Managing Regulatory and Political Risk
Posted by | Fuld & Company
In our paper The Global Economy’s New Frontiers, my colleague Nathaniel Emmons and I argue that when investing in emerging economies, companies can realize high returns but only if the risks are successfully managed. Transnational mining companies operating in Zimbabwe, for instance, are in crisis management mode following this month’s coup, impeachment of President Mugabe, and transfer of power to yet another strong-man. Not an unanticipated series of events given the political instability experienced in recent years, and something that needs intense effort to navigate.
That’s way over in Africa, one client recently said to me, waving away any need to actively manage the risk of political and regulatory uncertainty in western nations. Wrong conclusion.
Mergers and acquisition policy. The reversal of technology rules. Immigration edicts. Let alone health care policy and the rush to install new and unilateral tax policies. More indirect than a military coup but equally impactful to business operations and strategies. And all found in what we once considered the bastion of stability, the United States.
What’s an executive to do? Hint: it goes beyond lobbying.
Create contingency plans no matter what your experts tell you
It’s easy to see the events leading up to a coup to oust a 93-year old president, but the Trump administration’s attempts to scrap an $85 billion acquisition – AT&T acquiring Time Warner – presents few indicators. Such vertical integration has rarely been opposed by policymakers, as noted by AT&T General Counsel David McAtee when he called the lawsuit a “radical and inexplicable departure from decades of antitrust precedent.” Yet, as Ken Brown writes in the Wall Street Journal, “The flaw in Wall Street’s thinking was that precedent would hold in an administration that doesn’t highly value precedent.” As investment managers are fond of reminding us, past performance is not indicative of future results.
Planning for contingencies is necessary regardless of the anticipated outcome. We encourage our clients to employ several risk-mitigation approaches, including scenario-based planning, competitive simulation exercises, and others, to ensure that the full breadth of possibilities is considered and planned for, regardless of the anticipated outcome. In today’s world, the environment is too tumultuous to gamble.
In a move that can only be seen as contrary to the administration’s action against AT&T’s acquisition of Time Warner, Federal Communications Commission Chairman Ajit Pai announced plans to fully dismantle current net neutrality regulations. This move is a victory for the telecom industry, and likely to benefit firms such as AT&T and Time Warner.
This move is less a surprise as Pai promised to take a “weed whacker” to federal regulations, slashing rules on media ownership and giving major companies a leg up on using the internet for advertising and content. A federal appeals court had upheld the current net neutrality rules in June 2016, siding with the FCC against a challenge from AT&T and industry trade groups. Head spinning, anyone?
The customer comes first
When Hollywood stars begin to advocate, you have a challenge to manage. For instance, television personality Alyssa Milano went to Twitter to advocate against FCC actions regarding net neutrality: “I know. We’ve faced a lot of issues threatening our democracy in the last year. But honestly, the @FCC and @AjitPaiFCC’s dismantling of #NetNeutrality is one of the biggest.”
While the action is being taken by the administration, Pai doesn’t have customers to worry about, corporations feel that blowback. Executives need to develop policy that includes an analysis of the customer, whether consumer or business, and articulate that policy appropriately and proactively to address grassroots pressure. A former financial services client after 2008’s home mortgage crisis relied exclusively on political lobbying at the state and federal level and was surprised to discover what an executive called “a flank attack” from customers. Not being in tune with your customers is often the beginning of the downward spiral.
Our clients are provided with qualitative and quantitative survey tools and techniques to allow them to assess customers’ stance on policies as well as to gauge demand for services. The resultant analysis and insights, together with input from government affairs and investor relations executives, allow companies to craft coherent policies that address numerous stakeholders.
Shifting health care and immigration policies, and the reversal of such from the relative stability of previous administrations, pose additional concerns for today’s executive. The required actions remain the same:
- Develop and analyze various scenarios to consider contingencies and craft plans, even if (or especially if) your experts think they know the likeliest outcome;
- Anticipate inconsistency, as political leaders can govern on intuition and whim;
- Focus on your customer, and relentlessly assess – using structured techniques – the appetites and concerns of your target audience, so you can form appropriate policies, proactively address challenges, and deliver products and services that are in demand.
We all see the necessity of undertaking these steps for operations in emerging economies, and our clients regularly realize the benefit of the analysis when investing in Africa, Southeast Asia, or South America. It’s more difficult to accept that we also need to take these actions when operating in the U.S. Today, stability requires our active effort.