Compliance risk in 'modern slavery' reporting

The 'business and human rights' phenomenon is about much more than just 'modern slavery' in corporate supply chains.

The potential for modern slavery practices to 'taint' the supply chains of formal, regular business is one form of 'business and human rights' problem.

This post makes a brief point about a form of 'compliance risk' that may not be fully appreciated as we move, in Australia, into the process of legislative enactment and implementation of reporting requirements for larger firms around the risks of modern slavery within their operations or supply chains.

By 'compliance risk' I do not mean familiar ideas such as the reputational, regulatory, legal or other risks possibly associated with non-reporting, poor or inadequate reporting, misleading or deceptive reporting (e.g. relative to internal processes of due diligence on the reportable risk).

I mean a risk that might emerge even if a firm has very commendable due diligence and reporting practices relating to the potential for modern slavery in its business and business relationships.

The 'compliance risk' I mean is a form of unintended blindness to human rights risks in the business's sphere even though these may not be modern slavery risks.

Thus the potential problem is that once firms are actively reporting on the risks of modern slavery within their operations or supply chains (since that is what legislative requirements relate to), those firms might pay less attention to other forms of human rights risk in their business models, forms that may have nothing to do with supply chains, or with forced labour or human trafficking.

Firms (and policy-makers, and civil society) will need to keep framing these overall issues more broadly than just the current 'hot topic' of modern slavery in supply chains, and principally by reference to the 2011 UN Guiding Principles on Business and Human Rights.

The 'business and human rights' phenomenon is about much more than just 'modern slavery' in corporate supply chains. In Australia, a focus on a possible Modern Slavery Act has obscured or may come to obscure (including in business's perspectives) the whole range of ways in which business might unwittingly or otherwise cause, contribute to or be linked to human rights problems.

I made this point in a March 2017 post on this blog, here, shortly after the Australian government announced its consultation towards a possible Act. 

Jo

@fordthought

See a recent post (May 2018) here on defining 'supply chain' in the Modern Slavery Act reporting context, and general comments in this post from October 2017 and this one from August 2017.

Compliance fatigue and sustaining sustainability

Is the proliferation of disclosure and reporting schemes capable of undermining efforts for more sustainable, responsible business?

Now, it is very hard to refute the merits of the 'disclosure revolution' on environmental, social, and governance (ESG) issues that has come in recent times at least to major Western listed firms.

The merits are fairly obvious. The more we and the market know, the better we can ascribe meaning to a firm's value proposition. The more a firm knows about its own ESG impact (through committing itself to data collection, analysis and disclosure), the better it can address potential disruptions and problems in its operations or supply-chain. Do well while doing good, etc.

The same goes for the proliferation of voluntary, hybrid or other multi-stakeholder, quasi-regulatory schemes for addressing issues ranging from a firm's impact on local insecurity to transparency around revenues paid to host governments.

In this light, the recent announcement by Unilever of a new human rights reporting and assurance framework is good news, and consistent with the due diligence elements of the UN 2011 Guiding Principles on Business and Human Rights.

One would hardly want to curb the energy and enthusiasm evident around institutionalising the responsible business agenda within corporate systems and cultures. Yet it was that announcement that prompts this week's post. Because there seem to be so many schemes and initiatives and regulations and conferences that I imagine the landscape now is becoming somewhat bewildering even to a well-meaning executive within a major publicly-listed firm.

(A related issue is the proliferation of single-issue charity, aid and advocacy groups: that industry now talks about engaging with business but might require some rather hard-headed business strategies to reduce the over-heads and donor fatigue associated with organisational proliferation, and focus instead on delivering social value 'at scale'. But hush -- the same could be said of proliferating blogs...!).

I cannot put a finger on it, but do think there's an issue with this flowering of schemes and initiatives, in terms of strategic considerations relevant to the business sustainability / responsibility agenda, such as the resources and attention-span and goodwill of corporate decision-makers.

Instead of carrying on further, I refer to a post from pre-Christmas 2012 (here), on proliferation and fatigue related to the many initiatives on responsible and sustainable business.

See too this recent piece in The Gaurdian on how over 2,500 different metrics are in use for measuring and reporting supply chain sustainability.

