When Oversight Spans the Globe

Directorship’s February 7 roundtable on global risk management kicked off with expressions of confidence in the international marketplace. “The No. 1 risk is not to become a global company,” declared Bill Zollars, president and chief executive of YRC Worldwide. “If you don’t, you’re not going to be around very long.”

The participants, who ranged from audit committee chairs to CEOs to private equity specialists, never once suggested backing off from an international strategy. In fact, they kept returning to the necessity of going global. Yet the session, sponsored by AIG, uncovered shared insecurities about doing business abroad, especially in emerging economies where accounting methods, regulatory structures and the rule of law may be murky. By the end of the roundtable, attendees had identified several types of global risk and offered suggestions for managing them all.

The broadest line of defense in the boardroom is for directors to become involved in global strategic planning from the beginning. In today’s hypercompetitive environment, taking a multibillion-dollar write-off after a poorly thought-out assault on Latin markets or an outsourcing nightmare in Asia just won’t cut it anymore. “While we’re busy having a large write-off, somebody else is getting the business,” said David Meachin, CEO of Cross Border Enterprises and a director of Lyondell Chemical. “So spend a lot of time, if you’re a director, asking tough questions in the strategic planning sessions.”

Kinks in the Supply Chain

The fact is, fewer and fewer big U.S. companies get by without having key functions performed abroad. “It’s not about price,” said Steven Crosby, a PricewaterhouseCoopers managing director who specializes in financial services (see page 65). Rather, “we’re in a global war for talent, and the talent is often in low-cost jurisdictions. If you want good engineering talent for analytical work, you go to India. If you want manufacturing, you go to China.”

But outsourcing risk takes several forms. In the case of manufacturing, companies that farm out specialized production tasks to plants in different countries can find themselves running almost a “virtual” business. In the electronics industry, for example, semiconductors, packaging and circuit packs may all be sourced from partners in far-off places. “It’s balkanized,” said Don Peterson, former chairman and CEO of communications network provider Avaya. “It happens in pieces, and you have to manage the supply chain across the pieces.”

It’s one thing, Peterson said, if a U.S. company operates a wholly owned subsidiary in India under its own control structures. It’s quite another if an Indian company formed three years ago becomes a critical supplier. That business, subject to local labor, financial and environmental risks, spreads them to the parent. “If that’s a key part of your supply chain, you bear the risk, because you’re the one that doesn’t have a product,” said Peterson.

Then there’s the problem of so-called further sourcing—when one supplier subcontracts to another—which reduces visibility by another degree. The Indian company may have a Chinese source of subcomponents, unbeknownst to the parent, so that a river flooding in China brings processes to a screaming halt in South Asia. Boards can guard against such risks only by insisting that management get constant feedback from the field.

More direct relationships carry different risks. Many U.S. companies test the waters in new markets by forming joint ventures, and the quality of their partners can make or break the strategy. Not least, choosing a partner that’s in the exact same business can amount to giving away your trade secrets. But in a market like China, where personal relationships with local or state officials often lubricate deal-making, joint-venturing with a domestic company is often a necessary first step.

Zollars cautioned that such partnerships bring more oversight responsibility, not less. “We went down the road of doing joint ventures as a way to get started [in China],” he said. “The complexity and risk that that adds is not trivial, because now in addition to managing your own processes, you’ve got to manage the processes of your partner. At its fundamental level, it’s an FCPA [Foreign Corrupt Practices Act] kind of issue. I mean, people can go to jail for that kind of stuff. But it goes well beyond the legality, just to the basic business processes you’re using to run your business and make it more successful.”