In this section, the advisors of this firm propose some issues to ponder over in Q&A format. As IR covers topics of strategic importance, companies must recognize changes in their operating environment that may have a direct or indirect impact on their business model. Investors will, at all times, assess companies’ preparedness and steering policy in light of such market forces at work (referring to Darwin’s theory). The dates for uploading are as shown.
Country Risk Revisited
- What is country risk ?
- The probability of a financial loss due to changes in the conditions for doing business in a country. The risks may stem from indigenous factors at one extreme, such as politics or social structure, or unforeseen events at the other, such as natural disaster.
- Is country risk on the rise worldwide ?
- Risks certainly seem to increase when economic growth slows or disappears. In South America, a couple of countries have nationalized private sector foreign interests in the name of the good of society, and this move has in turn discouraged foreign investments and decreased job creation. In Asia, social disorder stemming from political, cultural or religious reasons has resulted in damage and work stoppages at some foreign-owned factories. The root causes are sometimes unclear, but may stem from social inequality, the absence of job opportunities, and censorship among other factors.
- Which country may be considered low risk ?
- The UK is one such country. The nation has a long history based on democracy, free speech and merit. It also had an immigration policy in place for many years especially for people from its former colonies. So through trial and error over the centuries, political and macroeconomic management has become high-principled, though not perfect ! But more importantly, the British people these days accept the inflow of overseas money and takeovers by foreign companies, so long as their jobs and livelihoods are secure. The British government believes sustainable economic growth is the foundation for peace, an orderly society and shared prosperity.
- What should companies consider before investing overseas ?
- Genuine acceptance of the foreign company’s presence in the country receiving investments, based on rules and customs that prevail in the G7 countries. That means the people in the target country should not have a grudge against the investor for historical and/ or other fundamental reasons. If the two-way goodwill is absent, then the business relationship will not last and the investor will most likely lose money.
The Great East Japan Earthquake
To all those afflicted by the earthquake and tsunami in northeast Japan, we convey our heartfelt sympathy. We pray for a speedy restoration of business operations for all companies affected worldwide.
- What is most important for companies, post-disaster ?
- Transparency. Overseas media tend to exaggerate and sensationalize bad news. To deal with such a negative tendency, Japanese companies must convince overseas investors that business restoration will be achieved as quickly as possible. Earthquakes, typhoons, war, etc., can all be included under disaster. To reassure investors, bad news, rebuilding measures and a schedule for restoration must be disclosed.
- What is the first step ?
- Clear communication as and when facts are confirmed. If a company does not already have a crisis management team in place, it should establish one immediately. This should be the window to the outside world, including investors.
- What kind of information should be disclosed ?
- First, the status of your company’s own facilities and employees. Second, the condition of your suppliers (upstream factors). After assessing your upstream factors, you can then see how those may affect your company’s business operations, and then your customers (downstream).
- In detail, what do you mean ?
- Post-disaster, first, investors will want to know how much damage, if any, your company has suffered. Also, to what extent, if any, employees have been injured, etc. This is a starting point to assess how productivity may be affected. But upstream factors also affect your output. If suppliers, including those for power and water, and distribution infrastructure have suffered damage as well, clearly, your operations will not function at full capacity. After assessing your upstream factors, you will then have a good idea how they will affect your downstream schedules. Namely for customers, your company must notify clearly the delivery situation.
- What else will investors want to know ?
- Revisions in financial forecasts. A shock to the supply chain will lead to delays in receiving factor inputs for production, especially in this era of just-in-time delivery. Sales estimates may need to be revised downward. When alternative suppliers are considered, this fact needs to be disclosed. If the input costs increase, then profits may come under pressure (unless your customers agree to bear the extra costs).
- Will investors question the existing business model ?
- As an unforeseen disaster is one extreme macro factor, investors will want to know how quickly your company can adapt (referring to Darwin’s theory about a change in the environment). In global competition, customers may start to source from other companies outside your home country, and this may erode your global market share. Investors will want to confirm whether such a loss of market share will be temporary or permanent. Your company’s quick responsiveness and adaptability will be judged accordingly. If your company chooses to expand capacity at an existing factory, for example, to meet ongoing demand, then that may reassure investors.