It is true that reporting on 'non-financial' issues can serve a commercial and risk-management purpose and is increasingly being incorporated into core business strategies; it is true that leading firms think beyond compliance to how the sustainability agenda can be an opportunity to create both social and commercial value; it is true that there is a counter-trend to this proliferation, where broader concepts such as 'materiality' are being deployed rather than  endless multi-indicator checklists and indices. It is true that the field is evolving and emerging, and this flowering of schemes and requirements may settle into something more sustainable and manageable without becoming complacent or quieted.

Yet this proliferation phenomenon is relevant (or is perceived as relevant) to compliance burden and cost, and so to the competitiveness of responsible business and finance (see here, a past post on regulation and values amid perceived strategic competition for access to markets and resources).

Now I believe there is no necessary trade-off between being responsible and being competitive when investing in developing regions. Indeed in time one might only be competitive through being responsible (and being seen that way).

Nevertheless the perception remains in those places inside firms and funds where it matters.

Those interested in promoting sustainable and socially responsible business practices ought to reflect more, I think, on whether the proliferation of schemes and reporting processes is confusing 'the means' with 'the ends' in ways that do not advance the end goals. 

Jo

See too this past post reflecting on who the audience is for corporate sustainability communications.

'Engage or fail'? Stakeholders in African investing

Africa investment risk advisers can sound good and play it safe by merely stating the obvious.

Yet the obvious is never pure and rarely simple. If it were otherwise, such advisers would find little demand for their services.

A recent report by FTI Consulting warns that investors in Africa risk failure if they do not 'engage' with government and social stakeholders: here.

Two remarks here. The first is that this is not new insight. The report calls itself -- and the strategy of engagement -- 'a new approach' to risk management in Africa. Well, not quite.

True, directly invested firms, especially in time- and capital-intensive sectors such as mining, have over time shifted towards seeking positive social impact, rather than just attempting neutral impact, mitigating negative impact, or not considering local impact at all. They have faced pressure to do so, on various fronts. To shift effectively they have had to re-conceptualise their relationship to host governments and communities. Some have also sought to see this embedded-ness as a value-creating exercise not just a risk-managing one. Still, it is a bold consultancy that presents as a new idea the notion that firms might further their objectives by engaging their host governments, and might protect and enhance their long-term value proposition by deepening their social license to operate through various forms of local inclusion, investment, outreach and disclosure.

The second remark is that consultants do their clients a disservice to simply state the obvious ('engage with stakeholders' ...) as if (a) the process of doing so will be self-evident, (b) the consequences of enhanced engagement are always manageable and foreseeable, (c) the identity of relevant stakeholders is clear and (d) these stakeholders are passively awaiting engagement by corporates and have no mixed feelings or motives of their own. None of these is typically the case in fact.

True, responsible firms with long-term plans in African localities would be well advised to pursue more deliberate, strategic and intensive stakeholder engagement. But the FTI report frames this as a risk-management strategy, when in fact the process of expanding and deepening links to host governments and social groups is neither easy nor risk-free. Few serious firms in Africa would read such a report and say 'Thank you -- it had never occurred to us to reach out locally'. They are far more likely to say 'Yes but it is hard, who is who, what do stakeholders really want, is this our role, where does it expose us?' and so on.

Reports such as FTIs make it seem as if not engaging is risky, but simply 'engaging' solves all social and political risks. That is far from obvious. 'Engaging' can itself become the source of (ok often manageable) risk. It assumes governments and communities speak with one voice, know what they want, understand firms' viewpoints, etc. Now these things are better handled by firms adopting an explicit pro-engagement mindset, actively seeking to find shared ground with authorities or other stakeholders, or delineating the extent of their responsibility. But merely calling on firms to 'engage with stakeholders' tells them nothing about how to do so, and suggests a far easier, smoother process than ever exists in fact.

I say all this partly because of my own fatigue (and my perception of generalised fatigue) at the constant refrain about 'engaging'. It heavily marks the whole area of sustainable / responsible business, and of cross-sector cooperation on development issues. My own blog goes on about it. So does a policy brief I wrote, published last week, on engaging the private sector in peaceful development in Africa. Yet I think a healthy dose of realism is required.

We use 'engage' as a short-hand, convenient phrase in the context of business-government-social relations because our intuition and ideals tell us it is better (for development impact, risk management, etc) than non-engagement. Yet it is far easier to call for than to do. Too few in my field seem prepared to admit this, as a recent post in effect noted, as did another post on enthusiasm for the act of public-private 'partnering'.

Last week's post made the same point in relation to NGO-business collaboration: on balance productive and advisable, but hardly a smooth ride.

