Sustainability could be considered to be the alignment of the business within the market and environment in which it operates to maintain strategic flexibility and increase business longevity. This article by Edward Nicholson, Managing Partner at Mercator Partnership Limited, and Consultant to Maitland Group, demonstrates how businesses can incorporate sustainability into their thinking and strategy and provides a checklist for businesses that have established a presence in Latin America and other emerging economies.
Having successfully established your business footprint in Latin America the attention will be on optimising the business to build value. To build a truly successful business in the Latin American environment it is, however, necessary to look beyond the core value proposition of the business and consider what actions can help make the business sustainable in the market in which it now operates. To some, a sustainability agenda is seen as an elective but others would argue that having a such an agenda in place is not only critical to the long term survival of a business but that it also creates value and is, therefore, an essential dimension.What makes a business sustainable will differ from business to business but there are certain key elements that are common to most businesses operating in developing markets. To identify what these elements in your business are, it is necessary to look at the business “holistically” and consider what the key elements are on which the long-term survival of your business depends. Not all will have the same relative importance. For example, for a mining or natural resources company, which has the potential to impact the environment significantly, managing the relationships with the local community in which it operates and with the government from which it receives licenses is critical; a breakdown in either could cause licenses to be revoked with significant economic consequences. The international mining group, Anglo American, has significant mining assets in Chile and has recently been in a dispute with the Chilean government regarding options granted to the government for the purchase of some of the assets. The government is contesting Anglo’s position and as such it will be interesting to see how this gets resolved given that there are considerable economic, reputational and regulatory risks at stake for both sides. The following sets out some suggestions on how best to achieve sustainability looking at the business through 5 inter-related lenses:
1. Core Business
While the achievement of satisfactory margins and the efficient use of capital is common to every successful business, consideration of the following can help the business be more sustainable in its market environment:
• Growth strategy: Critical to have articulated in order to drive momentum in the business and keep the focus on the external market particularly in high growth environments.
• Funding of: How will growth be funded and what are the constraints? Through internally generated cash flows, a capital injection, or recourse to local capital markets bearing in mind that in many countries these are still under-developed?
• Regulatory changes: Attention to these is critical as they can evolve rapidly, have a significant impact and be hard to contest retroactively. In Argentina, many of the major utility companies have been privatised during the last 15 years under a regulatory framework, which contained clear parameters for tariff increases. Following the severe economic crisis in 2001, the framework was unilaterally changed preventing the owners, many of them foreign, from imposing tariff increases in accordance with the original contract. Although the position has now improved, residential tariffs remain artificially low.
• Staffing: Investment in training and development will improve the quality of your workforce and reduce reliance on the market. Reducing dependency on expatriate staff will encourage skills transfer and reduce costs.
• Intellectual Property (IP): Protect what is valuable!
• Partner relationships: It is important to anticipate how partnerships might evolve. Anecdotally, most partnerships end with one party acquiring the other. What is the vision for your venture?
• Control: Decide on the extent to which the need for control is important going forward. It may be possible, as a minority, to include negative covenants in a shareholders agreement giving effective control if certain defined objectives are not met.
• Implications of: Acquisitions or mergers could significantly dilute ownership, reaching to the extent of a non-control position. The risks of this will have to be judged against what is the best strategy for longer-term value creation.
In developing markets the requirement for strong and adaptive management can be much greater than in developed markets where change is slower and the environment more predictable.
• Governance mechanisms: There is a need for robust mechanisms that also reflect the changing needs of the business.
• Use local expertise: Local board members can make a valuable contribution if selected carefully and encouraged to do more than just “rubber stamp” decisions. A local board is recommended.
• Intelligence gathering: Build a network of contacts to get independent and objective insights on economic, political and industry issues to identify threats and opportunities early.
4. Environment and:
This is a critical aspect to be considered by all companies but particularly for companies with foreign control or significant foreign ownership. It is one area where modest investment can bring significant rewards. Investment should be directed to actions having a positive, visible and tangible impact on the environment or community. It is easy to forget what actions/policies have been implemented and it is, therefore, recommended that all actions, however small, are recorded in a way in which they can be readily shown to community leaders or local officials if required.
• Good corporate citizenship: Be recognised as making a positive contribution through actions, which benefit the community directly such as improved healthcare, education or recreational facilities. In more sophisticated communities the emphasis will be more on cultural activities. Across Latin America, wealthy families increasingly pay attention to their social responsibilities. Foundations with philanthropic aims have been established by many entrepreneurial families including those behind Itau-Unibanco and Gerdau in Brazil, the Santo Domingo family in Colombia, The Fundacion Carlos Slim and the Fundacion Femsa in Mexico to name but a few.
• Good place to work: In high growth economies the availability of qualified human resources can be a challenge. A competitive package of benefits and salary together with issues such as recognisable corporate values is an investment providing competitive advantage in attracting talent and necessary skills.
5. Value capture/Profit taking:
In a rapidly changing business environment the ability to realise and repatriate profits when needed should not be overlooked.
• Dividends/profit extraction: Governments change and economies go through cycles. Having an implementable dividend policy in place, which is regularly reviewed, is a necessary discipline.
• Exit: While exiting may not be on the agenda, having the certain knowledge that exit could, if needed, be achieved provides comfort for ongoing investment in the business. There may nevertheless be times when exiting is prudent, even if the timing is not perfect – be guided by your market intelligence sources, foresight and instinct, which will no doubt tell you if the time for this is right. A slightly different, yet innovative approach was adopted by Banco Santander, the major Spanish bank, in 2009, when it undertook an IPO for it’s Brazilian subsidiary raising more than US$8 billion to fund growth and strengthen the group’s capital position.
Sustainability is naturally embedded within the actions of most businesses. What is being suggested here does not, therefore, represent a radical departure from normal business practice but rather a fine-tuning of these actions to take account of the local environment via a focus on those actions that can really make the difference and help add value to your business.