Beyond the Boardroom: Emerging Markets - What Directors Need to Know

Strategy Talks

Podcast Series

Beyond the Boardroom
Emerging Markets:
What Directors Need to Know

Dave Forster
John Nyholt
Brenda Eprile
DJ Peterson
David Beatty

Episode 41: Beyond the Boardroom into Emerging Markets - What Directors Need to Know

Release date: May 26, 2011
Host: Dave Forster
Guests: John Nyholt; Brenda Eprile; DJ Peterson; David Beatty
Running time: 16:50 minutes

In this episode of Strategy Talks, Dave Forster, PwC's managing partner for the Greater Toronto area, interviews a panel of guests about the opportunities in emerging markets for Canadian companies, and what boards of directors need to know when considering moving into these markets.

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Episode 41 transcript:

Announcer: Welcome to Strategy Talks, the business podcast series by PricewaterhouseCoopers Canada. Hosted by Helen Mallovy Hicks, National Leader of PwC’s Valuations, Forensics & Disputes Practice, and Calum Semple, an Operations and Consulting Partner. This interview series, featuring new topics and guests every episode, is designed to valuable insight into some of today’s hottest issues affecting your business.

Dave: The number of transactions complete by Canadian companies in emerging markets and economies is on the rise. It has increased by more than 360 percent since 2003. This is presenting directors with new and unique challenges and opportunities. The fact is tapping into emerging role growth can offer world-class deal opportunities - but this doesn’t come risk free.

I am Dave Forster, PwC managing partner for the GTA and your guest host for today’s podcasts on achieving growth beyond borders. I am pleased to have with me today, from PwC, John Nyholt, former national leader of our Transaction Services practice; and Brenda Eprile, national leader of our Regulatory Advisory Services practice. We also have two special guests, DJ Peterson, the director of Corporate Advisory Services for Eurasia Group, one of the world’s leading geopolitical risk advisory firms, and joining us by phone David Beatty, chair of Inmet Mining and Western Coal, and director at the Bank of Montreal and First Service Corporation. Welcome everyone.

I am going to make my way around the table with some questions. First to John Nyholt, I’ll start with you. We see that emerging markets like South America and India are really taking off for Canadian companies in terms of deal making with activity increasing almost fourfold in the last two years, what factors are influencing this growth projection.

John: Well David I would summarize that by saying that it’s all an opportunity, when you look at the growth in the developing nations like India, their economy growing at a very fast pace, there is a significant need for infrastructure improvements, power plants, roads, all sorts of things like that to support that growth. And Canadian companies see real opportunity in being part of that and taking advantage of those significant needs. In South America it’s also a similar story in terms of opportunity related to fast pace growth and developing economies in South America in countries like Brazil, Chile, Peru, Colombia particularly, but in those countries specifically, we’re seeing a lot of Canadian mining companies expanding their reserves by doing acquisitions. These countries have stable governments, have sensible, workable mining codes and massive reserves of base metals - and that’s what our Canadian miners are after.

Dave: Thanks John. DJ, it sounds as though yet increasingly volatile global operating environment out there. How are leading companies accessing and responding to geopolitical risks and opportunities?

DJ:  Companies are looking are the issue in a number of ways. One is at a deal level and doing much enhanced transaction diligence. When they’re looking at targets in emerging and frontier markets, really important to look at the people at the tops of the firm and what are their political connections. Do they have positive ties with political authorities, governments? Do the governments support them? Or perhaps, does the government hinder their opportunities? And it’s very important to look at the broader political eco-system around a target company to see if it’s favourable or negative. A second issue is to look at is the trajectory of a country. Is the country moving on a political path that suggests more openness to business and foreign investors? Or is it on a trajectory, say, imposing greater regulations or restrictions on foreign investment, or increasing tax burden on foreign participants? For instance, in the natural resources sector where in many countries political leaders see the opportunity to extract, increase taxes and rents given the high prices for natural resources right now. So it’s looking both at the immediate transaction opportunity but also looking at the political trajectory.

Dave: Thank you DJ.  David, question for you, in your experience in the mining sector in particular, how much more important does due diligence become in these international markets? Do you have any stories to share with us?

