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Michael Shtender-Auerbach

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The Top 5 Socio-Political Business Risks for 2010

Posted: 01/13/10 09:30 AM ET

If 2008 saw the worst financial crisis since the 1930s, 2009 couldn't end fast enough. The question now is - what will 2010 bring?

We witnessed some encouraging signs of recovery in 2009. The United States inaugurated a President who vowed to bring "change," repair a fractured global (and domestic) economy, and further the global common good. Though the worst of the crisis appears to be over, indications are that many of the structural problems underlying the economic malaise remain. Now, at the onset of growth, corporations need to carefully calibrate their strategies while remaining conscious of risks that affect their standing and operations in a climate that will mercilessly punish those who move too fast - or those who move too slowly in taking advantage of the opportunities presented by the recovery.

As the weaknesses of the Western developed world have been exposed, the emerging economies of the global south and those to the east have begun flexing their muscles with new confidence. The rise to prominence in 2009 of the G20, which has all but replaced the G8, underscores the indisputable emergence of China, India, Brazil, Russia, Turkey and others to the top of the global player league. In 2010, those challenges will be magnified as Western companies confront not only their standing in the global marketplace, but also the values that have long underpinned it.

Below is a list of the top five sociopolitical risks that global multinationals must be aware of, prepare for, and confront proactively, lest they face the prospect of falling behind. Reputation and image management, and a proactive engagement with the challenges of the 21st century, are critical to ensure continued success in 2010.

Human Rights Risk

Human rights impact management catapulted into the spotlight in 2009 and will continue to be an integral necessity for existing corporate risk management processes.

John Ruggie, UN Special Representative on human rights and transnational corporations, continues to lead the debate through his extended mandate to guide multinationals on how best to identify and eliminate human rights risks from their operations. The aptly named "Ruggie Framework" outlines: (1) that the primary responsibility to promote and protect human rights and fundamental freedoms lies with the State, (2) that transnational corporations and other private enterprises are responsible for respecting human rights in their practices, and, (3) that access to effective redress of grievances for individuals and communities claiming abuse is essential for the promotion of human rights.

In 2010, multinationals will find increased pressure from governments, NGOs, stakeholders and shareholders to conduct human rights due diligence in order to effectively abide by Ruggie's second principle - that transnationals have a responsibility to respect human rights. In a climate where the state of the economy is precarious, companies may be tempted to play tough and cut corners without considering that this short-sighted approach may not result in sustained business success but rather lead to serious reputation and operational risks.

Corruption Risk

The year 2009 was "the most dynamic single year in the more than thirty years since the Foreign Corrupt Practices Act (FCPA) was enacted," according to Lanny Breuer of the Department of Justice (DOJ). True, The DOJ is currently investigating well over 100 separate cases and ended the year with close to 20 indictments. Corporate executives are scrambling to institute internal FCPA compliance programs, because the result of inaction could land senior executives in jail as well as impose huge individual and corporate fines.

Corruption and bribery have a pervasive and troubling impact on developing countries, since they distort public choices in favor of the wealthy and powerful, and reduce the state's ability to protect the social, political, and economic rights of its citizens. This fact is in many respects the driving force behind the increase in prosecutions.

And it's not just US companies that should be concerned. In 2009, US regulators sent shockwaves across the pond to Europe. Among the European companies targeted in the recent period were a Dutch pharmaceutical company, a Norwegian oil business, a German engineering giant and a British arms company. The latter case is by far the most interesting: when British authorities, citing national security concerns, dropped the investigation, US regulators upped the ante by claiming jurisdiction as the money flowed through American banks and securities exchanges.

All indications are that 2010 is set to be a record year, and corporate executives must institute internal mechanisms to prevent, detect, and remediate violations of the FCPA.

Tax Avoidance Risk

In many instances, developing countries lose more money to tax evasion than they receive in aid. Multinationals are increasingly coming under fire from NGOs, governments, and international agencies for avoiding their fair share of taxes and royalties in developing countries. When companies avoid such tax burdens, it makes it impossible for the host country to meet its obligations to its citizens - from housing to health care to education.

