Tag Archive: geopolitical risk

Directors Assess Long-Term Election Implications

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This is the second post in a series addressing the short- and long-term impacts of the 2016 presidential election. Read the first post here.

Directors gathered to discuss the impact of the recent presidential election on November 16, 2016 with audit and risk professionals from accounting firm EisnerAmper. While immediate-term changes were pressing on the minds of directors, they also discussed strategies to address societal and business challenges that coalesced around the following topics.

Can Corporations Bring Back Modern Manufacturing Jobs?

Directors were skeptical that the type of manufacturing jobs that have fueled American economic growth since the end of the second World War would ever return—and asserted that changes in trade agreements may directly impact the ability to create jobs.

peter-bible

Peter Bible

EisnerAmper Chief Risk Officer Peter Bible outlined how the developing administration of President-elect Donald Trump could affect the ability of American companies to export their goods. The Trans-Pacific Partnership (TPP) “is basically on hold now” said Bible. “He wants tariffs on China and Mexico, wants to renegotiate NAFTA, and reconsider the U.S.’s involvement in international trade agreement.” Bible also pointed out that the president can act unilaterally on trade agreements, thus negating congressional checks on trade decisions.

Jill Wittels, chair at eMagin Corp., voiced concern about the pace at which companies could replace factories to offset the impact of tariffs and build more jobs for Americans. “Imposing currency restrictions and tariffs on goods coming in from China, South America, or other parts of Asia would be highly disruptive,” Wittels said. “You don’t instantly create replacement factories in the U.S. at a comparable cost.”

robert-klatell

Robert Klatell

Robert Klatell, chair of TTM Technologies, concurred. “Realistically speaking, there is not that much flexibility. We cannot create in the United States the scale of manufacturing that exists in China,” Klatell said. “We don’t have the people or the capital to do it. We’ve rarely had a government willing to support manufacturing the same way that China has in the past 10 to 15 years.”

William Leidsdorf, director at Icahn Enterprises, offered a different viewpoint. “I think you have to look at how Congress may change or water down the president’s decisions,” Leidsdorf said. Trump “is a businessman. He’s a pretty good negotiator. He’s going to go in [to the presidency] and say he’ll do a lot of things and then negotiate.”

Educating the Workforce

Re-educating the American workforce has been a ubiquitous topic at roundtables co-hosted by NACD throughout 2016. This event was no exception.

sharon-manewitz

Sharon Manewitz

A vigorous discussion about the modern workforce was ignited when Carol Robbins, principal of financial services strategic advisory group CER Consulting, cited the invention of a garment-sewing robot as a groundbreaking technology likely to replace countless garment manufacturing workers around the world. Sharon Manewitz, principal and executive director at Manewitz Weiker Associates, a firm that consults with struggling companies, responded: “But who will make the robots? Will they be made here? We need corporate America to help educational institutions change the nature of education in America” to meet the demands of a knowledge-based economy.

The ability of the workforce to be retrained for modern jobs, and how automation will continue to disappear unskilled and lower-skilled positions, was discussed at length. Klatell, however, looked to the future. “Some people won’t make the transition, so we should be focusing on their children,” Klatell argued. “Hopefully, we can get their kids through school with a more meaningful education to make them more employable.”

Laurie Shahon, president of Wilton Capital Group, placed a board lens on some companies’ struggle to fill open positions in certain fields. “Human capital is an issue boards have to deal with,” Shahon said. “We see jobs available in financial services and other industries, but they can’t be filled because there aren’t sufficient qualified people to fill them. The board can and should present alternate cases in its strategy planning to address these changes.”

Deregulation Fallout

If Trump makes good on his campaign promises, deregulation is expected under the new administration and the forthcoming Republican majority congress. How long, though, can directors anticipate deregulated policies to last? Bible pointed out that the current administration might attempt to press through lingering Dodd-Frank provisions. However, he warned that deregulation could cause disruption. “These things are deeply rooted, with a lot of capital behind them,” Bible said. “You can’t just say ‘poof—gone.’ It’s impossible.” Practices that companies have implemented as a result of post-financial crisis legislation [such as the Dodd-Frank Act of 2012] are likely not to disappear as governance best practices because companies invested time, energy, and money to comply with them.

