The current economic climate continues to be in flux, with many companies falling back to Plan C, which is hunker down and ride things out until the next Presidential election and hope for some clarity in 2020. This obviously requires continued perseverance even if your crystal ball remains murky. For US, multinational companies with a global focus, this challenge is doubly difficult given the instability of the government’s position on a wide variety of international issues, literally from day-to-day. Now add in the compliance practitioner’s responsibilities and you begin to see the difficulties moving forward.
I was therefore interested in a recent article in the Harvard Business Journal (HBJ), entitled “Globalization in the Age of Trump”, where Pankaj Ghemawat provided insights into how businesses might think about moving forward. I found many of the ideas useful for a Chief Compliance Officer (CCO) of a multinational to think about assessing not only the Trump effect on compliance but the inherent protectionism and what it might mean for compliance going forward.
The first key insight is that globalization has not gone into reverse. To be sure it has slowed somewhat but is still steady. The DHL Global Connectedness Index, which tracks international trade, capital, information and people flows, noted that for the latest year where data is available, 2015, globalization has slowed but not gone into reverse. The author believes this finding turns on two principals which govern commercial globalization. The first is that “international activity, while significant, is much less intense than domestic activity.” The second is that “international interactions are dampened by distance along cultural, administrative, geographic, and, often, economic dimensions.”
If you consider both of those principals from the compliance perspective you can begin to see some of the challenges which lie ahead for any CCO or compliance practitioner. The first is that compliance tends to be more robust where there is the greatest amount of business and for almost every US company that means in the US. The second challenge presented is that international operations bring on their own unique set of cultural, administrative, geographic and economic challenges not presented inside the US. I would ask each CCO to consider whether they have assessed, let alone addressed, your compliance program from these parameters.
The author went on to put forward three different ways for a business leader to consider moving forward under the current Trump administration uncertainty. For any CCO or compliance professional you should contemplate these approaches and then consider the compliance function response. Obviously, they present different risks but with the mandate to operationalize your compliance program as set out in the Department of Justice’s (DOJ’s) Evaluation of Corporate Compliance Program (Evaluation), this type of approach is warranted.
The first question Ghemawat posed is “Where to Compete?” and he noted, “in an environment of plunging commodity prices, dropping demand for globalization-related services, and, for U.S. companies, shifts in exchange rates—factors that clearly played outsize roles in the performance numbers. And longer-term declines over the past decade coincide with a period in which globalization actually slowed down.” Yet what he found lacking was any significant analysis of why there was any downturn in a specific market, using “a case-by-case approach in which a globalization-related move is evaluated on its own merits rather than subjected to some sweeping injunction about whether to go forth and globalize or to come back home.” However, even without such a rigorous assessment, “many multinational companies do need to pay renewed attention to where they compete—in other words, to market selection.”
This type of analysis would seem almost self-evident to any robust compliance program. However, without true operationalization of compliance my guess would be most compliance programs take a much broader global approach and consider the business in every market. The author believes that most companies have four top markets, including their home market, which generally accounts for up to 60% of corporate sales. This information allows a CCO to marshal the compliance resources for those markets, perform risk assessments which identify, analyze and address the compliance risks faced in those markets and manage them going forward.
From the compliance perspective, you might consider looking towards business “opportunities where they can find cultural, administrative/political, geographic, and economic affinities.” Such an approach would allow compliance to build upon existing structures and culture to more fully integrate compliance into the business planning going forward. This is the type of operationalization I think the Evaluation is designed to foster going forward.
The second factor Ghemawat puts forward is “How to Compete?” as your business may be required to use a mix of strategies going forward. Here he points to three globalization strategies he has previously articulated; “Companies use adaptation when they want to adjust to cross-country differences in order to be locally responsive. They use aggregation to achieve economies of scale and scope that extend across national borders. And arbitrage strategies are used to exploit differences, such as low labor costs in one country or better tax incentives in another.”
Your business answers to these questions will go a long way towards dictating your compliance response. But you will only know where to start if you are participating in these decisions or at least are aware of them so you can adequately assess the compliance risks. If it turns out that one strategy is more problematic than another from the compliance perspective, you can add that to senior management’s decision making calculus.
In one of his more interesting insights, Ghemawat also advised that beyond where and how to compete is the issue of engaging with the local society. Here he pointed to the backlash against globalization, both in the US and abroad as really a backlash against big business. He wrote that “Multinational companies need to craft governmental and societal agendas that are both localized and linked across countries. Anti-globalization pressures require that multinationals deliver more local benefits—and communicate about them—in the countries where they operate. Such efforts must go well beyond compliance to include contributions in the form of jobs, technology, and so forth.”
Not only does this final point speak to the greater requirements of a sustainable Corporate Social Responsibility (CSR) program but it also relates to the operationalization requirement by moving the compliance functions closer to the front lines of a business where it will be in a better position to do more business ethically and in compliance which can only help to win over local markets. This is yet another way in which compliance can be used to further business goals, make business more efficient and at the end of the day more profitable.
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© Thomas R. Fox, 2017