From China to Brazil, emergent nations claim one thing in common. They are fast growing and lure some of the largest firms to invest in them. A further pang of hunger comes from the West’s own slowdown.
It is hard not to be impressed by the vitality of these newer markets. UK firms for instance, now win over one quarter (28.2%) of their income from them. We can expect these markets to further increase five-fold, becoming larger than the developed world by 2050.
…the economies we currently call “emerging” are going to power global growth over the next four decades.”
The World in 2050, HSBC
Economist James Booth paints an equally upbeat picture:
The world is upside down. The emerging market countries are more important than many investors realise. They have been catching up with the West over the past few decades.”
Such hot sources for business pose questions about what it means to run a responsible business. What passes as legal in China for example, may be quite the opposite in the West. Leaders seeking to stay ethical often feel torn. They must stay on the right side of laws in their own countries. Meanwhile they must ensure sound business behaviour elsewhere. Often this brings them into conflict with local laws and culture.
A Deloitte study describes some of dangers firms must navigate in newer markets. This and other evidence suggest the known predators poised to strike are
- Mis-treatment of labour
- Political unrest
- Uncertain information by third parties
- Trade sanctions
- State protection
- Local regulatory changes
- IP protection
The first two of these are often the source of major reputation damage.
Mis-treatment of labour
While the UK bans children working in factories, this often happens in some developing countries. Even when a company is determined to operate a virtuous supply chain, to track down and end these situations can prove costly and time consuming,
For example, Apple’s code of conduct states the company won’t employ staff under the age of 15. However warned by outsiders, the company found one of its suppliers, Real Faith Pingzhou Electronics, employing seventy four children under the age of 16. 
Apple’s annual report – which monitors around 400 suppliers – uncovered children employed at 11 factories making its products. Some had been recruited using forged identity papers.
Other bad labour practices haunt normal business efforts to make the most of the business opportunities. They present a large compliance challenge to even the most organised entrants.
Bribery continues to be a major issue for executives. In the earlier mentioned Deloitte survey, paying off government ofﬁcials ranked as the greatest compliance and integrity-related risk by 40 percent of executives.
Most research shows executives feel ill-equipped to handle this issue and that their company struggles to “do what’s right.”
Political unrest is yet another fertile source of trouble. For example, an FBI informant, who once served time in jail for bribery and now lectures on issues to do with compliance suggests
In the developing world, governments sign deals for goods and services on a sporadic, infrequent basis-and a sudden upheaval, like a regime change, can scuttle the deal at the last minute”
Wall Street Journal, April 24, 2014
Even for large, well resourced companies finding solutions to political instability may prove impossible. Often the firm cannot wield sufficient influence at the local level to make a difference.
How can today’s business leaders create transparency and ensure an ethical climate in these challenging markets? Based on existing research here are the top 7 actions to consider:
TOP 7 ACTIONS FOR STAYING ETHICAL IN EMERGENT MARKETS
1) CULTURE: Create a meritocracy where performance counts more than who you know or what influence you can wield
2) RECRUIT: Select people based on how they can benefit the company, rather than through social connections and ethnic background
3) PROTECT: take a positive approach to whistleblowers to help stamp out bribes making sure they are not bullied or suffer undue pressure to stay silent
4) ASSESS: conduct prior risk assessments and due diligence studies to consider not only whether a proposed investment is feasible and lawful, but will also deliver a good return.
5) STRUCTURE: arrange investment to gain from available protections against expropriation, discriminatory conduct and intrusive regulations.
6) DISCOVER: identify local laws and culture using local on-the-ground advisers to counsel regularly about these issues.
7) LAUNCH: install a robust compliance program consisting of
i) Leadership – Only with the buy-in and commitment of the board and other senior managers will others make compliance happen
ii) Standards and controls – Based on the risk assessment devise measures to reduce the risks
iii) Training and communication – The compliance message needs to be fully disseminated throughout the business through training, codes of conduct and compliance manuals so people know what’s expected of them
iv) Monitoring, auditing and response – conduct periodic self-reviews and health checks to test compliance.
Emergent markets are like commercial catnip–hard for multinationals to resist. But the integrity risks make doing business ethically troubling.
Only by taking suitable defensive and diligent actions can ethical leaders avoid the risk of damaged reputation or coming into conflict with local cultures
On a positive note, there are many remedies available to tackle problem areas.
1 Look before you leap, Navigating risks in emerging markets, Deloitte, 2012
2 P. Melling and S. Mann, Emerging risks – growing compliance problems in emerging economies, Legal Week, 04 May 2012
Additional research for this post by Uriel Roth.
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