Jo

Post-script:

The FTI report's mini-poll of WEF-Africa attendees does reinforce a good point: foreign investors in Africa have a long way to go in communicating better with / to local stakeholders. In previous posts (see 'Corporates, Communities, Communicating' here) I've noted that firms involved in the bumpy African growth story can improve their messaging about the nature of the constraints they face, their limited ability to meet social demands, the delineation of their responsibilities from those of government, and so on. High expectations of firms (individually and as a class) are a source of risk, both directly and in feeding arbitrary and/or populist-placating fiscal demands and regulatory actions.

Corporates, communities, communications

The inimitable, irreplaceable Nelson Mandela will be buried this week.

 

Despite his message (or because of his distinctiveness), very few South Africans expect the leadership that has followed to rise to the same level, but one thing both government and the private sector in his country will nevertheless continue to struggle with is managing the high expectations of especially younger people in terms of job-creation and service provision.

 

Questions of expectations management arose this week at the 'governance of natural resources' session of the Blavatnik School's 'Challenges of Government' conference I attended  in Oxford (here). This focus was somewhat natural since the conference theme looked at issues of people-power and access and accountability and legitimacy. Yet even if that were not the theme, any contemporary discussion of governance and resources in Africa would need to focus strongly on expectations management issues by communities, governments and investors -- especially in countries that have only recently made significant discoveries of sub-soil mineral wealth.

 

Managing community and other expectations in the extractive sectors is not solely about communication strategies, but they are a big part of it. Firms would be advised not to confuse rolling-out social investment and responsibility strategies with handling short- and longer-term expectations: mollifying expectations is not necessarily managing them.

The challenge is not just aligning with community needs and wants those initiatives and investments that firms think would be and look good. It is also to communicate in credible, accessible ways information that helps communities understand realities such as the long timeframes between discovery and production, and between production and profit, or the difference between government's duties and corporate responsibilities, with all the delicate and political balances involved where the host governments at various levels also face and hold high expectations.

 

Firms still tend to focus on external audiences (the market, or activists back in the first world) in terms of their efforts towards communication strategies on corporate responsibility issues; one question discussed at the conference was whether that focus needs to shift more towards firms communicating what they are doing, can do, cannot do, etc., to (a) local community and government audiences and (b) internally with the firm in terms of explaining social engagement issues in ways that are shown to protect and enhance, not distract from, longer-term shareholder value.

 

Moreover, corporate responsibility issues (beyond the more narrow phenomenon of CSR programmes) arguably lie at the heart of firms' risk-management and value-creation concerns, especially in some sectors. Yet in many cases the issues are dealt with as aspects of corporate communications -- non-core and essentially addressed to external audiences.

 

This week saw the publication of KPMG's annual survey of corporate responsibility reporting (here). This follows trends in reporting on corporate responsibility (by over 200 of the world's largest firms, and the 100-biggest firms across 41 countries).

 

This does not necessarily reflect trends in corporate responsibility practices per se, including how these practices or the issues they represent are treated by boards and executives within these firms. Nevertheless, by assessing firms' reports against several criteria (including whether and how a firm's reporting shows how its management governs responsibility / sustainability issues within corporate governance), the KPMG survey does offer some insight into the extent to which these issues may be migrating from the relative periphery to more core areas of strategic and commercial consideration. One sign of that might be where a firm incorporates these issues into its general reporting to the market, rather than (or in addition to) distinct responsibility / sustainability reports.

 

The report is worth a read. In an ideal world firms and governments are managing problems, not just managing (through communication strategies) expectations about problems. In the real world, the latter will continue to matter a great deal to firms invested in places where formal reports of the sort surveyed by KPMG do not necessarily speak to the issues that lead to political and security pressures on firms and the governments that host them.

 

Jo

 

The politics of business: 'crazy for good'

Politics, as they say, is a tricky business.

For companies this makes the politics of doing business in tricky places ... particularly tricky.

This is so even (or perhaps, in complex settings, especially ...) where a firm is trying to promote public good-spiritedness and aspirational values, typically in pursuit of its strategy for market position or building reputation / mitigating reputational risk.

Last week in Zimbabwe, Coca Cola found that its new can of Coke opened something of a small can of worms -- highlighting how even firms which adopt a studied neutrality on domestic politics can unwittingly find themselves forced to say where they stand on tense, changing local political issues, and in hard cases to make or avoid value-ridden judgments about which side of history they [may be perceived to] stand on.

