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5 STEPS FOR EFFECTIVE DUE DILIGENCE IN ASIA

By RL Expert Leesa Soulodre

Beware the Icebergs - 5 due diligence steps for reputation and risk/opportunity management when forging Strategic Alliances in Asia

Partnerships are a risky business. Particularly when reputational risks are still regarded as the greatest threat to a company's market value (Deloitte, 2014, PricewaterhouseCoopers 2014, Economist Intelligence Unit 2014). However, in a global business context, where often the only way we can achieve market reach, extend our capabilities and to localize our products and services is via Strategic Alliance Partners, partnering and due diligence have become 2 essential tools in our Executive toolkit.

Due diligence will not typically provide a yes or no answer to the question: should we partner with a particular entity? Rather, it documents the analysis conducted on the target partner, so that a company can make an informed and educated decision on the respective partnership and provides a recommendation for consideration. Due diligence is about looking at icebergs - not only focused on what is above the water, that we can see. But, also trying to understand what lays below the water that we can't see - so that we can adequately identify, manage and mitigate risks.

Due diligence is also not a once off event, rather it should begin as soon as negotiations commence and continue under a "lifecycle risk management approach" throughout the term of the business partnership. Outlined below are 5 steps to sound due diligence so that you can mitigate reputation risks and capitalize on opportunities in Asia.

1. Plan your due diligence approach

Due diligence can be an expensive, distracting and time consuming process. Ensure that you have a plan so that you are using your internal resources wisely.

Identify who on your team will be involved, what resources, data sources and technology they will use, what methodology they will take and by when your Board will receive the compelling reasons for and against the partnership. Prior planning prevents poor performance and ensures that your Board are empowered to make an informed decision.

2. Gather intelligence

Leverage related business intelligence tools to assess the information provided by your partner. Ensure that you have all the information necessary to determine the financial and sustainability performance of the company.

Ensure that you assess the reputation risks - i.e. the disconnect between what the company says about itself and how it operates (inside out) and what it's stakeholder's perceive about the company (outside in).

Google can provide a search of the company's information, but it does not provide a deep web view. The Deep Web (also known as Invisible Web, Deepnet or Hidden Web) is the World Wide Web content that is not part of the Surface Web, which is indexed by Google. This is where specialized data sources play a role in desktop research.

Assess the "inside-out: What does the company say about who it is and how it operates?

1. Are they aggressively accounting i.e. cooking the books?

GMI Rating's forensic Accounting and Governance Rating (AGR) uses more than 60 metrics to identify the fingerprints of fraud of more than 20,000 companies based on the company's annual reports and provides insight into the company's accounting approach (aggressive or not), the likelihood of a class action lawsuit and/or financial distress. This is a superior way to assess, detect and predict accounting irregularities. On July 1, 2014 they will release coverage of a further 5000+ companies in markets including Indonesia, Philippines, Vietnam, and Malaysia.

2. What outrage risk exposure will we have on Environmental, Social and Governance (ESG) factors?

We know now that the risks that kill people are NOT the same as the risks that upset people (Sandman, 1987). This has been proven in an array of sectors: the IT&T sector's Foxconn suicides, the food and biotech industry's "No GMO" and food safety issues, the retail sector's Bangladesh factory disaster, the energy sector's Deep Water Horizon disaster and the automotive industry's constant spate of product recalls. Gone are the days when a Chief Risk officer can only assess for the likelihood of hazards - i.e. the risks that kill people. In today's digital context we need to be effectively assessing and pricing in the risks related to stakeholder outrage on key issues.

Environmental, social and governance issues are increasingly impacting our social license to operate. Asset Owners and Managers are increasingly negatively screening companies out of their investment portfolios for bribery and corruption, child labor, water scarcity, severe carbon exposure monocultures, indigenous deforestation and palm oil. To ensure that our company does not lose access to key investors and to mitigate risks related to boycotts and loss of stakeholder trust, we need to examine our prospective partner's exposure to these sensitive topics.

Many tools for ESG risk management exist in this market, but most take only an "outside-in" view using published publicly available information, typically only from media and online web sources. GMI Rating's Environmental, Social and Governance Ratings, covering 6,000 companies and measuring 150 Key Metrics, uses an "inside-out" approach, analyzing and benchmarking the companies own publicly issued statements (including sustainability reports) against it's local peers (taking into consideration differences in country disclosure requirements), against the company's sector and against its global peers.

Examples of key metrics include:

Environmental: climate change risks and disclosures,supply chain risk disclosure and monitoring, environmental management standards and board level environmental governance and reporting.

Social: Employee relations, diversity, political contributions, bribery and corruption and vendor standards

Governance: Board accountability and effectiveness, integrity of accounting practices bribery and corruption, ownership structure and control, executive pay policy and oversight

In particular they assess issues that can have a material impact on the company's performance: securities class actions, transactions: M&A, divestitures and refinancing, the Foreign Corrupt Practices Act and product safety issues.