David: Well I believe that as these large projects become ever more difficult to discover, and as the demand for the products that they produce get ever higher, we’re going to be moving into areas that we wouldn’t in the past have contemplated going into for ethical, moral or any other kind of economic reasons. So, the due diligence components I think not only become more necessary for boards to come to a decision, but it also become deeper in terms of understanding the kinds of challenges you may be facing. I had an experience recently as chairmen of the board of Inmet Mining, when we were looking to merge with Lundin Mining. Lundin owns a 24 percent share holding in the Katanga province of the Congo, and it is operated by another mining company called Freeport-McMoRan. Earlier in my life, I lived for four years in Papua New Guinea and was in the mining business there and we had many refugees coming across the border from Irian Jaya, claiming genocide was occurring in and around the mine run in Grasberg run by Freeport-McMoRan. So I was extremely anxious to understand what kind of a company they were today, and as a result I traveled out to the Katanga province of the Congo to see this mine, to meet the mine operators and to familiarize myself with their community relations.

Happy ending is that everything was going very well out there and was most impressed with the quality and experience of the executives running the mine. I was deeply impressed by the community improvements that the mine had made and brought to the lives of over 125,000 people in the immediate area around the mine. And I came back and was able to tell my colleagues on the board that in spite an unhappy earlier experience, I was quite confident that we had in this mine and in all the operations an asset that would not in any way cause us any embarrassment and would not be guilty or any infraction of human rights or any community relations kind of infraction. So it was a very important thing to do for the board and for myself personally. And therefore the depth of due diligence in this nature is undergoing some pretty profound changes, and colleagues at PwC are very much involved with that with the Eurasia group - and I learned a great deal from them.

Dave: Thanks David And finally Brenda, I want to touch on the issue of corruption. Doing deals in unfamiliar in different cultures must open companies up to an increase risk of corruption and bribery in some cases. What are some of the key issues that directors need to be aware of?

Brenda: One of the things that directors need to focus on is the way the business operates in the foreign markets. So is the business rely extensively on third-party agents:  you know sales agents or distributors, then the risk is going to go up in terms of corruption, bribery and so you need to make ensure that you’ve done your due diligence on everybody involved. Because one of the issues with the legislation in North America that will apply to companies operating in these jurisdictions is that you have successor liability if you buy a company. And in fact, if it has been operating improper payments, you will liable: the company, the officers and the directors. So it’s key that you do very thorough due diligence. The other thing to keep in mind is even if you’ve done that, and there aren’t any issues, going forward you got to make sure the employees on the ground and any of the other parties that you are working with understand your compliance policies and procedures, and you’ve got monitoring on that so if there are any issues you can nip them in the bud early so that if you do have an enforcement action it will be contained.

Dave: Well thank you Brenda. DJ, another question for you. What indicators do you use to project the political stability or trajectory of a jurisdiction?

DJ:  One of the key indicators we use is the election cycle or the cycle for election or selection of leaders of a country. You take the example of Peru right now is in the middle of national elections, and who wins that election will have a clear indication of the foreign investment climate in that country. Especially in the mining sector. Also look at the example of Canada and its national elections and understand who the key players are and understanding their trajectory will give you an idea of where Canada might go after the election. Similarly, you can look at individual ministries that might be important to your business. Who is the Minister of Finance or who is the Minister of Forestry or more importantly who is the Deputy Minister? Who might be replacing or coming up in the coming years and does that person have ideas or philosophies or policies that are favourable or unfavourable to your environment? So understanding the political actors both in government as well as various ministries can be a very important indicator.

Dave: Well thanks DJ. Brenda, are there any recent developments in the regulatory environment affecting Canadian companies looking at acquisitions in emerging markets.

Brenda: There are because even though Canadian companies, we’ve got our own legislation, and were not known for being out there and really tough on anti-bribery corruption. The US Foreign Corrupt Practices Act (or FCPA) and the UK Bribery Act are both those regulatory jurisdictions have very active enforcement functions. And so a lot of Canadian companies are listed in the US and so by virtue of that you could get caught under the ambit of the FCPA and recently the US authorities have increased their requirements by adding a whistleblower incentive program. So that whistleblowers can get a portion of the fines levied under FCPA, which can be very significant. And so the risk has risen, so the people may not complain to the company that there is an issue and the company can investigate it and nip it in the bud, now there’s a concern that employees or other parties could go directly to the authorities.