The Zimbabwe issue arose as an incidental part of Coca Cola's global marketing / social awareness campaign 'Crazy for Good'. One feature of this is an adaptation of the standard red Coke can, altered to show open hands -- waving, reaching out to each other.

The problem (if it is one) is that in Zimbabwe, red is the colour of the Movement for Democratic Change (MDC-T); an open-palmed hand has long been its distinctive party symbol.

By contrast, its rival (Robert Mugabe's ZANU-PF party) is typically associated with the clenched fist gesture so often used by its long-time leader.

The 'Crazy for Good' / 'Open Friendship' campaign and its new Coke can happened to coincide with the lead-up to probable 2013 elections given that the mandate for Zimbabwe's dysfunctional post-2008 ZANU-MDC power-sharing government expires at the end of next month. Some over-sensitive ZANU politicians accused Coca Cola of blatantly aligning its brand with the MDC -- just in time for electioneering. The brand I suppose is typically associated, through the company's efforts over decades, with fun, freedom and friendship.

Coca Cola of course can easily refute the suggestion, pointing out that its brand colour has been red for decades and that this is a global campaign. (In a post-Arab Spring world in places with restless politicised youth one wonders how threatening some of the world's more paranoid and less secure leaders might find any new version of Pepsi's long-running mantra with its emphasis on a 'New Generation... !').

Anyway, the incident neatly raises the dilemmas that brand-sensitive firms can face in juggling neutrality on political issues (on the one hand ...) with their desire to align their brand with aspirational sentiments or universal values (on the other hand ...).

This dilemma is a subset of the wider difficulties global firms have in navigating local political turbulence, and often the strategic decision of whether to abandon pretence at neutrality, subtly re-align oneself for alternative possible futures, or hope that one's firm is not found exposed at the intersection of politics and business.

Coca Cola's recent full-page newspaper advert in nearby Swaziland raised some controversy -- it wished happy official birthday to the king of Africa's last absolute monarchy, which has strongly suppressed alternative political expression (even if the royal family as an institution retains considerable popular loyalty especially in rural areas).

Then there's a firm like South Africa's Nando's which took a different tack: one advert openly mocked Mugabe, resulting in threats to its staff in neighbouring Zimbabwe -- it withdrew the adverts, perhaps having calculated that Youtube hits would continue soaring and that the kudos in the SA market was worth whatever happened in the much smaller Zimbabwe one.

Close political ties can be handy, but also be a handicap ... That is, these issues are obviously especially acute in places like Angola where the local business elite (whose cooperation may, as there, be needed for any viable corporate strategy) is for all material purposes indistinguishable from the political elite. Relations, explicit or otherwise, that make things easy or which are unavoidable in the short term might carry with them long-term liabilities (whatever their implications on foreign corrupt practices laws and the like). Operating hand-in-glove with political elites carries both near-term reassurance and longer-term risks...; yet remaining even-handed can be difficult where one's brand or operation is singled out by either the incumbent or the opposition (or activists).

Greater demand for electoral democracy in sub-Saharan Africa means that firms which in the old days needed only to appease the incumbent may need to consider, for example, the risk that a change of administration might make them vulnerable where they are perceived to have 'taken sides'. Firms that have already sunk a lot of capital into a country or which hope to be there for a long time to come will need to strategise around the prospects of change and of the implications (there and abroad) of enforced lack-of-change.

Sometimes the risks are in plain sight; sometimes they are foreseeable even if unlikely; sometimes they take firms by surprise. In some cases, mere presence in a controversial country represents a value-based decision by reference to democratic or human rights norms -- or is seen that way.

In many cases, the firm's licence-to-operate and brand will emerge intact, perhaps only with a rap on the knuckles; most will be able to make a good fist of staying well away from political controversy. Firms that are newly entering have one set of dilemmas, but those with existing investments tied up in a country to some extent have one hand tied behind their backs in terms of backing down in the face of politicised counter-campaigns. The main consideration for brands with global exposure is an awareness of the importance of consistency across markets on value-based issues: the left hand needs to know what the right hand is doing.

Policy choices impacting the business environment can be highly political -- raising the question for business of when and how to explicitly join national conversations about such issues. In considering the role for socio-political leadership by business, this blog has referred for example to the dilemma individual firms face in South Africa in putting their heads 'above the parapet' rather than remaining silent. Speaking under the umbrella of a business chamber mitigates that risk. Note that this last week apparently saw a Guatemala business group criticising the genocide conviction of a former head of state: now that takes 'private' business engagement on public interest issues to a whole different level!

