Business Risk April / May 2010

Overview of Asia

Act now to mitigate these common factors

Managing and growing a sustainable business in Asia can present unique challenges to foreign multinational corporations and overseas investors.

The recent global economic downturn and continued volatility on the world’s financial markets has exacerbated these risks. Yet Asia still offers the greatest opportunity for growth. Many firms will become entangled in difficulties simply because they lack comprehensive and relevant risk-mitigation policies, or because they have failed to conduct effective due diligence.

The informed investor and corporate management will already be aware that risks in Asia are more considerable than in their home countries. This is due principally to a number of unpredictable variables, including non-transparent business environments, poorly developed and still-evolving legal systems, insufficient and unreliable information upon which to make informed decisions, and rapid and confusing change.

We recently reviewed a number of major issues and crises that we helped clients resolve and identified a number of common factors in these situations. Significantly, in each of the cases studied the same key factors (see below) were present in one combination or another and had a major bearing on the problem. We believe that any multinational corporation with three or more of these factors therefore runs a higher risk of a significant corporate crisis, corruption exposure or the potential for massive fraud. Such organisations would be wise to act immediately to focus their resources, both internal and external, to identify and mitigate such risks.

For foreign companies to succeed in Asia and other emerging markets, it is critical that they understand clearly where the actual risks lie and take robust measures to diminish these risks. Risk mitigation is not a quick fix but a continuous process that necessarily evolves apace with the development of an organisation and its environment.

Organisational and structural factors that increase multinational corporations’ risk profile in Asia:

  • Matrix management systems
  • A recent business process re-engineering exercise or significant restructuring
  • Expatriate management rotated every two years or so
  • High local staff turnover
  • Internal controls are insufficient or not appropriate to the Asian environment, such as not allowing for chops at firms and local or national practices
  • Overdependence or over-reliance on technical solutions or on apparently sophisticated controls, while failing to allow for the real risk of collusion among internal staff, resulting in the compromise of such systems
  • Insufficient pre-employment screening of employees and permitting recently hired executives to recruit personnel in complete “tribes” from their previous workplace—their loyalty may not lie with the new employer
  • Anti-money laundering programmes that are wooden or not relevant to the local circumstances or the actual threat
  • External accounting procedures that are weak, or the use of external auditors who have little or no experience in the industry
  • Internal audit staff reluctant to confront local management for cultural reasons, especially in Japan
  • Previous early warnings or minor frauds that had been covered up for internal corporate or political reasons, resulting in a corrupt culture
  • Overall low staff morale, probably due to a combination of all the above factors, resulting in an unhappy workplace