Meanwhile, directors in the room considered what impact deregulation might have on enforcement of the Foreign Corrupt Practices Act (FCPA) and other international business policies by the Department of Justice. Andrea Bonime-Blanc, founder of GEC Risk Advisory, reminded attendees that enforcement of the FCPA, the False Claims Act, and other laws has been on the rise lately. “People are asking, ‘What’s going to happen with FCPA enforcement?’” Bonime-Blanc asked. “Companies can’t just say ‘oh, let’s stop worrying about bribery.’”

Bible responded: “I believe that the FCPA will continue to be enforced as a worldwide standard, and that the new administration’s focus is going to be on executive compensation and on market regulation. I don’t think there will be an increase or a decrease in enforcement.” If anything, Bible indicated that directors should be concerned about the risk of tax repatriation from companies that have moved their headquarters offshore. “Is everyone familiar with how the overseas tax issue works?” Bible asked. “There is $2.6 trillion in money offshore, and $500 billion of that is held by tech companies. There are drives to get that money back into the U.S. economy that can be done without addressing the entire tax structure.”

Don’t Give Up on Culture of Inclusion

The social unrest incited or revealed by the vitriolic presidential election was discussed in the context of the culture of inclusion and tolerance that their companies have invested in building for decades. Aside of the moral imperative felt by many attendees, the disruption of hard-won corporate culture by internal or external actors could present a reputation risk to the company.

Wittels noted that a popular American shoe company had been endorsed by an incendiary website littered with forms of hate speech after a senior manager at the shoe company stated that it felt the country was moving in the right direction under the incoming president. While the company released statements strongly stating its commitment to principles of inclusion, “there are comments about boycott,” Wittels said. “This is a real reputational risk, and a risk with consumers, that could instantly in this communication age go viral and affect the bottom line.”

Klatell returned to the question of the board’s responsibility to ensure that the CEO, his direct reports, and management across the organization are responsible for maintaining a culture of respect, dignity, and inclusion. In the face of employees who may be looking to throw principles of inclusion out of the door, Klatell said: “I’d hope that most companies would stand up and say ‘No, this is what we stand for, and this is how we behave.’”

To see the full list of participants, please click here

At Roundtable, Directors React to Trump Election

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While President-elect Donald Trump worked last week with his transition team from the Trump Tower, directors met just blocks away at the Harvard Club of New York City, to address how in the aftermath of his election boards should begin preparing for what could be sweeping regulatory, tax, and social change.

(Left to right) Robert Klatell, Steven Kreit, and Laurie Shahon

(Left to right) Robert Klatell, Steven Kreit, and Laurie Shahon

Leading the discussion were EisnerAmper’s Chief Risk Officer Peter Bible and Steven Kreit, an audit partner with the firm. While the directors disagreed on the order and priority of policy changes, there was consensus around one point: Uncertainty will rule. Bible and Kreit suggested directors focus on in the near term and shared recommendations directors might take to remain agile in the face of politically driven risks.

How can a director prepare? Boards must engage deeply in strategy in the coming months. Anthony Buonaguro, president of the New Jersey NACD chapter and director of Enclave Homeowners Association, ignited a debate on whether or not boards will develop investment strategies focused on continued investment abroad.

Anthony Buonaguro

Anthony Buonaguro

“It resonated with me that we’re facing several years of uncertainty,” Buonaguro said. “Is this going to make boards more conservative? Usually there are two ways that people handle uncertainty: forge ahead as usual, or freeze. If it’s the latter, it’s not good for the economy or stocks. What are boards supposed to do to revamp strategy?” Kreit answered: “You have to put pen to paper and identify scenarios, then plan for them. Will you hit the scenario that happens? Possibly—or not. But if boards don’t strategize, they’re not going to get anywhere.”

NACD Directorship Publisher Christopher Y. Clark asked participants to suggest calls to action. Shaun Higgins, director of Aryzta AG and Carmine Laboratories, reiterated the importance of establishing strong enterprise risk management (ERM) practices. “I think you go into the board meeting and make strategic planning your number one ERM priority,” Higgins said.