Jo

See the South Africa version of the Coca Cola 'Crazy for Good' campaign -- here.

See one (note -- mainly anti-ZANU) news story of the Zimbabwe-Coke story -- here.

See my earlier post on the Swaziland-Coke story -- here.

See the Nando's advert about Mugabe -- here.

See discussion in an earlier post of Coca Cola's entry into Myanmar -- here.

See discussion in an earlier post of (limited) reputational risk from mere country presence -- here.

Inclusive growth in Africa: the 'good-times gap'

Is there a name for the high expectations accompanying new major resource finds in sub-Saharan Africa? I will call it the 'good-times gap': the distance between what locals might hope to see, and the potential for a significantly less transformational outcome.

Last week I attended the 'Galvanising Growth' conference at Oxford's Blavatnik School of Government. Of the many issues that emerged, one stood out -- at least in the session on governance of natural resources.

One can approach that issue from many angles -- revenue transparency and management, conflict prevention, sustainability and environmental issues, or (which was the conference's intended overall theme) in terms of capitalising on natural resource wealth to deliver economic growth.

I think we all should have revised the topic explicitly to 'galvanising inclusive growth' and spent more time developing the points made by various speakers -- from Nigeria's finance minister to a senior Rio Tinto executive -- on the imperatives of local job-creation and appropriate sharing (as between investors, governments and communities) of both the revenues and responsibilities related to major resources projects.

On the Paul Collier-mediated resources panel, in my view one issue came through strongest: the problem of explaining, to those populations who should stand to benefit from newly-tapped resource wealth, the many caveats potentially involved in its realisation. The challenge is really one of education, of 'public relations' in its literal or deeper sense. Especially where youth unemployment is high, the disappointment from unmet high expectations can translate into political instability, or 'vuvuzela politics', resource nationalism and populist politics. Sometimes 'populism' is merely a call for fair terms or distribution, but it can have significant impact on investment. Poor information compounds it.

It is a problem shared by governments and firms exposed to the consequences. Often even the officials involved in negotiating deals may not fully appreciate the long timeframes and the potential for changed global conditions to substantially affect local projects, or other variables. Misapprehension is likely to be higher on the street. Listed firms are obliged to report finds or deals to the market. Increasingly, this information (often expressed in terms of billions of dollars of reserves or projected capital investment) is available in the host community. Yet its wider context may not be appreciated. Locals who receive news of a $1.2 billion dollar project may believe that this sum represents what will be transferred to government.

Many colleagues working in corporate external affairs, corporate responsibility etc., spend a lot of their energy on social impact / social investment reporting where the audience is the market, the potential regulator, the Western media or NGO world, all in the home country. Yet from a risk perspective, the main audience that suggests itself is perhaps in the host country where projects are actually situated. Major mining and hydrocarbons projects that have triggered many media headlines -- and boosted GDP growth projections -- seldom directly create as many jobs, at least for the less-skilled. Helping to stimulate local economic opportunities while addressing job-creation expectations will remain pressing challenges for extractive sector firms and their host governments.

If 'uncertainty' is an indicator for risk calculations, the uncertainty of host populations about what developing their resource entails is a relevant issue on which risk-mitigation and 'external relations' might focus. It is tricky: how do firms stimulate a national conversation about new revenue wealth and its management -- and in the process, say, manage overall popular expectations -- without either trespassing into government's zone or triggering its disapproval, or other unexpected consequences? How do firms align themselves with government education programmes, if any, on the new resource?

One other stand-out theme from the expert panels was this: the immense difficulty, whatever the design of one's policy, of implementing public policy generally. The humility that shared experience suggests we should harbour on implementation is not unrelated to the 'good-times gap': if policymakers should be more realistic about what is really do-able, one can see why there's a need to dilute the expectations of recipient / host communities about major resources projects.

As we know, and may come in future to see more starkly, greater awareness + unmet expectations = a source of instability risk for investors and governments. Yet from the perspective of a transparency activist -- of which there were a few at the conference -- these high hopes might also help fuel local demand for greater accountability on the part of state officials for the proceeds of natural resource extraction.

Jo

Various previous posts (for example, here) have dealt with dilemmas where the private sector attempts overtly to enter public policy debates in Africa.