And the US has also been very active at   entering into deferred prosecution agreements in the last 18 months, so their activity levels have gone off the charts in this area. And what these agreements do is they are not prosecuting companies instead they are settling with them usually with a 3 year term and the companies then as part of the deal, basically point the finger at other parties, their competitors, other parts of the government they’ve been dealing with in these foreign jurisdictions, etc. So it allows the regulator to cast a very broad net and go after whole industries. So impact is huge. In the UK, the UK Bribery legislation which has been revamped and coming into force later this year is much broader than US legislation. So it goes well beyond foreign government officials to commercial business activities. Soyou know all nature bribes and corruption. And it also covers not just the parties paying the bribe but the party receiving the bride. And it does not have an exemption for facilitation payments which are kind of routine payments paid to sort of speed up the process of low level licenses and what not. But is provided for under the US. So we’ve got a much higher bar on the requirements, with much more active enforcement.

And finally there’s much greater international cooperation. So particularly between those major jurisdictions, so the Serious Fraud Office works with the SCC and the Department of Justice in the US. And so the activity level is just massive. You can go on the FCPA blog and just see lists of cases and settlements galore.

Dave: Thanks Brenda. David, final question, at the end of the day, as a director, how do you really assess the risks of making a new investment in an emerging jurisdiction?

David: One of the challenges of the boards and management teams now is we move into more and more esoteric regions of the third world is that if somebody on that board or management team must have had live, hands-on living experience in at least one of these countries. I’ve had a good fortune earlier in my career to spend two years in Tanzania where I worked in the Central Planning Office, was a co-author of the Second 5-Year Plan and carried on a lot of my work in Swahili, so I got to know fairly early an appreciation of other cultures and other ways of doing things. And I then spent four years in Papua New Guinea, probably the most diverse country in the world in terms of languages: over 750 languages and two and a half million people. I was the chief economist during the transition from colonial status to self government to complete independence. And there again I interacted with all kinds of people with from very different backgrounds, very different norms and certainly different language groups.

So I’ve always felt somewhat advantaged and privileged to have had that experience. But I think any company or any management team and board seeking to do business in these more esoteric parts of the world must have somebody nearby who has lived, worked, and talked in the local language other than their own to gain some appreciation of the cultural variables. Some of them are appropriate cultural norms in the society in which they are placed - we may not agree with. But it doesn’t mean they are wrong, or immoral, or wouldn’t pass the scrutiny of any third-party observer. Boards I think need to do their due diligence, but I think they’d be well advised to have somebody close to the decision who actually had experience in one or more of these countries.

Dave: This is really a fascinating topic and I’m sure we’ve only scratched the surface. Unfortunately were out of time, and I’d like to thank all of our guests for being here today. To learn more about our Directors program, please visit pwc.com/ca/directorconnect, and to read more about deal making and emerging markets please pwc.com/ca/emdeals.

Announcer: This concludes this episode of strategy talks. Thank you for listening. We hope you will join us again soon for another episode. To download or to subscribe to this podcast series, or to find more information, please visit pwc.com/ca/strategytalks. The information in this podcast is provided with the understanding that the authors and publishers are not here and engaged in rendering legal accounting, tax or other professional advice or services. The audience should discuss with professional advisors how the information may apply to their specific situation. Copyright 2009 PricewaterhouseCoopers LLP. All rights reserved. PricewaterhouseCoopers refers to PricewaterhouseCoopers LLP, an Ontario Limited liability partnership or as the context requires, the PricewaterhouseCoopers global network or other member firms of the network, each is which a separate and independent legal entity.

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Hosted by Helen Mallovy Hicks, a Partner and National Leader of PwC’s Valuations, Forensics & Disputes Practice, and Calum Semple, a Partner in the Operations and Consulting practice, Strategy Talks is a series of audio podcasts that explore key issues affecting businesses in Canada, and share strategies that companies can use to help address them.
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