The organization Publish What You Pay (PWYP), a global civil society coalition working toward greater transparency in the oil, gas, and mining industries, succeeded in getting one of the world's largest mining companies - to voluntarily disclose tax royalty payments to thirteen of the countries in which it operates.

While tax minimization is in many respects a fiduciary responsibility for any for-profit enterprise, tax avoidance often results in unfair competition as large multinationals have the upper hand. In 2010, multinationals will be under increased pressure to disclose contractual relationships with sovereigns and in many cases may be forced to renegotiate their existing licenses to operate and pay their fair share.

Conflict Minerals Risk

It has been nearly twenty years since the "blood diamond" trade in Sierra Leone hit international headlines. Large multinational diamond merchants took advantage of lax government oversight and export protocols by purchasing directly from armed rebel groups that were responsible for the deaths of tens of thousands and displaced more than two million civilians.

The conflict minerals of 2010 are no longer the diamonds that bejewel brides throughout the West, but the minerals that make up the components in our laptops, cell phones, and MP3 players. It is likely that you own something that includes illicitly sourced metals.

The Democratic Republic of Congo (DRC) is still embroiled in the deadliest conflict since World War II - with close to 5.5 million people having died from war-related causes in the DRC since 1998. Rich in natural resources, Congo's illicit mineral trade - made up of gold, tungsten, tantalum, and tin (gold + the "3T's") - is directly responsible for the ongoing carnage that kills 45,000 people a month and results in countless rapes.

The US Senate as well as the EU have taken up this cause. In the Senate, two separate bills are under discussion, the Congo Conflict Minerals Act and the Extractive Industries Transparency Disclosure Act, which are set to force an industry to provide to its investors and consumers the locations of the source of its minerals.

In 2009, the UK company Afrimex was fined for violating OECD guidelines by sourcing minerals from the Congolese war zone. Global Witness and other international NGOs brought the complaint in the UK, which resulted in the verdict that Afrimex had "failed to contribute to sustainable development in the region and to respect human rights" and "applied insufficient due diligence to the supply chain, sourcing minerals from mines that used child and forced labor."

Multinationals in 2010 will be pressured (through legislation or activist networks) to conduct robust supply chain assessments to ensure their products are conflict-mineral free.

Climate Risk

One of the biggest risks facing the world today is climate change. The challenges it presents to the environment and the world economy at large are staggering. Increases in volatile weather have alarming impact on business resources, insurance markets and corporate vigilance. But it doesn't stop there: basic human rights such as safe and adequate food and water are threatened as well, with the poorest countries and communities being the most severely affected.

Our global water supplies are diminishing with the increase in drought, and approximately 1.1 billion people have only dirty water to drink, which increases the threat of malaria and other water-borne diseases. The biodiversity of our ecosystem is diminishing with the reduction of organisms necessary to maintain balance, and the warming of the oceans is leading to the extinction of many forms of marine life necessary to the survival of other forms of marine life, which could be catastrophic.

While climate change is one of the more profound business risks of the 21st century, it also presents opportunities for expanded business activity and cost reduction. Multinationals in 2010 must undertake thorough assessments of the probable risk exposure to the financial and competitive consequences of climate change and secure their position to take advantage of the enormous and endless opportunities.

Trending: Suicide Risk

While suicide is certainly not a top risk for 2010, it is an extremely important trend that multinationals must begin to take seriously. Stress caused by debt, drought, work/life balance issues, and corporate malfeasance have been blamed for incidents ranging from the mass suicides of Indian farmers (over 1,500 farmers in the Indian State of Chattisgarh alone in 2009) to the suicide epidemic that swept France Telecom and claimed 26 lives in 16 months.

Whether it's poor management, the economic crisis, or what Stockholm University in a recent study labeled the "contagious suicide syndrome," multinationals must realize they have a shared responsibility to take measures that will effectively prevent suicide from becoming an alternative grievance mechanism in the coming year.


Michael is Vice President of Social Risk Consulting at Control Risks.