Many previous posts deal with the related issue of firms 'educating' counterparts in government about their constraints or contingencies -- and problems with thinking of it like that.

Last week's post, including the Blavatnik conference link, is here.

Public policy, private leadership and social media

Does leadership always involve decisive overt action? When does good leadership by a firm on a issue of significant public interest suggest one stands back rather than steps forward?

We have just ended our annual 'Global Horizons' conference, where one of the most interesting panels looked at leadership -- and the communication dimensions of this -- in a 'wired world'.

Debate included not just social media as a tool of (and something impacting) states' foreign policy, but also the policy of social media firms in dealing with states using their platforms in this way, with censorship / self-censorship on content that affects public policy issues like security or human rights, or firms' policies in designing applications intended to promote popular participation in governance and accountability.

(The recent reaction to a Youtube video deemed offensive to Islam has of course given further impetus to these debates, discussed previously -- here).

The panel at our conference spoke about the risks and limitations of social media platforms, but tended largely to adopt the view that leaders (from whatever sector) who did not use Twitter and other tools risked losing the initiative. Nature abhors a vacuum, went this argument, and if one doesn't fill it with one's position, others could distort or swamp that position.

However, it strikes me that there will be cases where leadership by a private sector executive (or group of them) on an issue that has spiked in public importance might sometimes involve saying less, not more.

That is, contrary to the idea that leaders should 'not just stand there, but do something!', might there not be circumstances where the better position is 'don't just do something, stand there'...?

What do I mean?

I was running the Africa discussion group where some participants were interested in discussing South Africa's recent mining sector unrest. One issue that corporate leaders continue to grapple with in that country is how far and when to raise their head (singly or as an industry) 'above the parapet' on hotly-debated, highly-politicised issues.

I don't purport to have any particular insight or experience on the tricky question of how CEOs of big mining firms should show leadership on issues that appear to rise above labour relations and become part of national debates about livelihoods, access to essential services, free expression and so on. Business leaders played a central role in facilitating government-ANC negotiations that led to the end of apartheid and democratic elections -- how's that for 'private sector, public world' -- but this was principally a behind-the-scenes role. The mining (and wider business community) in South Africa has been internally divided on the utility of entering public debates on issues such as proposed mines nationalisation in that country.

There is a role for business leadership on public policy issues in Africa, especially (as my last post intimated) where governments are unable or unwilling to address, for example, social issues that perpetuate injustice (and might potentially disrupt business activity). Indeed, I can imagine writing many a post decrying the lack of private sector leadership on some issues. Moreover, CEOs are often entitled and probably well advised to put their side of a story that has entered the public domain in an acute or serious way.

However, I can envisage many circumstances where 'leadership' by corporate actors involves saying less, not more, on an ongoing issue.

The main issue in corporate leaders speaking out on public debates -- whether through loudhailer or Twitter -- will be credibility.

If that is so, most of the leadership that firms could show might amount to deeds, not words. So while big business in African settings may need to ensure its contributions and constraints are better appreciated in the wider community, I do not think this necessarily means an over-active media profile on hot, hard case debates. Often it may be more appropriate -- and safer for firms -- that officials lead on politicised policy issues.

I think of these lines in Rudyard Kipling's great poem on leadership, 'If':

'If you can keep your head when all about you
Are losing theirs and blaming it on you ...

... And yet don't look too good, nor talk too wise...'

Talking too wise can have difficult consequences for firms grappling public policy dilemmas (some social media platforms may not be amenable to wise talk ... ).

In the regions I cover, credibility will remain at a premium in the content of CEO communications -- whatever their medium -- on issues at the intersection of business, politics and society.

Jo

Resource nationalism and risk

This year a lot of my work has been helping firms navigate and anticipate the demands of governments and/or communities in African countries for a greater stake in natural resource projects -- mainly mining.

It's made me wonder about how we tend to think about 'political risk'.

The term one often hears with clients facing these demands is 'resource nationalism'. Now, the term is not particularly helpful: such demands partly reflect cyclical patterns (much of the 2000s was a commodities price boom), and so its hardly surprising that from Australia to Zimbabwe there'll be some seeking to re-adjust relationships for more favourable terms; the phenomenon is not limited to emerging or developing economies; and where a country's strategic longer-term interests are involved the term 'nationalism' seems pejorative, whereas its perhaps only natural that sovereigns move to protect their resources...