Andrea Bonime-Blanc

Andrea Bonime-Blanc

Andrea Bonime-Blanc, CEO, founder, and director of GEC Risk Advisory LLC, jumped in: “I think the answer is to know what your top strategic risks are that need to be focused on.” Regarding specific risks, Bonime-Blanc said that when assessing the election’s implications, “We must pick the top five risks to integrate into business planning and factor U.S. geopolitical risk into our own strategic planning in a way that we never have had to before.”

The EisnerAmper hosts shared their near-term advice. “I can’t find a better reason for your companies to have ERM systems and processes in place,” Kreit said, noting that this is not the time for “mail-in” board members.

“I think this is a great time to start thinking about whether the people you have in the boat with you are the people you want to have in the boat with you,” Kreit said.

To see the full list of participants, please click here

What We Know

Kreit addressed what can be readily understood from the election. “There’s talk about what is going to happen, but no one really knows,” he said. “Board members should really be prepared for anything. Start thinking about some of the concepts Trump has been talking about, what some of his main areas of focus have been.” Work with management to address how the following, possible policy changes might impact business:

  • Anticipate inflation and its impact on cash flow and management, equity valuations, and borrowing abilities. While an initial jump in equity markets was seen, according to Bible, “the debt market got $1 trillion knocked out of it,” a sign of anticipation of inflation. Companies should begin scenario-planning for changes in borrowing ability.
  • Expect early review of tax policy. The dominance of the Republican party across Congress and the executive branch indicate the probability of perhaps even speedy tax reform.
  • Repeal or replacement of the Affordable Care Act. Some changes will come to the policy, and companies should be prepared to address its impact on their workforce.
  • De-regulation and repeal of the Dodd-Frank Act. Bible and Kreit anticipate the repeal of at least some Dodd-Frank provisions, and, at a minimum, a review of leadership at the Consumer Financial Protection Board.
  • Changes are coming to trade. One of the major planks in the Trump platform was a general desire to repeal trade agreements and impose tariffs on China and Mexico, as well as opposition to the Trans-Pacific Partnership. Bible and Kreit underscored the fact that one of the American executive branch’s unilateral powers is to control foreign commerce, which could lead to trade wars “that could trigger a recession,” Bible cautioned.

Kreit also outlined the timeline of key power changes in the White House and Congress:

  • December 19, 2016: The Electoral College convenes to vote.
  • January 3, 2017: The 115th United States Congress convenes.
  • January 6, 2017: Congress declares the president-elect.
  • January 20, 2017: Presidential inauguration marks the beginning of the Trump administration.
  • March-September 2017: Congress anticipated to debate raising the debt ceiling.
  • September 30, 2017: The U.S. government’s fiscal year ends, opening the door for Congress to address budgetary and fiscal matters.

These dates could serve as important milestones for developments impacting their companies.

“Back when we were determining a topic for this discussion, one thing I think we could all agree on was that this election could change the course of the country—and, potentially, the world,” Bible said in summation. “I felt very strongly that we should have this type of dialogue for one reason, and that’s because board leadership is essential for success. It’s a brave new world.”

A second post reporting from this roundtable addresses longer-term concerns raised by directors. To continue reading, click here

The US Election: Implications for Companies and Boards

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DJ Peterson

DJ Peterson

This is the third of a three-part series looking at the global economy and uncertainty in 2016 and 2017. In the first post, the challenges of slow growth in developed and emerging markets was addressed. The second post explored how political entrepreneurs such as Donald Trump have exploited voter anger over limited economic opportunity and the perceived inability of institutions and elites to solve problems. To dive deeper into election implications, join DJ Peterson and David Kistenbroker, Global Co-Head, White Collar and Securities Litigation, Dechert LLP, for a webinar on December 15, 2016. Members may register to attend here

On November 8, American voters extended a series of striking political surprises and rebukes that in 2016 began with the June referendum on Brexit and in October Colombians’ rejection of a peace deal with rebel forces. Looking forward, the success of Donald Trump raises questions about what will happen next in Europe when voters go to the polls in Italy, the Netherlands, France, and Germany in the coming months. Populism, nationalism, anti-globalism, and authoritarianism seem to be on the rise and time-honored principles and institutions are being weakened as a result.

