Expert Commentary

Country Risk Management: Removing Board Blinders

At a board meeting of a top 20 multinational corporation, the question of whether to invest $50 million in a project in a Middle Eastern country was discussed. The president of the company's subsidiary who was seeking the board's approval insisted that the country was a safe place to invest because of its recent history of economic and political stability. Satisfied with the president's assurances and facts, the board approved the investment—a decision they came to regret.

Political Risk
September 2009

As it turns out, the country in question was not as stable as it was portrayed and the company's investment is now tied up in costly legal limbo, which has had far-reaching and potentially damaging implications for the company's brand and reputation.

To make matters worse, the interests of some of the actors involved were not directly aligned with those of the company. The corporate underwriters were incentivized to promote the deal internally so they could meet their production targets. And, while the underwriters sought the views of the country risk manager charged with vetting the transaction, a large portion of that analysis was deleted from the final version that went to the corporate risk manager for final approval before being given to the president. Neither the corporate risk manager, the president, nor the board of directors knew this had happened and believed all necessary approvals had been obtained in the manner previously mandated by the board.

Inherent Failure of Internal Risk Analysis

This is just one example where the due diligence process in place failed to alert decision makers to the risks associated with their international business operations. As is illustrated by this real example, companies often rely exclusively on their own risk management processes, which they believe are bulletproof, but which may in fact be riddled with holes, inconsistencies, and contradictions. Clearly, the company's risk management function and, more specifically, the final version of the country risk analysis, were faulty. Without data or insight of its own, the board was too reliant on the company's assessment to make an effective decision and fulfill its duty to protect the interests of the company and shareholders.

If the board had been better educated about the economic, social, media, and political situation in that country, it may have been able to identify the errors in the assessment it received. The board may then have forced the company to conduct more thorough due diligence before requesting a vote, rejected the request outright, or made the approval conditional on receipt of the company's plans to mitigate and address the potential risks.

Problem Areas

The above example is far from extraordinary. In the last couple of years, a number of high-profile international investments have faced serious unanticipated obstacles to success. For example, to name just a few:

  • A prominent private equity firm's ability to monetize its investment in a Korean bank was jeopardized by political and popular resistance there.
  • A Middle Eastern port operator's management of a U.S. asset was derailed by political opposition.
  • An Australian mining company's executives were jailed in China.
  • A major beverage manufacturer's products faced concerted rumors of contamination in South Asia.
  • In Venezuela, there have been numerous nationalizations among multiple industries.

Expanding the Board's View

As company operations and holdings continue to expand into all corners of the globe, decision makers too often pay too little attention to specific country risks and other matters of crucial importance. Boards of directors are particularly vulnerable to this glaring oversight due mainly to a lack of direct insight into a particular country—which leads to an inability to discern fact from fiction—and not knowing the right questions to ask of corporate management.

Look at the Board Composition

How can boards make better decisions with respect to country risks? One place to start is in the composition of the board itself. Too often, board members are selected from a small group of high-profile, well-connected, and prestigious individuals who may not have relevant experience in foreign investments or operations and who may not want to appear ignorant about a subject matter being discussed, so they may fail to contribute meaningfully to board discussions.

Company management should emphasize experience and knowledge when selecting board members. That said, it is difficult, if not impossible to find individuals who have direct and timely experience in every country that may be an investment target for a large corporation.

Look at the Risk Management Procedures

Another solution is for boards of directors to press companies to regularly update their own risk management procedures and insist on instituting appropriate checks and balances. Given the competing interests that may influence an internal risk management team, a better solution is to look outside of the company's country risk management function and insist that either the company hire an independent third-party assessor or, ideally, do so themselves.

A qualified third-party can conduct regular risk management audits that test and stress the system, provide insights into the target country that incorporate political, economic, and social risk, and thus can provide board members with unbiased information, empowering them to ask the right questions.

Ultimately, a company's and board's ability to successfully address risk rests with the establishment of a sound risk management process that creates an environment conducive to effectively managing risk. An essential place to start is to establish an effective in-house process to analyze country risk. This should include:

  • Country exposure limits and an accurate system for reporting country exposures
  • A country risk rating system
  • Regular monitoring of country conditions

Look at Internal Controls

Adequate internal controls and an audit function can give management the ability to stress test foreign exposures and engage in scenario planning. It is important to establish clear tolerance limits, delineate clear lines of responsibility and accountability for decisions made, and identify in advance desirable and undesirable types of business in which to be engaged. Policies, standards, and practices should be clearly communicated, and enforced, with affected staff and offices. Reporting should be imposed at least quarterly—more frequently if foreign exchange exposure affects a given investment.

Look at the Board/Management Relationship

Especially when considering international business operations, the underwriting and pricing process should be viewed as collaborative, seeking the affirmation of others in the decision-making chain. Unfortunately, even when a problem is identified, boards are sometimes reluctant to confront management. Candor often gets lost in the politeness of board proceedings, and too often, boards are focused on building consensus, which inhibits due diligence and proper risk management. By remaining polite and silent, boards can do more than contribute to monetary losses and they may unwittingly cause reputational risk, often with long lasting and severe consequences.

Look Very Closely at the Prospective Country

Regardless of the course that a board may choose to make better decisions, there are a number of factors they must consider in addition to the straight financial, legal, and regulatory assessments:

  • The political landscape, including election schedules, the current government's composition, and the strength and platform of the opposition
  • The media landscape, including the editorial position of the leading dailies as well as of the most popular and populist outlets
  • The relative strength and fervency of advocacy groups, including labor unions and nongovernmental organizations
  • The target country's relationship with and attitude toward foreign investment and the company's country of origin
  • The regional political and economic climate

When looking at these different data points, a board will be better attuned to the potential for unexpected obstacles and problems, and can look for warning signs—some more obvious than others. Among these are a highly contested and partisan upcoming election, a strong nationalistic orientation in popular media, and a history of crippling labor actions.


When gathering and managing information, it is best to utilize information from a variety of sources, identify the central themes that keep reappearing, and make a judgment about the nature of the risk. This should not be done in a vacuum, however. Therefore, board members must exercise their responsibilities with renewed vigor and with a solid base of knowledge and insight. If that had been the case with the company described above, the outcome would have been much different.

Jack Gutt is Director of Kreab Gavin Anderson in New York.

Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

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