Shakerhill Partners

Domestic Political Risk
Are You Watching Your (not-so-Silent) Partners?

Alan

Alan R. Hibben, ICD.D

Director, Hudbay Minerals Inc., and Discovery Air Inc.

” There is an old saying that the government is your partner from birth, but they don’t get to come to all the meetings.”
— John Malone
 

While domestic governments have long been viewed as the silent partner to business, profiting when business conditions are good and not losing money when conditions are bad, it would now appear that the “silent” stage is long gone. While companies and their boards have long been attuned to assessment, monitoring, and management of political risk in emerging markets, I believe that domestic political risk must now be viewed with equal weight.

 

A few examples from recent history:

  • John McKay’s private member Bill C-300 from the 2010 Parliament would have provided if passed, an unprecedented extension of political involvement into the non-Canadian activities of mining companies domiciled in Canada. The bill was actively supported by a wide range of non-governmental organizations (NGOs) and came perilously close to passage.
  • The CRTC’s recent decisions with respect to usage-based billing (UBB) have been second-guessed by the Conservative government, with the result that substantial uncertainty now exists with respect to the role of the CRTC and the effectiveness of its rulings. A body that was intended to put political objectives at arm’s length has been breached.
  • The current vague approach of Industry Canada to the “net benefit to Canada” requirement of the Investment Canada Act reinforces this act as a political document and not necessarily a legislative approach. The inability of actors to predict the results of political arithmetic makes decision-making within the context of the act extremely difficult.
 

All of these examples bring to light the increasingly intrusive nature of the political process into the existing operations and plans of Canadian companies. While some may support such additional intrusion and some may reject it, in any event, it would appear to be an increasingly permanent part of the landscape – and cannot be wished away.

In my board experience, there have been many times where perfectly normal and uncontroversial regulatory decisions have been shelved due to political concerns – usually just the fact that an election is imminent. So even political inactivity can be a risk, particularly with the current fast pace of global competition.

 

Unfortunately, the calculus of politics does not look like the calculus of regulation. While in most cases legislation and regulation can be adequately assessed and predicted with the help of experienced legal counsel, to greater degree legislation is now being drafted to allow for more political interpretation through vague regulation and a plethora of “rules” that can be adjusted based on political winds. For example, while the Dodd-Frank Act legislation itself covers 848 pages (817 more than the Federal Reserve Act!), it still requires the development of 243 “rules” outside of the purview of Congress and the Senate. Assessment of compliance with these “rules” may not be feasible outside of the political context in which they will be interpreted, as can be seen by the substantial delays in even drafting these rules within a split Congress/Senate. Another recent example is U.S. President Barack Obama’s draft Executive Order, “Disclosure of Political Spending by Government Contractors,” clearly intended to bring enhanced political scrutiny to those doing business with the U.S. federal government.

 

The rise of “political” rule-making has been encouraged by the growth of NGOs in the domestic market (such as Mining Watch Canada, in the case of Bill C-300) as well as well-funded and organized corporate lobbies and industry groups that have aggressively targeted competitors through the political process. While companies of significant size and regulatory interest (banks, insurance, pipelines, and energy) have traditionally been well equipped to deal with domestic political risk, it would now appear that smaller and less visible industries may be equally at risk to political change.

 

To date, one gets the impression in a number of cases (especially the recent Investment Canada files) that boards of directors have not been adequately prepared for the political process prior to the announcement of deals, and often have been “on the back foot” from the start of the process. How can boards of directors adequately address domestic political risk? How do companies make their previously silent partner a more predictable and even supportive part of their business strategy?

 

First, and most obviously, the company’s risk management framework must explicitly deal with this new domestic reality. While most frameworks will clearly specify some of the regulatory risks that the company will face, these will tend to be interpretable within the context of governing legislation and will be subject to both analysis and normal regulatory relationship-building. Internal regulatory staff, corporate counsel, and independent advisers provide risk mitigation. However, the new political risks tend to come from outside an existing legislative framework and may not be part of the regular legislative and regulatory scans done by management under its traditional risk management approach. By its nature, political risk could easily be divorced from the regulatory and even deputy-minister level within the relevant jurisdiction, which implies a much more proactive strategy to assess and monitor.

 

Second, management should have an active approach to both assessing the political agenda (federal, provincial, and local) from direct contact with politicians and their staff, as well as monitoring the NGO population for emerging issues. In this latter task, it may be necessary for companies to avail themselves of independent communications services as the effort to monitor the “blogosphere” for indications of NGO activity may be beyond all but the largest of corporations. The ability of modern social media to move government policy quickly should not be underestimated, as seen in the recent furor around Internet services and usage-based billing.

Third, management (supported and aided by the board in some cases) must have an active outreach program with the political staff of the most relevant ministries. While there may be good day-to-day contact between operations executives and the relevant ministries, only through the involvement of the most senior executives and the board will responsive relationships be created-such that access and dialogue can be enhanced when necessary. Often, the influence and contacts of the board chair can be used to advantage in this effort.

 

Fourth, the company’s communications and investor relations strategies must be informed by research on political and NGO “hot topics.” The time for a communications strategy is not when a transaction or event becomes subject to political scrutiny. The company’s strategy should encompass relevant political dimensions, and communications efforts in support of the strategy should be included with periodic, quarterly, and annual reports, especially in its reports related to corporate social responsibility. Companies should make special efforts to ensure that CSR reports are delivered to their broad political constituency. In addition, although this is not without risk, the company should ensure that its social-media strategy supports its political objectives. (And if a company does not have a social media strategy, it should get one, fast.)

 

Lastly, companies and their industry groups should take great care in using the political arena to advance commercial interests. Once a company becomes known for aggressive use of political relationships against its competitors, it becomes more difficult for it to defend itself against the self-serving attacks on that front from NGOs and competitors. Such battles can escalate.

 

Boards of directors will find themselves in a position where their experience in a wide range of industries and their deep contact base can be of real value to management as they navigate this very sensitive risk. Boards may also need to consider domestic political experience as a part of the director skills matrix, particularly in highly sensitive industries where government activity can significantly impact value.

 

As noted, the time has progressed from the days when governments were only silent partners. Domestic politicians are now an integral part of the risk profile of Canadian corporations and must be considered as the now-vocal partners that they are.

 

Alan Hibben is a Director of HudBay Minerals Inc. and Discovery Air Inc. but has a day job with a Canadian bank. He can be reached at alan.hibben@rbccm.com or (416) 842-7601.

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