Corporate foreign policy

Dr Peter Davis

October 10, 2013

Developing economies continue to be a core feature of global exploration efforts. Dr Peter Davis looks at managing political, societal and ethical risks in such regions.

As Dick Cheney once observed, “the good Lord didn’t see fit to put oil and gas only where there are democratically elected regimes friendly to the United States.” As extractive companies increasingly find themselves exploring business opportunities in—to quote Dick again— “places where, all things considered, one would not normally choose to go,” they find themselves facing a raft of new and unfamiliar challenges.

Most obvious is political stability— quite simply, is the person or government with whom a deal was transacted likely to remain in place? If not, is a likely successor minister or government likely to honor the deals already in place? However, even if a government is stable, and legal, other structures may not be in place.

Regulatory frameworks will often be challenging; in the Democratic Republic of Congo (DRC), for example, mining regulations are virtually non-existent. Similarly, rule of law may be weak, and so contracts and other legal frameworks may not be enforceable in practice.

Getting these issues wrong can be very costly. First Quantum owned the Kolwezi copper and cobalt tailings project in south-eastern DRC. The company had spent a reported US$430 million preparing the commercial production. In early 2010, the company’s licence was revoked for rather murky political reasons.

A country’s ethical and social norms, ethnicity and religion, also pose challenges. What are the relationships and tensions between different groups? Is it possible to operate to international standards in relation to health and safety?

Is corruption a concern, and if so how can an investor avoid activities that may, for example, lead to prosecution under the US Foreign Corrupt Practices Act? Do local norms disadvantage women, specific ethnic groups, or other elements of society?

Finally, companies have to deal with problems associated with infrastructure. Transport links can often be poor or non-existent, outside major urban centres, and power supplies can be erratic. “Soft” infrastructure will frequently be problematic—in many countries weak education systems fail to provide companies with adequatelytrained potential employees. Commercial and other links, in order to access local goods and services, may also be absent.

Emerging good practice

Operating in countries like this is not new. Those companies who have been doing it for a long time have developed ways of dealing with the challenges they face.

Anglo American, for example, has developed a socio-economic assessment tool (SEAT) to increase site managers’ understanding of the needs and priorities of local stakeholders and of their social and economic impacts.

Notwithstanding the difficulties they have recently experienced in America, BP has been a leader in understanding and managing its impacts in emerging economies. In Azerbaijan, for instance, the company invested in a business development center to develop local businessescapable of providing goods and services for BP’s operations.

At a global level, approaches have been developed to help companies address issues they face in emerging markets. The Extractive Industries Transparency Initiative was developed to deal with corruption in payments by extractive companies to governments. The Voluntary Principles on Security and Human Rights provides companies with guidance on the use of security forces at their sites.

Corporate foreign policy (CFP) and socio-economic due diligence

There is still a need for a more systematic approach— to place the understanding and management of social, political and ethical issues on an equal footing with more “traditional” issues, such as technical solutions, legal structures and financing, when planning and implementing new country strategies.

In developing new operations, companies are very familiar with due diligence. Yet, why is there no analogous process of socio-economic due diligence? It is at least as likely, probably more likely, that a venture in a developing country will be derailed by a problem emanating from local societal issues than from any other cause.

The starting point is to understand the context of the country in which a new operation is planned. Companies do not have to start from scratch. Bilateral and multilateral donor agencies, such as the US Agency for International Development, or the British Department for International Development, will have detailed country plans based on analysis of the country’s needs.

The next step is to assess what the likely impact of a country’s development challenges will have. Questions might include:

How might a poor skills base in the country hinder potential for expansion? How might procurement processes or hiring strategies perpetuate labor abuses, gender inequalities and ethnic tensions?

How might a company operate in such a fashion as to support a domestic government’s effort to reduce graft and corruption?

How might a lack of capacity in key government ministries hinder an ability to obtain key approvals or licences for operations?

In what ways might security procedures need to be modified in order to take account of local tensions and efforts to manage them?

By asking questions like these, a company is able both to understand how the development context is relevant to its business, and formulate challenges that need to be addressed. Simply, a company can create a “to do” list of issues which need then to be addressed as part of day-today management processes.

The challenge of making CFP work

What stops CFP from being general practice among companies operating in emerging economies seems to be that companies’ existing structures do not cope well with understanding and managing complex societal, ethical and political issues.

Many companies, especially those with a strong technological background, such as oil and gas operators and contractors, rely on quantitative systems and spreadsheets to manage their activities. When dealing with essentially qualitative issues, such as politics and society, this approach is not helpful.

Companies also need to consider the skills and aptitudes of their employees. Oil and gas companies generally hire and promote people on the basis of technical competences—be that as an engineer or project manager.

CFP requires people able to cope effectively with less tangible issues, and to take decisions on what will often be incomplete and imperfect information. Managing societal issues also requires the ability to deal effectively with very different and often challenging groups of people—tribal peoples or military forces, for example.

Companies therefore need to hire staff on the basis of their abilities in non-technical, as well as technical, disciplines. Furthermore they need to train and promote on the ability to manage societal relationships effectively, and see this set of skills as being as important as capabilities in other areas.

Developing economies are complicated places. Politics, religion, ethnicity, ethics, and history all conspire to create an environment difficult to understand and in which to operate. CFP, and the process of socioeconomic due diligence, are designed to distill that complexity and identify the key challenges.

Companies operating, or seeking to operate in developing economies need to adopt this approach, and to prioritize the management of socio-economic issues, alongside the more usual technical and financial considerations. OE

Dr Peter Davis is a member of Henley Business School’s visiting faculty. His research focuses on the role of multinational companies in conflict zones, and his book, Corporations, Global Governance and Post-Conflict Reconstruction, was recently published by Routledge. He was educated at the Universities of Oxford and London.

BP and Statoil review Algerian security

Dealing security risk, even in more developed countries, was brought into stark light following the January 16 attack on the BP/Statoil operated In Amenas gas plant in Algeria.

Forty people were killed in the attack. Statoil, five of whose workers were among the dead, said in a report, published in September, neither it nor BP could have prevented the attack, but questioned both firms’ reliance on Algerian military protection, which had not detected or prevented the incident.

It also said security measures at the site were not constructed to withstand or delay an attack of the scale that occurred. Statoil has established a security risk management system, but, it says: “The company’s overall capabilities and culture must be strengthened to respond to the security risks associated with operations in volatile and complex environments.”