2. Another tool that is valuable to this process is TruCost. Trucost provides an assessment of a company's environmental impact and disclosure ratios for carbon, waste, supply chain and water usage help us to quantify these risks and opportunities. When properly identified and weighted, these factors can and do have a significant impact on both financial performance and investment returns.

Assess "Outside-In"

Survey tools have significant weaknesses. Our stakeholders have been exposed to too many surveys, resulting in survey fatigue and poor response rates. Sending your surveys to a large population, much larger than the actual number of responses needed in order to ensure the minimum number of responses desired results in oversampling. In addition to poor response rates and oversampling, another issue is the time it takes in which to run a survey. Weeks of time, even when done online, is typically necessary to secure enough contributors and process the results in order to extrapolate meaningful and representative data.

To assess what a company's stakeholders perceive about what a company says about itself and how and why it operates, we not only examine the information provided by the firm itself, we also look to third party monitoring providers.

Negative

RepRisk provide an outside in - gossip layer to measure negative published sentiment from media and web sources based on the lens of the UNGC/UNPRI framework. Sourced as raw data from media and online web sources across an unlimited universe of companies, RepRisk takes UNGC/UNPRI specific negative published content in 13 languages, tags the data for sensitive topics and related NGO's, providing a quick temperature check of environmental, social and governance risks associated with an unlimited universe of companies and projects.

Worldcheck is a Thomson Reuter's tool that provides information on individual people. The World-Check screening service is a comprehensive and widely adopted database of Politically Exposed People and heightened risk individuals and entities.

FactSet is my preferred tool for hierarchy analysis. Often when a company is exposed to negative things, they hide them in small subsidiary companies that do not share the same name or country of operations. Factiva's hierarchy data can show you the affiliations and ties between the entities of a company around the world.

Positive

We also know that partnerships are not just about risk management to mitigate reputation and compliance risks and financial losses but it's primarily about taking advantage of new opportunities.

Factiva: a company founded by Dow Jones and Reuters in 1999 covers news and media content in 28 languages across 200 countries, aggregating content from paid and free media sources. Factiva provides both the positive and negative view of published media data, social media content and online web sources for a related company - private or public. As companies often hide risky businesses under non-company named Product brands, a search on a specific product brands within a company's product brand portfolio can often provide insights into risk exposure for a company e.g. given the obesity crisis, Danone for many years branded all healthy products with the Danone company logo. However, their sugary biscuit products, did not wear the Danone company logo. It was later uncovered by stakeholders and they were pressured to sell the product line.

Radian 6 offers users comprehensive coverage of discussions on the social web, covering hundreds of millions of blogs, comments, the public Facebook API and the full Twitter firehose. In addition to this coverage, when integrated into the early warning listening strategy, Radian6 is scalable within an enterprise, allowing online comments about the partner to be assigned within the business, to customer service, sales, marketing and so forth for due diligence or risk management once the relationship is established. Radian6also integrates with other enterprise applications like Salesforce.com and analytics like Webtrends, Omniture andGoogle

Analytics so that you can track trends on the partner and incorporate it into your ongoing stakeholder engagement strategy.

Public Policy: Understanding the company's public policy issues is critical to ensuring that you will have a sustainable and profitable partnership. Be sure to complete a horizon scan on the sector and country and ensure that looming regulatory and policy issues are not going to have a negative impact on your ability to deliver the value and profitability envisaged through the partnership.

Tools including DODS, BurrellesLuce, Dehavilland are examples of tools that can provide this data in Europe and the US. Unfortunately in Asia, there is no real-time data sources for your fingertips that I am aware of. This data is largely captured by your sectoral industry representatives e.g. Food Industry Asia.

Other useful desktop research database tools include Glassdoor, Marketline, Experian etc. Be sure to include the Voice of the Customer, Voice of the Regulators, Voice of Suppliers, Voice of the Public and Voice of Employees in this due diligence process.

3. Analyze your business intelligence

While we are here to assess the risks and potential of a partner, we cannot forget the primary reason for the exercise in the first place - we are here to strengthen our company's competitive position in the market through the alliance, in order to achieve greater revenues/market share or accelerate cost reduction/efficiencies. With this in mind, we must first analyze the company's competitive context (Five Forces, SWOT).

What are the company's strategic objectives and what does it need to have in terms of geographic footprint, revenues, capabilities (people, process, corporate responsibility, policies and technology) in order to achieve it. 

Does this partner strengthen our competitive position or weaken it…?

Given the company's expressed risk appetite and tolerance, is the risks identified with the partner - in line with the company's articulated risk appetite / tolerance or not…?

Does the company need to review its risk appetite in relation to its economic performance, corporate image, social responsibility, environmental and social accountability and policy compatibility, if it takes on this partner?

