As we head into 2017, we wanted to share with you, based on our worldwide advice to clients, some of the likely challenges and opportunities we see facing corporations around the globe in the coming period. While management and boards of directors may prepare for these challenges differently depending on their unique circumstances (e.g. geographic footprint, sector, financial stability, etc.) we believe the following are key areas to watch for any Israeli company operating an international business.
Crisis preparedness: When is enough?
In today’s world, no matter where a business is located, it can be subject to unpredictable crises, “life or death” experiences for the firm. The past year saw several high profile crises at Israeli companies arising from problems varying from food contaminations to employee work stoppages. These companies are not alone; in recent years some of the world’s biggest organizations have faced serious crises: Samsung, Volkswagen, Facebook and Malaysia Airlines to name a few. Whether it’s the theft or loss of commercially sensitive information, an environmental disaster, employee misconduct or a cross-border product recall, businesses are vulnerable to potentially lethal levels of risk. When navigating crises businesses must contend with a variety of potential issues separate and apart from dealing with the cause of the crisis itself: public disclosure, including stock exchange announcements for public companies; dealing with employee issues, including sometimes as to rogue employees; issues surrounding cooperation with regulators, including preservation of privilege; social media coverage; etc. A badly managed crisis can ruin corporate and individual reputations and is often accompanied by a falling share price, stakeholder dissatisfaction, loss of trust, financial penalties, brand devaluation and customer attrition among other side effects.
While crises are dangerous they may even present opportunity if well-handled. The key is being ready and knowing, to the extent possible, the nature and level of risk your organization faces and having a robust disaster management plan in place. In our experience, being ready to act deftly in the first 48 hours is critical. One helpful step is pre-planning likely responses to the most perceived crisis scenarios and identifying the team, including internal personnel, outside PR advisors and law firms, that you will call upon.
The past year was a particularly tumultuous one geopolitically, with Donald Trump’s election to the U.S. presidency and the United Kingdom’s referendum to exit the European Union. Global investors and businesses are still digesting the likely consequences of these events. In 2017, significant elections are scheduled to be held in France, Germany and Iran. In addition to electoral surprises, geopolitical risk lurks in the continued rise of ISIS, natural disasters, wars and migration flows. These developments and many others affect any company operating internationally. They impact, sometimes personally, on employees, customers and suppliers, and on revenues and profits. These sorts of risks, with which Israeli companies are well acquainted, are inherently difficult to predict but must be taken into account in setting strategy for the year to come.
As any international businessperson can testify, we live in an ever more regulated world. Regulators across different jurisdictions are cooperating with one another more than ever before, so that a bribery problem in Africa can quickly become a problem in the U.S., the EU or Tel Aviv. At the same time, regulators continue to apply often inconsistent or nationalist approaches, which makes compliance across borders exceedingly tricky. Areas such as anti-bribery, trade sanctions, tax and cartel behavior continue to pose potentially devastating risk for corporations that run afoul of regulators.
Companies operating globally need to be aware of ongoing changes in these areas (including in 2017 potential reductions or simplifications in certain areas of U.S. regulation if President-Elect Trump is able to carry through his expected program). Companies must vigilantly implement compliance programs to avoid tripping up and must act quickly and effectively in the event they do experience a compliance issue. It doesn’t take a “Volkswagen-style” mega crisis to inflict significant damage. The consequences for even minor infractions can be massive if the company was negligent in not implementing appropriate policies or the discovery of an issue was not handled properly: investigations can last years, morph into investigations of other corporate misbehavior, cross borders to other national regulators and spur civil litigation in multiple jurisdictions.
In the seven years since we have had an active Israel-focused practice, we have noted the penchant of Israeli companies to invest in emerging markets. Whether next year’s hot markets are India or Chile, Vietnam or Nigeria, we expect this trend to continue. Alongside the potential higher returns afforded by emerging markets, comes higher risk. Careful planning—before the investment is made—can help mitigate much of that risk. For example, structuring your investment through a jurisdiction that has an investment treaty with the target jurisdiction can afford you access to international arbitration rather than relying on local courts in the event of unfair treatment (or worse) from the host government.
Activity by activist investors—firms that use stakes in public companies to push for changes in corporate strategy—slightly slowed across 2016 by some counts, but is by now a well-established phenomenon that should be on the radar of all public companies. By some estimates, activist hedge funds now manage over $200 billion, a stunning figure especially when one considers that the asset class barely existed just 15 years ago. While the lower liquidity and common presence of controlling stakes found in Israeli public companies have so far limited the impact of activism on companies traded on TASE, it is not inconceivable that in the future we will see activist funds begin to attack locally traded Israeli companies.
In the meantime, a number of Israeli companies traded on overseas markets, particularly in the U.S., have come under attack over the last year. Senior business and legal personnel of Israeli companies traded in the U.S., or companies considering listing there, should review their potential susceptibility to activist campaigns and ready themselves vigilantly to respond quickly and effectively.
Executive compensation caps and the globalization of unions
Driven by populist media and political candidates, we are witnessing both in and outside of Israel resistance to what is seen as excessive CEO and senior management compensation. In Israel this trend reached new (and in our view misguided) heights in 2016 as pay caps were introduced in the financial sector. On the other end of the employment law spectrum, to combat a decrease in membership, trade unions have in recent years begun forming global union alliances. This trend presents increasing complexities for employers that operate across borders since the goal of these global union alliances is to abolish the different working conditions that exist between different countries and to raise employment standards globally. Especially in the wake of the recent wave of unionizations in Israel, employers will want to coordinate their local policies with global considerations and to stay abreast of global trade union activity in their industry.
