Investing in emerging markets? Civil society should be your friend

Investing in emerging markets? Civil society should be your friend

Conga project protests (Credit: Golda Fuentes)

Jenik Radon is Adjunct Professor of International and Public Affairs at Columbia University. He joins us at GAIM 2016 to discuss how the recent global crackdown on civil society can affect the bottom line for investors. We caught up with Professor Radon to get some background on the issue from his decades of experience in settling international disputes, advising political leaders, and advising and lecturing on conducting business internationally.

Should alternative investors become more responsive to civil society?

Simply put – yes. With corporate responsibility and culpability norms evolving to impose greater responsibility, even liability, on the private sector, alternative investors can no longer adopt a ‘hear no evil, see no evil, speak no evil’ approach.

Embedded in legalese, management reports or annual reports of investee companies may not accurately represent the state of affairs on the ground. It would not be incorrect to say that reporting on environmental, social and other human rights issues are treated as a box-ticking exercise. Given this, civil society voices can be a reality check for alternative investors – they can become the eyes and ears for institutional investors and help them cross the last mile by relaying information otherwise not available from traditional sources.

Civil society (which includes a range of actors from communities to non-governmental organisations to media) is often able to provide local knowledge, expertise, and access to other stakeholders. I can speak from personal experience of the value of such local expertise – when I advised leaders in Estonia during the independence movement. My engagement with civil society gave me on-the-ground knowledge. In fact, I am on record for predicting Estonian independence by 1992 and even EU membership. And I published my predictions in May 1991 when Estonia was still a part of the USSR. Estonia became independent in August 1991 and today is known as the land of Skype.

The importance of local knowledge and listening to all voices becomes especially obvious when institutional investors invest outside traditional markets in the US or EU with their established institutions for relaying information. In emerging countries, information is not readily available – who are the businessmen, what is their background? There are many reasons – lack of capacity or government control on information or just lack of information sources.

The information asymmetry is acute and the foreignness of legal, economic and social conditions in these countries can become a liability for institutional investors. Community protests in the extractive sector around the world, such as the Conga project in Peru or the Pascua Lama project in Chile are a result of companies and governments not listening to local community voices. Another example is the protests by Ogale community in Nigeria – where the community spokespersons lament that in spite of their efforts, officials from Shell are unwilling to discuss the environmental harm from Shell’s operations and compensation to the communities. The community is now suing Shell over oil spills and chronic environmental pollution.

Protesters against the Conga project in Peru (Credit: Golda Fuentes)
Protesters against the Conga project in Peru (Credit: Golda Fuentes)

Needless to say, in addition to legal and reputational issues, such protests directly affect the bottom line of multinational companies. For example, a report on the cost of community conflicts in the extractive sector concluded that a mining company loses USD 20 million per week of delayed production on account of community conflicts and so on. Companies such as Barrick Gold are shutting down operations or evaluating options to write-off the huge investment costs incurred by them in projects marred by community protests.

In conclusion, being responsive and listening to civil society goes a long way in understanding the local geopolitical and social circumstances, the business networks and the political and institutional structures in a country you are targeting for investment. As discussed, all of these are necessary to protect the interests of institutional investors and may not always be available with the management of investee companies. Further, in cases where alternative investors participate in the management of investee companies, they can avoid potential personal and other liabilities by gaining independent insights from civil society, which will help them in making informed decisions.

In short, alternative investors need alternative sources of information to make investment decisions. And civil society is that alternative source.

Can investors succeed in economies where information is restricted?

Depending on the assets underlying the investment, institutional investors can profitably develop any investment, in spite of the circumstances. But at what cost, with what effort and with what added risk? I would urge investors to take a more nuanced and sophisticated approach to this issue.

Lack of information prevents investors from undertaking effective due diligence on the local circumstances and their local partners and imposes significant additional costs on investors. For example, the lack of information and opacity relating to corporate information in Myanmar poses a challenge for multinational companies looking to form partnerships with local companies. In 2015, it was revealed that Coca Cola’s local partner and a member of the board of directors was also a director and shareholder of a local jade business, which was quite controversial (although there were no specific claims of wrongdoing on the part of Coke in this matter).

Similarly, investors investing outside their home countries in the US or EU often base their investment decisions on ‘economic fundamentals’ – in the absence of adequate and reliable information on different aspects, such as macroeconomic indicators, economic policies, legal and institutional frameworks, social conditions and so on. The information on these ‘economic fundamentals’ may not be sound. For example, industry analysts and economists lament the lack of adequate information on the underlying fundamentals guiding the GDP statistics in China, and caution about the potentially devastating fallouts from such opacity.

In this regard, a worrying issue for institutional investors is the increasing restrictions on civil society, NGOs and media, in different nations across the world. In countries as diverse as India, Indonesia, Bangladesh, Israel and Algeria, civil society has been forced to deal with unjust legal obstacles, in the form of severe restrictions on foreign funding, limitations on activities that can be undertaken by them, as well suppression of open reporting. These obstacles severely restrict civil society, with the result being their voices go unheard.

This is a serious issue for institutional investors, as it takes away one of their most important sources of information. Alternative investors have the responsibility not to intrude into civic space but they also need to do more. Given their important role in global economy, they are uniquely placed to shape the policy agenda and support civil society actors. There are multiple examples where companies have spoken out against state practices that infringe on civil society – for example, Tiffany & Co.’s call to the government of Angola to end the criminal trial of independent journalist and activist, Rafael Marques, who exposed corruption and other human rights abuses in Angola’s diamond ministry.

Thus, there is a strong business case for investors to actively engage on issues of transparency on the international stage.

Jenik Radon
Jenik Radon is Adjunct Professor of International and Public Affairs at Columbia University. He participated in the constitutional peace process in Nepal and served as a drafter of the interim peace constitution, which granted citizenship to millions of stateless people in the Terai region. In 1980, Radon co-founded the Afghanistan Relief Committee that sought freedom for Afghanistan and supported refugees displaced during the Afghan-Soviet war. Serving as an advisor during Estonia's independence struggle, Radon co-authored the country's foreign investment, mortgage/pledge, privatization and corporate laws and was an architect of Estonia's privatization. In 1990, he was the first to officially raise the U.S. flag in Soviet-occupied Estonia since the 1940 Soviet invasion and was awarded the Medal of Distinction of the Estonian Chamber of Commerce.

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