A major European oil company suffers production setbacks after militant groups sabotage their pipeline in Nigeria. A Canadian mining firm is forced to sell its majority stake in a mining joint venture in Peru following sudden regulatory changes. A multinational retailer finds its tax exposure transformed overnight in Russia. All of these problems represent foreign investors experiencing issues of a political nature – issues for which they were evidently poorly prepared.
Foreign policy used to be practiced only by statesmen. No longer. In an increasingly globalized economy where much of the growth potential resides in countries with inadequate rule of law, businesses are finding it necessary to seek out new tools, expanding beyond the traditional set of responses to meet political risk. There is an urgent need for these investors to establish guiding principles to manage relationships and engage multiple constituencies. This is the essence of an emerging doctrine: Corporate Foreign Policy.
Corporate Foreign Policy (CFP) is comprised of a set of strategies aimed at protecting assets and employees from the damages of state intervention, building trust with local partners, compliance in challenging and sometimes irregular circumstances, and creating a network of incentives to gain access to opportunities. In broad terms, CFP is a values-based methodology that guides the decision-making process when business issues become intertwined with foreign relations among states and companies.
The origins of this doctrine can be traced back to the early governance challenges experienced by major trading companies in the Asian subcontinent in the 17th Century, who not only engaged in large-scale infrastructure building, but also were responsible for early versions of political administrative structures and judicial institutions. However, in later years, this link between state foreign policy and business interests would later produce serious conflicts of interest and social grievances, ranging from human rights abuses to corruption and economic nationalism. In response, international institutions such as the United Nations, the World Bank, and the OECD began elaborating standards and principles for corporate social responsibility, while legislatures sought to tackle corruption through frameworks such as the US Foreign Corrupt Practices Act or the UK Bribery Act.
A company that exercises a strong corporate foreign policy aims to avoid these kinds of problems before they begin, not through the favouritism of the embassy, but rather by conducting their own foreign policy, forming their own relationships, and aligning the company’s interests with those its local partners. Executives will have to overcome their traditional aversion to politics, transparency, and public profile, but the risks of laying low and hoping for the best are simply too high.
In today’s economy, the question is no longer whether or not corporations should have a foreign policy, but rather what principles should guide a corporation’s engagement abroad.
There already exists extensive literature on the values that a company’s foreign policy should emphasize, including respect for human rights, anti-bribery, pro-democracy, and access to remedies.
After six years of development, this past June the United Nations Human Rights Council formally endorsed Special Representative John Ruggie’s framework for Guiding Principles on Human Rights and Business, otherwise known as the Protect, Respect, and Remedy doctrine. These concepts are smart and well intentioned, however the CSR narrative has debilitating shortcomings in that it is 1) designed for implementation in a legitimate rule of law state, and 2) is overwhelmingly concerned with regulatory compliance.
CFP, on the other hand, is what is needed for companies operating in countries where the rule of law is an ongoing question, and where in addition to compliance issues there are also possible instances of the host government and competitors using unlawful measures against the interests of the company. A good strategy should be about more than just PR; it should be an actionable set of programs and relationships that are felt by local communities.
One of the great mistakes I see among many foreign investors is the unshakeable belief that a good relationship with a president or other political leader protects them all problems. But even the most entrenched and seemingly popular leadership can quickly change, and the next government may not be eager to offer the same conditions to a company that had ignored their plight for the previous years. It is a much better strategy to remain in touch with all political parties, interest groups, and civil society movements. A lot of CFP is inherently political, simply because you may be assisting civil society groups operating outside the government stream, however based upon the values emphasized by your company’s engagement with the people of the country as a whole, this should be encouraged.
When a foreign investor encounters difficulties in an emerging market, too much is made about foreign recourse and the imposition of foreign norms, sometimes to the point that it overtly backfires. There is a tendency on behalf of many general counsel to simply hire one of the big international law firms, when in fact so much more could be learned from a local veteran criminal lawyer, who would know exactly where all the fissures lie in the leadership, who you should (and should not) be doing business with, and how results are accomplished particular to the local system. Local remedies may often surprise. Finding good local counsel, local lobbying, and local public relations teams are essential to understanding the environment.
We are frequently surprised when meeting with new clients by how much more preparation should have been undertaken to prevent the problem. A foreign investor should understand and explore the full universe, no matter how unrelated it may seem, of local and international legal options, including the often overlooked areas of Administrative Law, Criminal Law, Environmental, Investment Law Review, Extra-territorial application of US/UK Law, Bilateral Investment Treaties, Human Rights, and Constitutional Law. For example, many corporations do not realize the potential leverage and benefit of lobbying in their home country to solve their issue, apply pressure, or even assist the host government in achieving a goal. Creative joint ventures under other flags – such as a partnership with an Indian firm – can overcome difficult issues overnight. CFP is all about thinking laterally to apply these different forces in a mutually reinforcing manner.
What a government wants, and what it may ask the foreign investor to provide as part of its CSR program, is often very different from the needs of the local community. The Chinese have experienced this several times in Africa, and have suffered a declining reputation among officials who do not appreciate unfulfilled promises. Corporations need to be doing a better job of listening to the needs of the local community, and focusing on doing more altruistic projects, rather just talking about them.
In a rapidly changing global economic environment, it is often too easy for principals to assume their good standing in a given market is unshakeable. However the reality is that it is not of question of if, but when, corporates need to put these policies in place.