Cybersecurity and data privacy
Managing and protecting data has become a key issue for businesses, particularly as regulators and consumers become more vigilant about how that data is processed and stored. In 2016, some of the world’s largest organizations endured serious cyberbreaches which resulted in the leaking of sensitive data belonging to company employees and customers. Perhaps the most stunning news of the year in this area relates to an older incident: Yahoo’s recent discovery that in 2013 a breach compromised over 1 billion accounts. It has become increasingly clear that whatever your industry, cybersecurity is a legitimate concern. As your organization holds more data, and your staff use their own devices to perform professional tasks, you become more vulnerable to security breaches. Companies need to be aware of the rules and regulations across the jurisdictions in which they operate and be prepared to act quickly in the event of a breach.
The continued rise of private equity
The last year was another strong year for private equity deals globally. With committed but uninvested capital, so-called “dry powder,” at record high levels, we expect this trend to continue well into 2017. In Israel, private equity has been a recognized phenomenon for a number of years already, with foreign firms executing some of the largest deals in recent years and a number of Israeli firms becoming well known as very active and successful investors. We expect continued growth in private equity activity in Israel, particularly as global private equity firms become more familiar with the market and extend their growing interest in technology companies.
China outbound investment
In the latter half of 2016, the Chinese government has been taking measures aimed at tightening outbound capital flows to curb what it views as unauthorized transfer of capital in the guise of investment. These developments bear careful watching for those seeking to transact with Chinese investors. In the meantime, Chinese outbound investment continues apace. By many counts, outbound investment from China has accounted for approximately twenty percent of all global M&A activity throughout 2016, with Chinese overseas investment more than doubling over 2015 figures. Although Europe has been the focus of Chinese M&A activity over the last few years, everyone in the Israeli business community knows this trend has been felt here as well. Transactions between Israeli and Chinese companies bring unique challenges, not least in cultural gaps, yet the wave of Chinese M&A involving Israel seems to be far from over, and with a mixture of patience, hard work and skilled advice these are difficult but doable deals.
Antitrust considerations remain omnipresent
Experienced businesspeople will know that antitrust law bears critical implications for their companies, whether in regard to the need to avoid illegal cartel behavior and abusive market dominance, or in regard to competition considerations for winning regulatory approval of mergers and acquisitions. These considerations have continued to gain importance in recent years as antitrust law becomes increasingly institutionalized in previously less regulated economies and as positions taken by companies in one jurisdiction may bear follow-on impacts in other jurisdictions. In addition to these traditional concerns, antitrust law is now assuming ever greater importance as national regulators in many countries are moving to restrict foreign ownership of sensitive industries or national champions, with principles of antitrust and trade law often playing a role in the analysis. Conversely, as we saw in the highly watched European Commission case against Apple earlier this year, supra-national regulators are also using trade and competition law as part of a wider move to curb state assistance to industries. These and other areas that invoke antitrust concerns require truly expert advice with a global view in order to best serve a company’s worldwide business.
The evolving nature of litigation/arbitration: risk and opportunity
With U.S.-style class action mechanisms becoming more widely available in the EU and elsewhere, companies operating in global markets are increasingly exposed to the threat of group claims. In our view, this trend is also likely to lead to more sophisticated plaintiffs’ bars in many jurisdictions. Compounding the rise of a global plaintiffs’ bar and the availability of class actions is the ability of civil claimants in many jurisdictions to bring tag along proceedings in the wake of ever more common regulatory investigations. In our experience, companies facing potential exposure to group liability benefit from giving early thought as to where they may be sued, potential damages exposure, the window of opportunity during which claims may be brought, and critically, how to navigate, and possibly exploit, the substantive and procedural differences between class action regimes.
Litigation and arbitration are of course double-edged swords: while our corporate clients are often on the defensive side of these claims, it bears noting that courts and arbitration forums may also present opportunity, whether to keep a competitor from misusing your proprietary technology or for redress against a wayward counterparty. One important trend we see continuing into 2017 is the rise of litigation funding, which can often convert what might be otherwise prohibitively costly claims into an avenue worth pursuing. While models vary, litigation funds typically fund litigation or arbitration claims on a non-recourse basis, taking responsibility for all or a portion of the claimant’s costs in return for a share of the judgement or award.
A second trend we see continuing into 2017 is the increasing openness to international arbitration as a more effective and neutral forum for redress than national courts when resolving disputes abroad. Companies entering new ventures with foreign counterparts should consider in advance whether their business agreements should include arbitration provisions.
Corporate culture and the “tone at the top”
As we saw a number of times this year, even the most senior corporate leaders can be forced to step down by pressure from shareholders and regulators if there is a perception, right or wrong, that they did not set the right example. Implementing and maintaining appropriate policies and procedures to strengthen and maintain corporate reputation continues to be a vital theme for global corporations. The cornerstone of healthy corporate culture is what has become known as “tone at the top”—the attitude of the board of directors and senior management towards ethical behavior. Striking the right tone at the top is especially critical for companies that are rapidly expanding or have widely spread workforces or operations. Public shareholders, regulators, media and others are looking beyond the letter of the law in setting expectations for good corporate behavior, so merely abiding by the law is insufficient.