In the corporate boardroom, disruption usually is thought of in terms of innovation, technology, and the competitive landscape—it is looked at as both opportunity and risk. And while board members are sometimes challenged to address economic disruption in business, political disruption is even more difficult to grasp and manage. Are board members asking the right questions? Are we creating the right scenarios?

Not surprisingly, NACD’s member surveys, as a well as discussions at the 2016 NACD Global Board Leaders’ Summit, reveal that a top concern of board members and corporate executives is how to navigate the tremendous economic and political uncertainty in the world today. A breakdown of broad-based consensus on free trade is a related concern.

Several megatrends driving the political disruption we are seeing include:

  • diminishing economic opportunities for the middle and working class;
  • a sense that urban elites—in government, the media, and business—are distant and not very concerned about the “average person”;
  • social media, which tends to play up societal challenges and divides;
  • and political entrepreneurs who look to capitalize on these trends of unrest.

This has played out on the trade issue. While lower barriers to international movement of goods and services help boost growth, the benefits are diffused throughout an economy while job loses often attributed to trade deals (wrongly or rightly) are concentrated in working class communities—making political mobilization easier. Social media, meanwhile, has helped reduce a complex policy issue to caricatures.

How might these trends impact long-term business and economic success in the United States in the coming years? Expectations are that the new Trump administration, together with the Republican-controlled Congress, will repeal a host of Obama-era laws and regulations, cut and simplify corporate taxes, and appoint business-friendly judges to the courts. These moves would be a boon for many sectors.

But Donald Trump’s populist appeal has also been derived from his willingness to blame countries for having unfair trade advantages; to publicly name and shame firms for sending manufacturing abroad; to criticize large mergers for concentrating economic power; and to target executives for opposing him. We don’t expect such appeals to end once Trump is power. He is likely to use such tactics from the bully pulpit of the presidency to bolster his position and “tell it like it is” personal brand.

Economic populism is one area where activists on the left are likely to be cheered by Donald Trump’s presidency. They certainly have been willing to name and shame companies for actions that they see as out of line with public interests.

This is where board oversight is important.

Directors can pressure test management’s assumptions about the political implications of their actions. Directors should urge management to consider what the political risk implication of the company’s actions are. For example, how will decisions about outsourcing operations, finding tax advantages overseas, or cutting job-training programs and hiring foreign workers be perceived? Will they land the company in the headlines?

Directors can ask management questions about strategy as well:

  • How are we identifying trends and disruptions that may affect the business?
  • Are we integrating political assessments into risk management—regarding, for example, currency, regulation, or supply chain strategy?
  • Are political risks considered as part of our strategic planning processes?
  • Are we considering a range of scenarios and market impacts for a country or an issue?
  • How are we monitoring and reassessing developments? Do we have good information?

Focusing the board lens on the bigger picture, in today’s populist, volatile political world, companies can no longer merely defend themselves against risks and criticize government policies and social activists. Rather, public-private cooperation is needed now more than ever.

At the 2016 NACD Global Board Leaders’ Summit, participants heard about conscious capitalism—shorthand for the many ways companies can make money by doing good for societies they are embedded in. Many proactive business leaders are looking for opportunities to be a part of the solution to the challenges spurning the disruption—from raising hourly wages to hiring and training refugees, to investing in underserved communities and making healthier products. Fostering long-termism is another way that companies can contribute to this aspect of the movement.

Many such initiatives are the results of a CEO’s passion and they often get relegated to the corporate social responsibility portfolio. It’s not hard to name firms and executives that get kudos for one socially responsible initiative but come under withering criticism for major failings in other aspects of their business.

For conscious capitalism to be a meaningful response to recent geopolitical disruption, incentives and priorities must be changed throughout the organization. This is stimulating a rethinking of corporate governance—the core values, norms, and rules that drive corporate behavior. Directors can help ensure long-term, conscientious response to populist pressures on businesses by asking: What is our ultimate mission? What are we doing to help solve today’s problems? How do we maintain and enhance our social and political license to operate?


DJ Peterson founded Longview Global Advisors in 2013. Longview Global Advisors is a consultancy that works with clients on a range of tasks that include strategic planning, market intelligence, thought leadership, and executive positioning. Business leaders and investors turn to Longview Global Advisors for a relevant worldview, and Peterson helps them monitor and make sense of the political, economic, and social trends they care about.