A new report from global advisory firm FTI Consulting looks at investments in emerging markets by companies in North America and Europe and how those investments are frequently hampered by regulatory decisions, loss of business due to fines or corruption and the impact those events have on the company’s reputation.
After the financial crisis and recession of 2009, many companies expanded their investments in emerging global markets such as China, India, Russia, Eastern Europe and Latin America, looking for the growth opportunities that organizations no longer could find at home. Within this framework of increasing interest in doing business in such markets, FTI Consulting’s 2015 Risk Research Project focuses on the risks businesses and investors face and examines how leading companies work to mitigate such threats.
Research drawn from a survey of 150 business leaders of multinational companies based in North America and Europe, specifically those executives involved in risk and compliance, indicate that most have suffered significant losses in emerging markets, stung by three primary categories of risk: regulatory, bribery and fraud, and reputational issues. The most damaging and costly incidents occur when two or more of the risks in this “dangerous troika” converge, creating a cascade of losses that can become increasingly hard for companies to contain or stem.
According to Jose Pineiro, a Managing Director in the Forensic & Litigation Consulting Practice at FTI Consulting, globalized companies operating in widely varying regulatory environments increasingly “overestimate their internal expertise to analyze overseas risk. They are not objective about their own capabilities. And, sometimes, business agendas overstep compliance protocols.”
By contrast, enterprises that have suffered the least have one thing in common: “They play by the rules, both local and international, and, thereby, furiously guard their reputation. They make compliance a strategic priority at the highest corporate levels and provide the resources to execute on the ground. These companies do not go along to get along. 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.”
The best companies protect themselves from risk in three major ways that others do not, the report’s authors say. First, leaders in this respect maintain a consistently good reputation over the long haul and take a long-term view of their investment in emerging markets. Second, leading companies take great care to accommodate and influence the local regulatory environment, even to the point of avoiding doing business in places where compliance may not be possible. And third, these companies successfully meld corporate ethical standards with local culture by conducting a continuous dialogue with staff on compliance issues and implementing compliance policies that are suitable to the jurisdiction in which they are doing business.