicated both internally and externally.’
According to the report, three measures that the most successful companies implement to protect themselves from losses in emerging markets are to:
• Maintain a consistently good reputation over the long haul. Companies that avoided the highest losses valued maintaining a good reputation more highly than competitors. They make a commitment to strictly adhere to the law and they conduct due diligence to make certain their business partners have great reputations and healthy balance sheets. The report also says companies should ‘maintain their reputation by working with and through the media before their reputation has been placed at risk.’
• Take great care to accommodate and influence the local regulatory environment. Companies that operate successfully in emerging markets do extensive research on those markets before making a financial investment there. They may engage in discussions with the potential host government to help understand and establish the stability of the regulatory environment so that the benefits to investors and the host country are clear. In addition, ‘leading companies believe it is more important to their success to avoid doing business in places where compliance may not be possible,’ the report states. If there is too much instability and risk, it may be better to wait until the regulatory environment improves.
• Meld corporate ethical standards with local culture. Successful companies make sure they have trusted employees and managers locally who understand the culture and the compliance issues the company must face. This includes placing native-born managers in key positions. Additionally, the report says that at leading companies, ‘top management impresses upon middle management that the company is committed to rigorous, unbending compliance and will act accordingly.’ High ethical standards are a priority.
‘Successful companies put a lot of effort into helping host countries establish economically rational regulatory environments, which benefit both investors and the host country over the long run, and in maintaining the stability of those regulatory environments as companies are buffeted by the inevitable winds of political change,’ says John Klick, global leader of FTI’s economic consulting segment.
