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Money Is Not Enough: Emerging Markets-Based Private and Sovereign Enterprises Need Strong Governance to Thrive in a Changing World

Like some emerging economy countries, some emerging markets-based private and state-owned enterprises (EMEs) that have had prior success and are financially strong are, at the enterprise level, in transitional phases. These EMEs:(1) are facing changing global and local economic and operating conditions;  (2) have newfound global visibility that invites greater public scrutiny; (3) have strategic, next level goals; and, (4) must navigate established and evolving standards of business conduct that are being set and enforced by diverse external constituencies and growing more material to the bottom line.

To adapt to changing conditions and advance their objectives efficientlyi.e., by proactively limiting reputational, commercial, legal and other risks and costs and capitalizing on opportunities that favor well-governed enterprises—these EMEs need not just strong governance, but entrepreneurial governance.

This note discusses: (1) some relevant changing global and local economic and operating conditions; (2) the roles and influence of external constituencies in today’s interconnected environment; and, (3) aspects, objectives, and advantages of entrepreneurial governance (relative to standardized, internally-focused corporate governance).Examples of entrepreneurial governance are provided, as relevant to EMEs that:

(1) are state-owned enterprises that are perceived to present risk by virtue of their government ownership;

(2) have interests in assets that are strategic, invite wide scrutiny, and/or are subject to foreign government approval (e.g., technology; food, agriculture, water);

(3) have goals that require strong governance (e.g., Middle East family owned companies considering IPOs or other expansions of investor bases); and/or

(4) are seeking business alliances with risk-averse, reputation-conscious entities (e.g., sovereign wealth funds or other asset owners seeking joint investments with pension funds or other institutional investors).

Changing Economic and Operating Conditions Compel Strong Governance

Absolute and relative economic gains in emerging markets in recent years have propelled many EMEs to the forefront of global business. With cash and willingness to spend and take on risk in a financial crisis-stricken world, many EMEs expanded, while many developed economy enterprises retreated.  Today, changing economic conditions—e.g., waning investment in emerging markets, sustained commodities price and demand declines, expected U.S. interest rates rises—may blunt EMEs’ financial edge.  As relative financial strength declines, strong enterprise governance will become more necessary and valuable as a competitive advantage.

In addition, as emerging economy nations take steps toward qualitative economic objectives, local legal, political, and market forces will compel stronger governance. For example, China’s clampdown on corruption and lax accounting/auditing within its state-owned enterprises will require those entities to improve their governance. Saudi Arabia’s recent opening of its capital markets to foreign investors will force affected companies to raise their governance quality. Notably, that result would align with Saudi authorities’ stated purpose of attracting “activist investors” to “allow [Saudi Arabia] to better align with best global practices and . . . accelerate [its] convergence to higher standards of corporate governance…”

Beyond the Four Corners of the Contract: Diverse External Constituencies Are Setting and Enforcing Business Terms

In today’s interconnected, rapid information flow world, the terms and outcomes of business are not confined within the four corners of the contract or driven exclusively by contractual terms or insider wishes. Today’s global business environment is participatory to the extent that diverse external constituencies—e.g., non-governmental issue or policy advocacy/monitor groups, transnational policy setters (e.g., the OECD), and the public at large—are part of a feedback loop through and from which business conduct standards are being developed, reinforced, and materializing as laws,[3] influential standards,[4] enterprise codes of conduct, and public advocacy (e.g., through social or other media).

At the business-to-business level, these standards are being enforced by reputation-conscious enterprises that are increasingly requiring partners, counterparties, suppliers, and others in their business orbits to adhere to standards that—while  variously purposed and styled—require or are the byproducts of strong internal and market-facing governance —e.g., transparency, responsible investment, ESG (environmental, social, governance), SCI (supply chain integrity).

The upshot for EMEs (and others) is that, to succeed in today’s environment, they must not only be good principals, but also desirable partners or counterparties. With entrepreneurial governance, EMEs can both: (1) avoid reputational and related risks that flow from unyielding or passive approaches to the realities of today’s participatory environment and (2) capitalize on opportunities that increasingly favor well-governed enterprises.

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