Also, the term is unhelpful because it suggests radical postures like the outright nationalisation of sectors experienced in Africa and Latin America in the late 1960s and 1970s (and sometimes since). Whereas what we see in the recent actions of governments such as those in Zambia, Namibia or Guinea may alarm investors and threaten margins and contradict existing agreements, but are not necessarily tantamount to expropriation or nationalisation. As I suggest below, in some cases we can understand these moves as mitigating, not increasing, longer-term investor risk.

I recently came across an in-house report from October 2005. At the time South Africa's parliament was considering a law compelling firms to process a portion of rough diamonds locally, in order to create more jobs. The report's title was 'Diamond law raises nationalisation fears'. But it struck me as wrongly stated: regulation like that makes full-scale nationalisation or other radical future action less likely, not more so.

In some cases -- Guinea is a good example -- new mining codes and revenue arrangements simply reflect a somewhat understandable readjustment of terms by newly-elected or post-conflict governments (facing huge development challenges and revenue shortfalls) after a generation or more in which unaccountable administrations did not necessarily pursue the wider national public interest in negotiating terms for the extraction of finite mineral resources, or were weakly placed to do this.

Sometimes 'resource nationalism' reflects nothing more than popular demand to see a greater share of natural resource wealth benefit the host country or community. Of course, the dynamic is open to abuse: Zimbabwe's indigenisation laws are an example of very small numbers of political actors using 'national entitlement' discourse to enrich their person or party; some accuse the ANC Youth League in South Africa of promoting mines nationalisation in recent years -- by invoking historic demands to ensure mineral wealth benefits 'the people' -- merely as a means to get the state to bail out distressed black empowerment investors.

However, in Zimbabwe's case the hijacking of indigenisation for political ends should not obscure how the notion that foreign investors should yield a greater share or show tangible livelihoods gains is a popular one in countries with high youth unemployment and levels of poverty. So on one level the term 'nationalism' is, after all, apposite to what is going on in many African mining jurisdictions, in the sense that it involves emotional issues as much as rational ones.

South African business leader Bobby Godsell was right when he said that ANC Youth League leader Julius Malema -- who has driven nationalisation calls there -- was giving some very bad answers to some very good questions. [See my subsequent post elsewhere on this: here].

One of the questions is 'how do we reach a proper balance between what is commercially viable in private sector investment, and what is publicly credible for communities increasingly conscious of the value of what lies beneath their soil?' These are difficult questions -- for one thing, South Africa's case is scarcely analogous to Guinea, or anywhere else -- but I wonder if many investors have misconceived political risk when it comes to the principle of the state taking a bigger stake in extractive projects. In the short term, such moves are ostensibly alarming. In the longer-term, when the state (and workers or communities) have a stake in a firm's success it can help stabilise the whole investment, grounding and legitimising it; the state then becomes a partner in the project in a more meaningful way, and when faced with local demands the firm can point locals to the government for answers, rather than dealing with creeping high expectations alone.

So when executives react to the state making noises about, say, a 'free' 10% stake in new exploration projects as indicating 'political risk', I sometimes wonder whether it isn't more risk-laden to believe one can enter on easy terms only to wake up three to five years into a project with the state demanding it all be renegotiated.

I often think that mining executives who 'high-five' each other for securing a good deal from an African mining jurisdiction might be unaware that there is such thing, in my mind, as a deal that is too good. If its terms seem very favourable but insufficiently match the local public interest, it seems almost inevitable that there'll be pressure to revisit the whole deal structure. Predictability is of high value in mining. In the longer term, a 'good' deal may be one that makes it very hard for even a populist government to justify alterations.

That is, one cannot guarantee everything and prevent every eventuality; but one can safeguard longer-term moves by narrowing the grounds on which host publics and governments can claim to not be getting a fair deal. Fairness may sound like tree-hugging in the hard world of mining. But a clear-eyed view of risk will often tell one that it is implicit in bargaining. Even Zimbabwe's self-interested ministers find it hard to sustain demands that are unfair for firms; but firms feel very exposed without being able to point to fair terms.

Renegotiation of terms can provide opportunities for firms (and others) to promote revenue transparency or tie further payments to improving social or national infrastructure -- perhaps providing greater insulation from accusations of extracting without truly investing.

Practical, country-specific manifestations of broader 'resource nationalism' ideas and trends are a big part of my 'day job', but also at the heart of what it means for the private sector to operate in an increasingly public world...