Now challenge your current thinking. Complete a horizon scan for early detection of the weak signals related to the company, sector and country developments. This requires a systematic examination of potential threats and opportunities (PESTLE). Determine what is constant, what changes, and what constantly changes and explore out of the box and unexpected issues as well as persistent issues and trends for the sector. Think outside the box and consider converging industry competitors (e.g. Banking sector's transaction segment used to only represent financial institutions - today the sector includes retailers, mobile data providers, virtual currency vendors and shadow banks).

4. Draft Memo

Now draft your memo to your board with relevant related comprehensive appendices to support your rationale outlining the pros and cons and your recommendation. Ensure the full brief has an executive summary that includes: Executive Overview, Business Situation, Recommendation, Rationale, Investment (if any) and Conclusion. Make the Executive Summary no more than 2 pages. If there is any investment involved, ensure that it includes both a detailed budget and recommended cash release plan so that it can be effectively evaluated in line with existing business programmes. Outline Key Performance Indicators (KPI's) that will illustrate success or failure of this partnership.

5. Lifecycle risk management

Congratulations, the board has now accepted your recommendation and proceeds to MOU and Strategic Alliance Go to Market (GTM) agreement. However, in today's volatile business environment, it is not enough.But, be aware. The due diligence process does not end with the signing of the MOU and GTM. The company's business operations and what it says about who it is as a company and how it operates, will still positively and adversely impact your company at anytime. We must put in place a continuous process to identify, assess, protect and measure for risks/opportunities.

Given a digital crisis can go global within 2 hours (Freshfield's 2013), it is a business essential to design an early warning/opportunity system for your new alliance. Design a system of alert services with your data providers based on your risk/issue and opportunity lens, that proactively alerts you to risks and opportunities that the Partner is exposed to. Ensure that your key stakeholders are kept informed at all times. It could be the difference between execution success or partnership leakage!

Set up a Joint Management Panel between your two companies with a Leadership team member for Governance, a management team member for Management operations and a tactical person who is involved in the daily execution of the alliance. Host monthly tactical meetings, quarterly management team reviews and an annual governance meeting for KPI reviews and ensure you are meeting the agreed goals of the Alliance.

Build into your Operational risk plan, a quarterly and annual formal review of the due diligence; identifying any new issues that might affect your company's involvement in the partnership. This should also be completed any time the agreement with the partner is amended or renewed.

Establish a whistleblowing scheme that provides channels for employees to discreetly report unethical behavior. Ernst and Young (2013) in their APAC Fraud Survey reported that only 32% of their survey respondents had a whistleblowing scheme, whereas 81% of respondents said they would be willing to use this procedure. This suggests a disconnect between the availability of whistleblowing schemes as a means to prevent fraud and employees’ ease of access and willingness to use the scheme in practice.Companies should ensure that they have the latest investigative procedures or enforcement actions to follow up whistleblower reports. The lack of a clear follow-up course of action could deter an employee from reporting an unethical act. We therefore recommend companies have a clear written policy in the local Asian language to guarantee whistleblowers protection from retribution.When assessing the viability of a partnership, we need to weight up the inherent risks versus the potential reward. While Asia's rapid growth represents a significant opportunity for new revenue growth, the real prices of risk - both the hazard and the outrage - and the associated reputation risks, should be factored into due diligence processes.

These 5 steps are a basic approach to sound due diligence in order to assess your Alliances and identify both risk and opportunities in Asia.

I'm sure many of you have other enhanced methods and detailed approaches to incorporate into this process. Please don't hesitate to share them. It is only through a reiterative process of continuous improvement that we can enhance our company's competitive position, mitigate reputation risks and forge strong alliances based on effectiveness, efficiency and flexibility to capitalize on Asia's growth opportunities!

If you enjoyed reading this post, please click the thumbs up icon above and let me know. For more on these topics, check out my other recent LinkedIn Influencer posts here:

About RL EXPERT Leesa Soulodre:

Managing Partner and Founder of RL Expert Group. A Member of the Global Advisory Council of NY Investment Advisory Firm, Cornerstone Capital; an Innovation Advisor to the University of Illinois Urbana Champaign Advanced Digital Science Centre, Singapore and Board Advisor to Belgian PR Software firm, Prezly and US Sports Analytics firm, Autoscout.

An Adjunct in Corporate Communications at Singapore Management University, lecturing part time on "Risk Issues and Crisis Management "and "Content Strategy" at the Lee Kong Chian School of Business. Prior to moving to Asia, spent 7 years part time in European Academia, lecturing on the Luxury MBA programs in Marketing, Communications and Reputation Management at two french business schools, Ecole Superieur de Gestion and Mod'Art International.

Connect: Leesa Soulodre, Managing Partner, RL Expert Group - ls@rlexpert.com

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